Contact: Tom Higgins 212-339-0314
For Release Wednesday, May 17, 2000 at 10 a.m. ET
Release #4564A
NORTH AMERICAN ECONOMY WILL GROW STRONGER
But Fruits Are Divided Unevenly Between Canada, Mexico, and the U.S.
The North American economy will surge 4.3% this year and 3.7% next year, according to a three-nation study released today by The Conference Board, Inc., The Conference Board of Canada and Centro de Estudios Economicos del Sector Privado A.C. of Mexico. Following the release of stronger-than-expected growth in the United States in the first quarter, North American Gross Domestic Product could be up to a quarter point higher.
"Unfortunately, the benefits of strong growth have been unevenly distributed in North America and around the world," says Gail D. Fosler, Senior Vice President and Chief Economist of The Conference Board, who co-authored the report with Thomas D. Higgins, International Economist. "The U.S., currently in the midst of the longest expansion in its history, continues to lead the North American economy."
The U.S. economy has been growing in excess of 4% for over three years. Despite rapid growth, inflation has remained relatively tame, permitting the Federal Reserve Board to take a gradualist approach to raising interest rates. During the next two years, the U.S. should be able to maintain the balance between rapid growth and low inflation thanks to its strong productivity performance. Large investments in information technology, specifically computers, have enhanced productivity, created labor-saving methods, and reduced unit labor costs and prices of final products.
STRONG U.S. GROWTH RIPPLES TO CANADA AND MEXICO
A strong U.S. economy has been good news for Canada and Mexico, which both rely heavily on exports to the U.S. Mexican exports account for 33% of Gross Domestic Product, while Canadian exports are equivalent to more than 40% of GDP. Both countries send approximately 85% of their exports to the U.S., which means that about 28% of the Mexican economy and 35% of the Canadian economy depend directly on what happens in the U.S. market. In the first half of 1999, Mexican and Canadian exports to the U.S. were up 8% and 10% respectively.
Canadian economic activity should also benefit from a recovery in personal incomes, bolstered by rising unemployment and modest tax reductions. By the end of 1999, the unemployment rate slipped below 7%, its lowest level since 1981. The recent pickup in global commodity prices, a federal budget surplus, and modest inflation should provide support for the Canadian dollar and give the Bank of Canada some flexibility on monetary policy.
Meanwhile, resurgent investment and consumption growth has reinforced the economic lift provided by the recovery in oil prices in Mexico. The recent conclusion of a free trade agreement with the European Union will allow Mexico to reduce its dependence on the U.S. market and could unleash a new wave of foreign direct investment.
"Looking ahead, the risks to the North American expansion are growing," said Fosler. "Rising interest rates in the U.S. will reduce demand, while the surge in U.S. asset values has heightened the possibility of a stock market correction. A major depreciation of the U.S. dollar and a sharp acceleration in inflation are less likely in the near term, but remain potential risks in the long-term."
BENEFITS OF GROWTH ARE UNEVENLY DISTRIBUTED
Since the North American Free Trade Agreement (NAFTA) became effective at the start of 1994, economic growth has been strong and per-capita incomes have increased on an absolute basis across the continent. However, per-capita income gains in the U.S. have outpaced those in Canada and Mexico. As a result, both Canada and Mexico have fallen further behind the U.S. on a relative basis.
Part of the reason for this relative decline was the relatively poor labor productivity performance in Canada and Mexico compared with that in the U.S. Despite this poor overall performance, Canada and Mexico have outperformed the U.S. in certain sectors. This suggests that NAFTA is leading to a division of labor in North America in which each country produces according to its comparative advantage. In other words, each country is stepping up production of those goods that it produces most efficiently. This increase in efficiency is one of the factors driving the absolute improvement in per capita incomes in North America.
Even if each country specializes according to its comparative advantage, this does not guarantee complete convergence in North American per capita incomes. The U.S. has a comparative advantage in high technology and physical-capital-intensive industries that are experiencing rapid productivity growth thanks to large investments in information technology. On the other hand, Canada and Mexico hold comparative advantages in natural-resource-based industries and labor-intensive industries, respectively. Such industries tend to experience slower productivity growth and benefit less from the use of IT.
The dominance of the United States in the North American economy has been a tremendous advantage, allowing the U.S. to adapt to a changing global environment. But Canada and Mexico are best positioned to take advantage of the dynamic U.S. marketplace because of NAFTA. From a global perspective, most countries benefit by opening up their markets. However, some will benefit more than others will due to their industrial specialization or size. Investment in information technology can help to level the playing field, but not completely. Basically, global capitalism imposes the discipline of the market without a larger infrastructure for pooling risk and sharing opportunity. While many countries are making absolute progress on living standards, relative progress has proven more fleeting.
Source: North American Outlook: 2000-2001, The Conference Board, Research Report 1268-00-RR
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