America’s neighbours catch a chill
While the debate over decoupling concentrates on Europe and Asia, how are America’s closest and most exposed neighbours faring?
America is by far the most important market for both Canada and Mexico, buying around four-fifths of their exports and “the creaking of the US economy is already having an effect”, noted Lex in the FT.
Canadian economic growth slowed to just 0.8% in the fourth quarter of 2007, thanks mainly to collapsing exports. On Tuesday, the Bank of Canada slashed interest rates a half point to 3.5%, citing “a deeper and more prolonged slowdown” in the US economy than projected in January; the third in three months and the largest since September 11.
Canada’s key export sector is manufacturing – it is a major supplier of the US auto industry – which is also being buffetted by the Canadian dollar’s 30-year high against its US counterpart. Canada’s economic growth is “going to slow materially” over the next few quarters, says Craig Alexander of TD Bank.
What next for Mexico?
Mexico has hitherto escaped its neighbour’s chill, indeed, fourth-quarter growth accelerated. But the key link with the US is via manufacturing, as Citigroup points out, so it bodes ill that the US manufacturing sector has been deteriorating rapidly. The government, which expects GDP growth of 2.8% this year after 3.3% last year, has unveiled a stimulus programme to bolster the economy, but continued slowing in US manufacturing is likely to offset tax cuts, warns Gray Newman of Morgan Stanley.
A US recession will hurt both countries, as Lex noted. But with domestic demand looking solid of late and their balance sheets in good shape – so there is scope for boosting demand – “their chances of containing the pain have improved”.
