Outlook for the major North American economies
Canada Despite respectable growth in both consumer and government expenditures, quarter 1 GDP fell 0.3 per cent annualised, reflecting sharp declines in exports (-4.1 per cent annualised) and stock-building as Canadian auto manufacturers cut back...
Canada
Despite respectable growth in both consumer and government expenditures, quarter 1 GDP fell 0.3 per cent annualised, reflecting sharp declines in exports (-4.1 per cent annualised) and stock-building as Canadian auto manufacturers cut back their activity. Production was hampered by an auto parts strike in the US, but the fundamentals for this sector have also weakened, reflecting the appreciation of the Canadian dollar as well as slower US demand.
A rebound in US growth in the second half of this year should help, although the stimulus payments being sent out in the US may give a relatively smaller boost to big-ticket items such as autos. Consumer Price Index (CPI), data and anecdotal reports suggest that Canadian car companies have lowered their prices in an attempt to protect export sales. It is expected that export growth will be flat in quarter 2, picking up to a 3 per cent pace in the second half of this year. The reduction in stock-building at the start of the year should set the base for positive growth in the remainder of the year, and full-year 2008 GDP growth is expected to reach 1.3 per cent.
The Bank of Canada noted on June 10 that the balance of risks to its inflation projection had "shifted slightly to the upside". Headline CPI and core CPI inflation stand at 2.2 per cent and 1.5 per cent year-on-year respectively, through May, but energy prices at current levels could take total CPI inflation above 3 per cent later this year. The market expects the Bank of Canada to raise interest rates towards the end of the year, taking the overnight rate target from 3 per cent to 3.25 per cent at year-end and 3.5 per cent in the first quarter of 2009.
US
The fear of stagflation, or at least a minimalist version of it, is a theme that has infected the US economy recently. Unemployment continues to climb while headline inflation is soaring due to high energy and food prices. It appears this is finally taking a toll on long-term inflation expectations.
As a result, the Federal Reserve Bank (Fed) has talked with a hawkish tone, stating that inflation expectations must be contained. And at some point, the Fed, may believe that action must back up words. As a result, the most likely scenario is that the Fed plans to validate market expectations of some interest rate hikes, and this is made more likely if the oil price continues to rise in the second half of this year. There are risks around this base-case, however. GDP is likely to splutter after the tax rebates are spent.
Unemployment is still rising sharply and it is expected to reach 6.3 per cent next year. Consumer expectations are at a 35-year low, while the energy share of consumption is now spiking from levels that have coincided with recession in the past. And the lack of a wage-price spiral means the biggest risk from high oil is a consumer slump, not higher core inflation.
Procedurally, the Fed may be raising rates at a tricky time: the Primary Dealer Credit Facility expires in mid-September, which raises the risk of financial markets becoming disorderly, October has historically been a month for market drama, while November sees the presidential election. There is plenty of scope for events to re-price market expectations either way, so things could get volatile.
Mexico
Recently the market started to anticipate up to 3 interest rate hikes by Banco de Mexico, largely as a result of a perception of increased inflationary pressures in the coming months. Market interest rates rose substantially in less than a week, although a small correction took place more recently. Most analysts dubbed this as an overreaction since the outlook for inflation did not deteriorate sufficiently to back up the market's move.
This over-reaction occurred in the middle of a rather tacit debate regarding the future path of interest rates. President Calderon and Minister of Finance Agustin Carstens expressed their opinion that interest rates should fall, based on the increased short-term rate differentials against the US which, in their view, implied that local credit was expensive.
The Central Bank reiterated that its main concern is inflation and the consensus clearly points to there being no room for interest rate reductions for quite a while.
More recently, the government announced a pact with the industrial sector to "freeze" the prices of about 150 food items. It is believed that the government is aware that these measures work only temporarily and should not be seen as long-term solutions. However, most analysts think that in principle they are positive so long as they work as vehicles to coordinate expectations and help to generate orderly price adjustments.
The problem is to what extent they will be self-sustaining considering that the outlook in terms of international prices of commodities is not very promising.
Also, the question is whether they will induce a larger adjustment in the future. So far, this may temporarily ease inflationary pressures and facilitate an adjustment towards less growth.
This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
Despite respectable growth in both consumer and government expenditures, quarter 1 GDP fell 0.3 per cent annualised, reflecting sharp declines in exports (-4.1 per cent annualised) and stock-building as Canadian auto manufacturers cut back their activity. Production was hampered by an auto parts strike in the US, but the fundamentals for this sector have also weakened, reflecting the appreciation of the Canadian dollar as well as slower US demand.
A rebound in US growth in the second half of this year should help, although the stimulus payments being sent out in the US may give a relatively smaller boost to big-ticket items such as autos. Consumer Price Index (CPI), data and anecdotal reports suggest that Canadian car companies have lowered their prices in an attempt to protect export sales. It is expected that export growth will be flat in quarter 2, picking up to a 3 per cent pace in the second half of this year. The reduction in stock-building at the start of the year should set the base for positive growth in the remainder of the year, and full-year 2008 GDP growth is expected to reach 1.3 per cent.
The Bank of Canada noted on June 10 that the balance of risks to its inflation projection had "shifted slightly to the upside". Headline CPI and core CPI inflation stand at 2.2 per cent and 1.5 per cent year-on-year respectively, through May, but energy prices at current levels could take total CPI inflation above 3 per cent later this year. The market expects the Bank of Canada to raise interest rates towards the end of the year, taking the overnight rate target from 3 per cent to 3.25 per cent at year-end and 3.5 per cent in the first quarter of 2009.
US
The fear of stagflation, or at least a minimalist version of it, is a theme that has infected the US economy recently. Unemployment continues to climb while headline inflation is soaring due to high energy and food prices. It appears this is finally taking a toll on long-term inflation expectations.
As a result, the Federal Reserve Bank (Fed) has talked with a hawkish tone, stating that inflation expectations must be contained. And at some point, the Fed, may believe that action must back up words. As a result, the most likely scenario is that the Fed plans to validate market expectations of some interest rate hikes, and this is made more likely if the oil price continues to rise in the second half of this year. There are risks around this base-case, however. GDP is likely to splutter after the tax rebates are spent.
Unemployment is still rising sharply and it is expected to reach 6.3 per cent next year. Consumer expectations are at a 35-year low, while the energy share of consumption is now spiking from levels that have coincided with recession in the past. And the lack of a wage-price spiral means the biggest risk from high oil is a consumer slump, not higher core inflation.
Procedurally, the Fed may be raising rates at a tricky time: the Primary Dealer Credit Facility expires in mid-September, which raises the risk of financial markets becoming disorderly, October has historically been a month for market drama, while November sees the presidential election. There is plenty of scope for events to re-price market expectations either way, so things could get volatile.
Mexico
Recently the market started to anticipate up to 3 interest rate hikes by Banco de Mexico, largely as a result of a perception of increased inflationary pressures in the coming months. Market interest rates rose substantially in less than a week, although a small correction took place more recently. Most analysts dubbed this as an overreaction since the outlook for inflation did not deteriorate sufficiently to back up the market's move.
This over-reaction occurred in the middle of a rather tacit debate regarding the future path of interest rates. President Calderon and Minister of Finance Agustin Carstens expressed their opinion that interest rates should fall, based on the increased short-term rate differentials against the US which, in their view, implied that local credit was expensive.
The Central Bank reiterated that its main concern is inflation and the consensus clearly points to there being no room for interest rate reductions for quite a while.
More recently, the government announced a pact with the industrial sector to "freeze" the prices of about 150 food items. It is believed that the government is aware that these measures work only temporarily and should not be seen as long-term solutions. However, most analysts think that in principle they are positive so long as they work as vehicles to coordinate expectations and help to generate orderly price adjustments.
The problem is to what extent they will be self-sustaining considering that the outlook in terms of international prices of commodities is not very promising.
Also, the question is whether they will induce a larger adjustment in the future. So far, this may temporarily ease inflationary pressures and facilitate an adjustment towards less growth.
This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.