Epsilon Capital Management’s First Quarter Americas Economic Round Up Part 1

June 4, 2012 - PRLog -- This is Epsilon Capital Management’s 3 Part Series on the Americas Economies for the first quarter of 2012.

In the first part of our report we will look across the region as a whole and more specifically at the United States and Canada. These are undoubtedly the 2 key economies in this region for very different reasons.

Economic Review Americas First Quarter 2012

Optimism over economic prospects increased across the Americas regions during the first quarter of the year, as economic data showed sustained improvement and global risks eased somewhat. Despite costlier fuel, consumer spending climbed in most countries across the region, especially in the U.S. The European fiscal crisis now appears less worrisome when compared to last year, while the slowdown in Asia has turned out to be milder than expected earlier. Commodity prices have recovered after the correction during the second half of last year, on an improved outlook in global demand.

Better U.S. economic prospects continue to drive the outlook for the rest of the Americas region and much of the rest of the world. U.S. consumer demand outlook was boosted by the better than expected labor market gains during the first two months of the year, though the unemployment rate remains relatively high. Economic growth forecasts for Canada have also been revised higher as the country’s exports are likely to be supported by increased global demand.

Among the Latin American economies, Brazil faced the steepest decline in GDP growth last year as its economy almost came to a standstill during the second half of the year. However, the fiscal and monetary stimulus measures introduced in recent months are expected to support a moderate recovery this year as well as in 2013. Mexico and Colombia should benefit from increased U.S. demand while increased global demand for metals and other resources will likely help Chile and Peru. Argentina is expected to see a substantial decline in growth rate this year as concerns over its government policies could deter investment inflows.

United States: Growth forecasts lifted as labor market gains support consumer sentiment

The U.S. economic outlook continued to improve during the first quarter as the positive trends from the labor market helped sustain consumer sentiment. Though job additions for the month of March were below expectations, gains during the first two months of the year were encouraging and the unemployment rate has declined moderately. Manufacturing and services activity expanded during the quarter while durable goods orders rebounded in February after the previous month’s decline. Most forecasters are now more optimistic about U.S. economic growth, led by the IMF that has lifted its GDP growth forecast to 2.1% this year and 2.4% for 2013.

Trade data for recent months show mixed trends as exports remained steady while imports fluctuated. Import growth was strong in January, reflecting the healthy domestic consumer demand, but declined unexpectedly in February on lower imports of manufactured goods from China and fuel. As exports increased marginally to a record high, the trade deficit narrowed during the month.

While the weak economic conditions in Europe could restrict U.S. exports to the region, it is now expected that this will be offset by the demand recovery elsewhere in the world.
Higher gasoline prices are one of the major risks facing the U.S. economy this year as there are persistent concerns that consumers will cut back on their spending on other goods if fuel prices rise further. Average gasoline prices moved close to the $4/gallon mark during the quarter on fears over supply shortages from the Middle East. While prices have eased slightly in recent weeks, the geopolitical risks that led to the price rise remain elevated. Nevertheless, the U.S. economy is in a better position to deal with higher oil prices now when compared to earlier periods.  

Though the housing market has shown signs of improvement during the first quarter, the trends do not indicate a sustained recovery as yet. While new and existing home sales have increased in some months, most of these gains are in multi-family units and not spread evenly across the country. At the same time, average home prices continue to fall, though the pace of the decline has moderated and select markets are now seeing price increases.  

The Federal Reserve has acknowledged the moderate improvement in economic conditions, but continues to maintain a cautious outlook as unemployment remains high and global risks persist.

Canada: Economic outlook improves on rebound in export demand

Improved U.S. growth expectations have lifted the Canadian outlook on hopes of renewed growth in exports, even as domestic consumption growth moderates. Slower export growth restricted GDP growth for 2011 to 2.5%, as compared to 3.2% for the previous year. U.S. consumer demand is a major driver of the Canadian economy as nearly three-fourths of the country’s exports are destined for the U.S. The labor market rebounded in March, after an unexpected decline in February, as the economy added more than 80,000 jobs, the unemployment rate declined, and average wages increased. If the job market remains buoyant, it could prevent domestic demand growth from falling further. The Bank of Canada has lifted its GDP growth forecast to 2.4% for this year while the IMF now expects the economy to expand 2.1%. The central bank indicated that it may raise its benchmark rate later this year, if economic conditions remain favorable.

The Bank of Canada has identified growing household debt as the biggest risk for the country’s economy, as increased loan defaults could trigger financial market instability if economic conditions worsen. Household debt as a percentage of income rose to the highest level during the second half of last year, aided by a mortgage boom as homebuyers were attracted by the strong recovery in property prices since 2009 and very low mortgage rates. Average home prices have increased by 35% since the beginning of 2009, though prices have corrected in select cities such as Vancouver this year. To control the risks of a credit crisis, regulators have stepped up the supervision of the mortgage market and the federal mortgage insurance agency.

The Canadian dollar strengthened against the U.S. dollar for the second successive quarter, as the currency recovered from a decline at the beginning of the year on improved economic prospects and the possibility of monetary tightening by the Bank of Canada. Despite the currency strength, export growth was robust during the last two months of 2011 and at the beginning of this year, swinging the country’s trade account back to surplus. However, exports declined unexpectedly in February on lower shipments of automobiles and oil. Even as other benchmark oil prices have increased in recent months, Canada’s oil export realizations have declined recently as the discount for the West Canada Select benchmark has widened on excess supplies.

Nevertheless, increased export demand for resources and manufactured products is expected to help maintain the trade account surplus and sustain the relative strength of the Canadian currency in the coming months.

In our 2nd report on the Americas Economies we will cover Brazil and Mexico, which are currently considered more developing than established economies.

Epsilon Capital Management is an independent investment advisory firm which focuses on global equities and options markets. Our analytical tools, screening techniques, rigorous research methods and committed staff provide solid information to help our clients make the best possible investment decisions. All views, comments, statements and opinions are of the authors. For more information go to www.epsiloncapitalmanagement .com