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Economy: 8 reasons the world is an uglier place today

These are stories Report on Business is following Wednesday, July 25, 2012.

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Troubles mount
Economically speaking, the world is an uglier place today.

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From economic readings to corporate earnings, from Europe to China to Russia, the numbers highlight the depths of trouble in some regions and the delicate nature of the post-crisis recovery in others.

"The list of woes for the global economy seems to get longer by the day, meaning that optimists are struggling to find any reason to stay upbeat," said market analyst Chris Beauchamp of IG Index in London.

Here are eight reasons:

1. Britain has descended far deeper into recession, according to its Office for National Statistics today, which said the economy contracted by 0.7 per cent in the second quarter, the biggest drop since early in 2009. Part of that was due to rain, and a holiday for the Diamond Jubilee.

"We all know the country has deep-rooted economic problems and these disappointing figures confirm that," said Chancellor of the Exchequer George Osborne. "We're dealing with our debts at home and the debt crisis abroad."

2. China appears headed for a "soft landing" but with slower growth, though much more needs to be done and many risks remain, the International Monetary Fund said today.

China's slowing pace is also filtering through as company after company cites the Asian giant in corporate earnings reports. They include United Parcel Inc. yesterday.

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3. Europe's debt crisis continues to drive up bond yields while, in the hard-hit countries, while, as in Asia, corporate results are being hit. Ford Motor Co., ArcelorMittal, Apple Inc. and DuPont Co., just as examples, have been affected. Spain is now seen headed toward a full-scale bailout, while Italy remains in the crosshairs of bond investors.

"Sentiment in Europe continues to deteriorate at a rate of knots with Spanish borrowing costs flattening out across the curve at unsustainably high levels, well above 6.5 per cent," said senior analyst Michael Hewson of CMC Markets.

"With signs of stress increasing, the five-year yield is trading marginally above the 10 year yield, above 7.5 per cent. This concern about Spanish solvency has also spilled over into Italy's borrowing costs, sucking them higher as well, as local unrest in both countries against austerity continues to grow."

At the same time, speculation is rising that Greece will be forced to seek another bailout and possibly even leave the euro zone.

4. Germany, the powerhouse of Europe, was hit this week by Moody's Investors Service, which cut its outlook on the country's debt to "negative" from "stable." Today, a widely-watched survey showed business confidence sinking in July for the third month in a row.

"Clearly the euro crisis is dragging confidence lower and should help pound home the point that Germany is not immune to the crisis and should be as proactive as possible in finding a solution," said Benjamin Reitzes of BMO Nesbitt Burns.

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5. Economic growth in Russia slowed on an annual basis to 3.8 per cent in June, from 4.2 per cent a month earlier, its economy ministry said today.

6. Economic growth in eastern European countries will slow to about half the pace of 2011 this year, hit by the euro debt crisis, according to the European Bank for Reconstruction and Development today.

7. Japan's trade deficit surged in the first half of the year, according to official numbers today, as exports slumped, also hurt by the European debt troubles and a strong yen. June alone, however, showed a surplus.

8. The price of corn climbed again today, after a dip, on the crippling drought in the United States.

There is one bright sign. As The Globe and Mail's Joanna Slater reports from New York, the battered U.S. housing market is showing signs of finally turning the corner.

Weill changes his tune
Sanford Weill, the man who put "big" in "big bank" while at Citigroup Inc., now thinks major institutions should be broken up.

"What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that's not going to risk the taxpayer dollars, that's not too big to fail," the former Citigroup CEO told CNBC today.

"If they want to hedge what they're doing with their investments, let them do it in a way that's going to be market-to-market so they're never going to be hit."

Mr. Weill said such a move would help the sector regain its reputation after the spate of scandals.

"I'm suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won't be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading, they're not subject to a Volker rule, they can make some mistakes, but they'll have everything that clears with each other every single night so they can be market-to-market," he said.

Suncor takes Syria hit
Suncor Energy Inc. is the latest Canadian company to take a hit on its operations in the Middle East.

The energy giant said today it took charges and writeoffs of $649-million on its Syrian assets in the second quarter of the year, while it posted a hefty drop in profit.

"In December 2011, the company declared force majeure under its contractual obligations in Syria due to political unrest and international sanctions affecting that country," Suncor said in a statement.

"As a result, the company has not recorded any production from Syria in 2012. The situation in Syria has not improved, and the company is not certain if or when it will be feasible to resume operations."

Over all, Suncor profit slipped to $333-million or 21 cents a share in the quarter, from $562-million or 36 cents a year earlier.

On an operating basis, its profit climbed to $1.3-billion or 81 cents from $980-million or 62 cents, on higher production volumes and better refinery margins, though offset by lower prices.

Earnings flood in
Quarterly results are pouring in from Canadian companies today, and, generally, they're lower.

Besides Suncor, here's a roundup:

Encana Corp. sank to a second-quarter loss of $1.5-billion from a profit of $383-million, hit by a $1.7-billion impairment.

Cenovus Inc., which used to be part of Encana, was also hurt by lower prices, reported a drop in second-quarter profit to $396-million or 52 cents a share from $655-million or 86 cents.

Teck Resources Inc. posted a 65-per-cent drop in second-quarter profit to $268-million or 46 cents a share, from $756-million or $1.28, hit by lower prices.

Loblaw Cos. Ltd.'s second-quarter profit fell to $159-million or 57 cents a share from $179-million or 70 cents.

Canadian Pacific Railway Ltd., hurt partly by a nine-day strike, posted a drop in second-quarter profit to $103-million or 60 cents a share from $128-million or 76 cents.

Canadian National Railway bucked the trend, with second-quarter profit climbing to $631-million or $1.44 a share from $538-million or $1.18.

Precision Drilling Corp. also moved up, with a gain in second-quarter profit to $18-million or 6 cents a share from $16-million or 6 cents.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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