North American neighbours Canada and the United States are currently experiencing vastly different f...
North American neighbours Canada and the United States are currently experiencing vastly different fortunes, with the former set for strong growth as the housing market booms, the Canadian dollar appreciates and unemployment remains low.
In the US on the other hand, the economy is set for slowdown, the housing boom is coming to an end and high oil prices are taking their toll on consumer spending.
Over three years to the end of September, the Canadian S&P/TSX Composite Index has returned 33.85% compared to 12.62% from the mainstream US S&P 500 and 16.78% from the Russell 3000 index.
Peter Frank, senior 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 the former is jumping ahead. External demand has been higher in the country and the Canadian dollar has appreciated against the US equivalent."
According to Frank, there has been an increase in Canadian 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.
In addition, Canada is also beginning to experience a housing boom. Despite their relatively small size, the bigger cities like Vancouver and Toronto are suffering an under-supply of accommodation and the value of building permits across the country is at the highest ever level.
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 subsequent reduction in GDP growth.
There has also been weakness in the housing market and retail sales have slowed down following the fade out of the impact of previous tax cuts. He warns that this is what has been holding the economy together.
The US has not only been hit by internal economic events, according to John Carey, executive vice-president at Pioneer Investment Management, pointing to the effects of terrorism and the spiraling oil price.
For Carey, the main concern is what happens if oil prices continue to rise. Although earnings have been generally good, he is unsure as to the economic outlook until there is some resolution of this issue.
As far as Canada is concerned, Carey points out the resource-rich country has been positively affected by the recent bull market in commodities, although he admits a sharp increase in oil prices will still be harmful.
According to Bill O'Neill, strategist at JP Morgan Fleming, oil is perhaps $10 or $15 overvalued and there is a one in three chance of the price returning to the low $30 range by mid-autumn. The key point to keep 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, he says.
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, according to JP Morgan Fleming.
Canada rich in commodities.
Canadian housing market strong.
Demand increase in Canada for goods such as automobiles.
Oil heavily overvalued at present.
Weakness in US housing market.
Price of oil still increasing despite increase in production.