Incoming economic indicators do not fit with the optimistic forecast for the U.S. economy – data releases have been much weaker than expected. However, this does not mean that another recession is in sight – far from it. Further growth is expected in the spring once extreme weather in North America subsides.
Weaker than expected seasonally-adjusted economic numbers have diverted attention away from an impressive list of positive underlying U.S. economic fundamentals. These figures offer a strong argument against those who believe that the U.S. is in a long-term stagnation. But the key to this positive outlook lies in business investment. It picked up in the 4th quarter and added 0.9% to the revised GDP growth rate, which shows that businesses are confident enough to expand capacity.
In contrast to the U.S., Canada has a shortage of positive economic fundamentals and its economy is out of balance – far too much weight is being put on consumer demand. Exports are in a protracted slump, and as a result, there is not enough business confidence to support business investment plans. The drop of the Canadian dollar will help eventually but results will not be seen immediately.
Recent job growth figures show that growth has been narrowly concentrated to Alberta, where net migration is also estimated at 100,000 last year. The employment trend in the rest of Canada, with some exceptions such as Toronto, has been flat to down. Oil is also an industry to keep under watch in Canada. The dramatic increase in oil production that is expected in the U.S. over the next two years implies an equally big decline in America’s oil import needs. This will have an additional adverse effect on Canada’s outlook. Business investment intentions for 2014 in Canada’s mining sector are also down sharply by 15%.
Internationally, downward pressure on emerging market economy currencies has stabilized in the past month bur at the cost of higher domestic interest rates. A major economic slowdown has been in place for some time in emerging market economies and this is expected to continue. Industrial production has continued to fluctuate around recession-level lows and shows no sign yet of a sustainable recovery. With much of the world facing sub-par economic performance, the U.S. is expected to stand out as its recovery picks up momentum, which should push the USD higher.
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