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.
"But averages can be deceiving, namely in the job market where inter-euro zone economic distinctions are painfully palpable. While nations like Germany are boosting employee ranks, others such as Portugal and Greece are shedding workers in droves. The slow-moving southern economies, with the inability to devalue away the problem of their uncompetitiveness via currency depreciation, must instead experience the brunt of adjustment via wage deflation ... and productivity adjustments, a painful, but necessary step as built-up imbalances unwind."
- Fed twists again to bolster struggling U.S. economy
- Kevin Carmichael's Economy Lab: Fed's new language raises chances for QE3
- Kevin Carmichael's Economy Lab: Why the Fed is under pressure to act
- Interest rates to remain low into 2014: CIBC
It's all in the details
There’s a line in last night’s G20 communiqué that speaks volumes as to why the euro zone is in crisis, why the markets are in turmoil, and why the people have lost faith in their leaders:
"We fully support the actions of the euro area in moving forward with the completion of the Economic and Monetary Union. Towards that end, we support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance."
Support the intention to consider concrete steps? Seriously, who speaks like that?
It’s time for some straight talk. What's happening here is that Germany won't bend to the mounting pressure for new solutions to the spreading euro crisis, including a so-called banking union that would mean all the nations of the euro zone would share the risk.
As The Globe and Mail’s Bill Curry and Grant Robertson write in today's Report on Business, Europe's leaders are considering common bank supervision and deposit protection. That was expected.
"A lot of good intention, but they haven't found the right balance of give and take to find a more holistic solution," said Sébastien Galy of Société Générale. "This is just one step to the next EU meetings. We will be talking about this for a very long time. Everyone has such low expectations they will eventually surprise us positively."
Italy is pushing for the region's rescue funds to buy the bonds of its troubled members, which would drive down bond yields. This is expected to be discussed tomorrow when the finance ministers of the EU begin a two-day meeting. There was some chatter from the G20 summit in Mexico late yesterday that Angela Merkel was warming to the idea, but Germany denied this. And anyone who follows the German Chancellor should know she's not likely to give in any time soon.
Ms. Merkel is devoted to ensuring that the rest of the 17-member monetary union lives and breathes fiscal discipline, and she'll only go so far.
"It is always about how far she would go," said Mr. Galy. "She represents the payers in a union without a central fiscal authority, which is pretty much the position you want to be in. She can't give without seeing the necessary reforms. Past examples in Greece, Spain and Italy suggest she is right. Reforms slack without a strong pressure. It isn't nice to play the bad cop but someone has to."
RIM begins layoffs
Research In Motion Ltd. said today it is in the middle of implementing layoffs as part of a broader restructuring that is aimed at helping the struggling BlackBerry maker cut up to $1-billion in costs by the end of fiscal 2013, The Globe and Mail's Iain Marlow reports.
The Waterloo, Ont.-based technology giant has seen its smartphone sales drop sharply over the past year as consumers overwhelmingly opted for Apple Inc.’s iPhone and devices running Google Inc.’s Android software. After several dismal financial quarters and a management shakeup that saw Thorsten Heins promoted to CEO, RIM announced in late March that it was launching a comprehensive review.
The company is looking to trim at least 2,000 jobs from its workforce of around 16,500, sources have told the Globe, but the cuts could go much deeper than that.
Toyota plants take top spots
Two Toyota Motor Manufacturing Canada Inc. plants won top awards in the annual J.D. Power survey of automotive quality released today, The Globe and Mail's Greg Keenan reports.
The Cambridge, Ont., plant that assembles the RX350 crossover for Toyota’s luxury Lexus brand ranked highest among North American assembly plants. The auto maker’s Woodstock, Ont., factory, which makes the RAV4 crossover, took the bronze award as the plant ranking third in quality as measured by complaints made by buyers of new vehicles.
- Procter & Gamble lowers earnings, revenue forecasts
- Burger King stock returns to public trading on NYSE
- Dutch court orders Apple to pay Samsung damages over patent