The soft U.S. indicators from last month are misleading. Employment gains and increased wages are now fueling consumer confidence and driving GDP growth. Household debt is down and income is increasing. Discretionary spending – motor vehicle and single-family home sales in particular – is up.
The current upward pressure on the USD will be a net positive for the United States. Although weakening overall exports will result in forced cost control and efficiency improvements in some U.S. companies, a strong USD means shallower, less frequent interest rate increases (benefitting the housing recovery), acts as a control on inflation, and increases consumer spending power. While U.S. oil output seems to have peaked, a high USD will also put a ceiling on price increases and prolong household savings on gasoline.
In Canada, the U.S. oil output slowdown will mean higher prices and a stronger CAD. That said, forecasts for Alberta’s economy continue to be revised downward. Oil royalty income to the provincial government is expected to decline by $5.9 billion in FY 2015-2016. The region also faces declines in home sales and housing starts, and a rising unemployment rate.
But this is not happening at a national level. Income and employment in Ontario are not threatened by oil price shock. Consumers will accumulate substantial savings on gasoline, and with the BOC leaning away from rate increases for Alberta’s sake, homebuyers in Ontario are receiving a mortgage rate gift. BC will benefit similarly.
The net result of these diverging economic trends across regions is a stalled national economy. Canada may show negative real GDP growth in the 1st Quarter and business sentiment is shaky. Twenty percent of respondents of the recent bank of Canada Business Outlook Survey expect to reduce employment this year.
The global economy is still in a slow growth mode, dampening international commodity markets. China had its weakest industrial output since 2008 in the 1st Quarter and is struggling with excessive debt, overcapacity and weak demand.
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