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Bank of Canada Governor Mark Carney


For the third year in a row, the global economy is entering a summer of dread. Central banks are reprising their roles as lonely guardians against disaster as politicians continue to bicker over solutions and corporate chieftains once again seek cover.

Any hope that 2012 would be different was crushed Friday by news that the International Monetary Fund will cut its global economic outlook this month. Hours later, the U.S. Labor Department reported American employers added 80,000 non-farm jobs in June, well short of the number needed to lower the country's 8.2-per-cent unemployment rate. The Standard & Poor's 500 Index fell almost 1 per cent, wiping out the week's gains.

There are plenty of reasons to be apprehensive about the second half of the year, many of them familiar. The euro zone's sovereign debt crisis has caused economic growth in the region to stall. That's weighing heavily on China, where the domestic demand is expanding, but not nearly fast enough to make up for lost export revenue from Europe. In the United States, cash-rich corporations remain on the sidelines, wary of the tax rates and regulations they will face after November's elections.

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The soft employment figures for North America that were reported last Friday are a reflection of an increasingly widespread feeling that the best part of the year may be behind us. Not only did private-sector employers in the U.S. add the fewest jobs in 10 months in June, Canadian private employment fell for a second consecutive month.

On Monday, the Bank of Canada publishes its quarterly survey of businesses across the country, a poll that will heavily influence policy makers' thinking as they finalize new forecasts that will be released next week, because it measures companies' expectations for future sales and their plans for hiring and investment in the coming months.

Resolution of any of these issues would dilute the malaise that currently grips financial markets. However, three years removed from the 2008-09 global recession, there is broad acceptance that an easy end to the world's economic troubles won't be found.

The world's economies ran up a monstrous amount of debt ahead of the financial crisis, and they only just have begun to deal with it. Until governments and households get their finances in order, there won't be enough money available to fuel the kind of growth to which the world became accustomed over much of the past couple of decades.

"What we have learned from from crises in the past is we have these decades of excess and then decades of stress and we're really just kind of half way through it," said Royal Bank of Canada's chief economist Craig Wright. "We don't usually escape such a dramatic downdraft in global growth prospects and just snap out of it."

At the end of last year, Mr. Wright predicted the global economy would grow 3.7 per cent, an estimate that he has since lowered to 3.4 per cent. Other forecasters are doing the same. Economists at Deutsche Bank, among the more optimistic at the beginning of the year, last week dropped their 2012 global outlook to 3.2 per cent from about 3.5 per cent three months ago. Bank of Nova Scotia shaved its forecast at the start of the third quarter and now predicts the world's gross domestic product will expand only 3.1 per cent this year.

To put those revisions in perspective, Global GDP advanced at least 4.5 per cent between 2004 and 2007, and rebounded to 5.2 per cent after contracting in 2009.

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Back then, business came easy.

James Kierstead, who co-owns Thorsby, Alta.-based Blue Falls Manufacturing Ltd., the maker of Arctic Spa outdoor hot tubs, calls the years ahead of the financial crisis the "hey day" for his industry, which lives on consumers' willingness to splurge on luxury. But sales haven't grown since 2007. Blue Falls' revenue from Canadian operations dropped to $39-million last year from $69-million before the recession. Shipments to Europe are down about 30 per cent. "We are seeing some life in the U.S. market, but by no means is it anything that makes you jump up and get excited," Mr. Kierstead said.

There are signs of life across the globe. Second-tier economies such as Australia, Poland, Turkey, South Korea and Colombia continue to gather strength. Multinational companies such as farm equipment maker Deere & Co. have been pulling in record profits. Moline, Ill.-based Deere is spending some of that cash on seven new factories around the world. "It's important to keep spending in bad times as well as good," Deere chief executive Samuel Allen said last week. "We do believe the recovery is under way. We do believe it's moving slowly."

On Thursday, central banks in China, the euro zone, Britain and Denmark independently took steps to lower borrowing costs, a vivid demonstration of worry over the state of the economy. Last month, the Federal Reserve extended a stimulus measure that was set to expire and promised to do more if hiring continued to languish. After Friday's jobs report, many analysts expect the Fed will do more before the end of the summer.

Cheaper money could help avoid another recession, but the number who think monetary policy can have a big impact at this stage is dwindling. "We're in for a really long haul," Mr. Kierstead said.

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