These are stories Report on Business is following Wednesday, June 20, 2012.
For the economy, a long, hot summer
From Europe to the United States and Canada, the economic signals are growing darker.
In the United States, the Federal Reserve has cut its outlook for growth while at the same time projecting higher unemployment than it originally thought. In Canada, economists are taking a dimmer view. And in Europe, the debt crisis shows little signs of easing and several of its economies deteriorate.
"The global economy hasn’t fallen off a 2008-style cliff, but it’s been too close to the precipice for investor comfort," chief economist Avery Shenfeld of CIBC World Markets warned today.
"We’ve nudged our already below-consensus call for 2012 world growth down by two ticks to 3 per cent, its slowest pace since the recession. Some emerging markets are on the boundary of a hard landing, Europe is mired in recession, and the U.S. is moseying along on its half-speed recovery ... There’s a long 'to do' list for policy makers that will have to be completed to repair the engines of global growth."
The Federal Reserve today extended its Operation Twist through the end of the year, with plans to buy $267-billion in Treasurys in a program meant to hold down interest rates amid a deteriorating economic outlook, particularly on the jobs front.
The Federal Open Market Committee, its policy-setting panel, again held its benchmark lending rate at an emergency low near zero, where it expects it will stay through 2014, citing high unemployment and a slowdown in growth in the labour market, The Globe and Mail's Kevin Carmichael reports. The U.S. central bank also said it was prepared to "take further action as appropriate" to juice the recovery and employment.
Under Operation Twist, the Fed buys and sells securities to twist what would otherwise be the natural path of interest rates by decreasing the gap between the shorter- and longer-term assets.
The Fed also released the individual economic forecasts of its members, ratcheting down projections for economic growth while anticipating higher unemployment, a particular disappointment.
The Fed members now see growth at 1.9 per cent to 2.4 per cent this year, 2.2 per cent to 2.8 per cent next year, and 3 per cent to 3.5 per cent in 2014.
While those forecasts are lower than a similar round in April, projections for the jobless rate are higher, at 8 per cent to 8.2 per cent this year, 7.5 per cent to 8 per cent next year, and 7 per cent to 7.7 per cent in 2014.
"The economic language is slightly more dovish than before, of no great surprise, given the recent data," Peter Buchanan of CIBC World Markets said of the Fed statement.
"As opposed to the improvement in labour market conditions reported earlier, job growth is described as 'having slowed in recent months.' With the economy weak and Europe threatening, expectations for action had been building. Today’s step was arguably the least the Fed could have done without incurring major market disappointment. Beyond the short-term beneficial placebo effect, we remain doubtful that today’s action will have much substantive effects."
Economists aren't convinced of the power of extending Operation Twist to fight the slowing recovery, however.
"Given the current very low level of interest rates, the actual impact of this program would likely be rather limited," said senior economist Martin Schwerdtfeger of Toronto-Dominion Bank.
"However, the message it conveys is perhaps more effective, given that it reaffirms the Fed’s commitment to do whatever is in its power to stimulate economic activity, and, consequently, a faster labour market recovery."
Mr. Bernanke told reporters in Washington that "we'll be prepared to take additional steps if appropriate" if the labour market doesn't improve.
Justin Wolfers, a prominent U.S. economist, believes the Fed could go further if there's one more weak U.S. labour report. In fact, he said, he wouldn't be surprised to see a move between regularly scheduled meetings.
As for Canada, CIBC World Markets today forecast that Canada's economy will expand by 2.1 per cent this year and next, with the Bank of Canada's benchmark lending rate remaining at its emergency low into 2014.
Europe, of course, continues to struggle, as some countries remain in recession, struggling under crippling unemployment.
"Whether the official data suggest a technical recession or not, to the average citizen of the euro zone, it feels like a recession," said Peter Buchanan and Emanuella Enenajor of CIBC World Markets.