Canada is set for strong growth as the housing market booms, the Canadian dollar appreciates and une...
Canada is set for strong growth as the housing market booms, the Canadian dollar appreciates and unemployment remains low. The US is a different story with the economy set for a slowdown. The housing boom is coming to an end and high oil prices are taking their toll on consumer spending.
Peter Frank, senior FX strategist at ABN Amro, says: "US growth has hit the ceiling, but there is much more room for development in Canada. It is likely Canada will outperform the US over the next few quarters, now the business cycle in Canada is jumping ahead. External demand has been higher in the country and the Canadian dollar has appreciated against the US dollar. The rise in commodity prices has been offset by this appreciation."
According to Frank, there has been an increase in demand for goods including automobiles and there is growing capacity in this sector. Similarly, the industrial sector has a healthy outlook, boosted by the more benign economy and lower interest rates.
Canada is also beginning to experience a housing boom. Despite its relatively small size the bigger cities like Vancouver and Toronto are suffering an under-supply of accommodation. The value of building permits across the country is at the highest ever.
Although Frank says the US has been recovering for the past two months, payroll figures have been weak and he thinks there will be a reduction in GDP growth. There has been weakness in the housing market, retail sales have slowed down following the fade out in tax cuts. He warns that this is what has been holding the economy together.
Frank forecasts GDP in 2005 to be 3.6% in Canada and 3.3% in US as it slows down. Of course, the US has not merely been hit by internal economic events, according to John Carey, executive vice-president at Pioneer Investment Management.
He says: "US fundamentals have looked good all year, but what has troubled the investors is terrorism, the elections and the price of oil."
According to Carey, the main concern is what happens if oil prices continue to rise. Although earnings have been good, until there is some resolution he is unsure as to the economic outlook.
Carey is more bullish than Frank as far as his GDP forecast is concerned - he expects 4% growth this year - but he does not think growth will be as dramatic as the previous years.
As far as Canada is concerned, Carey points out that the resource-rich country has been positively affected by the increase in commodities, although he admits a sharp increase in oil prices will still be harmful.
Jesper Bie-Olsen, senior strategist at Nordea, thinks in the US the oil price is the main driver and what we are looking at is how consumers will react to it. There is a strong possibility this could reduce household wealth.
If recovery should continue, the low interest rate environment should help investment pick up in the last quarter. Although the Fed is tightening monetary policy he thinks this will be done gradually so as not to damage the economy.
Bie-Olsen says it is difficult to tell what is going on in the labour market. The payroll data over the past couple months has been bad, but a household survey on employment, which included people who own their own business, showed more positive signs.
However, Nordea has revised down its GDP forecast for this year at around 4.4%. Bie-Olsen predicts GDP will slow for 2005 and 2006.
According to Bill O'Neill, strategist at JP Morgan Fleming, oil is perhaps $10 or $15 over valued, and that there is a one in three chance of the price returning to the low $30 range by mid-autumn. The key point to bear in mind is that 2003 forecasts of demand and supply have been proved wrong, and the current high prices are reflecting decisions that were based on these forecasts. Although Opec has reacted by raising production, there is a time lag between pumping out the crude oil and reaching the global markets in refined form. Inventories have been re-built and this is a deflationary factor for the oil price in the longer term.
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