Skip to main content

The Globe and Mail

Economy in midst of 'seven lean years,' three still ahead

These are stories Report on Business is following Thursday, Dec. 8. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

Follow Michael Babad and Globe top business news on Twitter

Seven lean years The global economy could be just over halfway through "seven lean years," with slow growth and high unemployment continuing to dog the outlook, a new forecast by CIBC World Markets warns.

Story continues below advertisement

"Akin to Pharaoh's dream for Egypt, the global economy could well be in the midst of seven lean years, as the debt-financed bounty of the prior expansion left a growth famine in its wake," said chief economist Avery Shenfeld.

"We're already more than halfway there, as the deep recession that began in 2008 was followed, at least in much of the developed world, by a lacklustre recovery," Mr. Shenfeld said in his report.

"In many countries, the climb from the recession's trough was powered by interest rate cutting and fiscal largesse, but that's now left little room to ease monetary policy further, and has raised political pressures to reduce deficits, even in countries where the bond market gives the leeway to do otherwise."

But for Europe, Mr. Shenfeld projected, there won't be a recession, though growth will "barely top" 3 per cent in each of the next two years, well below the pre-recession pace of 5 per cent. And even that, he warned, depends on "intelligent policy making" in the United States and Europe.

In Canada, he forecasts growth of about 2 per cent a year over the next two years.

Also troubling is his projection for unemployment, which he sees continuing in the area of 7.5 per cent into 2013, though that will remain below a U.S. jobless rate of around 9 per cent.

Carney sees threats The Bank of Canada warned today that threats to the Canadian financial system have climbed over the past six months, largely from the euro crisis.

Story continues below advertisement

In its semi-annual financial stability review, the central bank under Governor Mark Carney flagged the debt crisis as the top threat, saying it poses a "very high" risk that has climbed since the last assessment by policy makers in June, The Globe and Mail's Jeremy Torobin reports.

ECB cuts rate The new chief of the European Central Bank has now undone the mistakes of his predecessor, though it's a generally accepted fact that the crippled euro zone is headed for a recession anyway.

Mario Draghi and his colleagues at the ECB cut the central bank's refinancing rate by another quarter of a percentage point today, and unveiled measures to fight the crisis, including long-term funding for banks and a drop in reserve requirements to 1 per cent from 2 per cent. But - and this has been a key question - there was no pledge to step up bond purchases.

Coupled with a similar cut in the key rate after Mr. Draghi took the helm, the main rate is now back to 1 per cent amid a bleaker picture painted by the central bank chief today.

Mr. Draghi's predecessor, Jean-Claude Trichet, was seen to have erred when he boosted rates twice in the midst of the debt crisis.

"At 1 per cent the refi rate will be at the same level as post-Lehman," said foreign exchange chief Kit Juckes of Société Générale.

Story continues below advertisement

Mr. Draghi said the ECB now expects economic growth to come in at between 1.5 per cent and 1.7 per cent for this year. But next year's outlook is bleak, with the forecast ranging between a contraction of 0.4 per cent and growth of just 1 per cent. The year after is a crap shoot, growth of between 0.3 per cent and 2.3 per cent.

"A number of factors seem to be dampening the underlying growth momentum in the euro area," Mr. Draghi said.

"They include a moderation in the pace of global demand growth and unfavourable effects on overall financing conditions and on confidence resulting from ongoing tensions in euro area sovereign debt markets, as well as the process of balance sheet adjustment in the financial and non-financial sectors. At the same time, we expect euro area economic activity to recover, albeit very gradually, in the course of next year, supported by resilient global demand, very low short-term interest rates and all the measures taken to support the functioning of the financial sector."

The Bank of England, in turn, held its key rate steady at 0.5 per cent.

High stakes and brinksmanship As Eric Reguly writes in today's Report on Business, the stakes are extremely high heading into tonight's EU summit in Brussels.

Europe could make huge strides at the two-day summit, or it could sink and face the wrath of the bond markets again.

Germany's Angela Merkel and France's Nicolas Sarkozy, who are leading the charge to save the euro zone, the smaller group within the EU that includes 17 nations sharing one currency, have upped the ante with their call for treaty changes to ensure fiscal discipline.

Many observers believe markets will be disappointed, despite the repeated warnings, as recently as today from Mr. Sarkozy, that there are no second chances. Having said that, this is, of course, the umpteenth chance for these leaders.

"Hopes are high going into the summit, but we've heard this story before … a few times," said Benjamin Reitzes of BMO Nesbitt Burns.

There are also reports today that the EU is working on a plan to loan €200-billion to the International Monetary Fund that could be used to bolster the euro zone.

Banks need almost €115-billion As if all this weren't enough, Europe's banks need to raise capital levels by €114.7-billion by the summer, according to the European Banking Authority.

The EBA's look at the region's banks take in 71 financial institutions, and finds shoartfalls at about 30 in 12 countries.

"Banks will be required to establish an exceptional and temporary buffer such that the Core Tier 1 capital ratio reaches a level of 9 per cent by the end of June 2012," the group said.

"The national authorities will require banks to submit, by 20th January, their plans detailing the actions they intend to take to reach the set targets," it added. "These plans will have to be agreed with national authorities and reviewed, shared and consulted on with the EBA and with other relevant competent authorities within colleges of supervisors as appropriate."

Central banks plot contingencies Central banks across Europe have begun drawing up plans in the event of a breakup of the embattled euro zone, The Wall Street Journal reports today.

It's not that they think it's going to happen, it's that they don't want to get caught short should the 17-member monetary union collapse amid its two-year-old debt strains, the newspaper says.

Among the central banks weighing such plans are those in Britain, Switzerland, Bosnia and Herzegovina, Latvia, Montenegro, Ireland and - no surprise here - Greece.

As the Journal reports, several of the central banks are studying how they could bring back their old currencies. Among the issues are the demand for printing presses.

This comes amid mounting fears that the euro zone will see some of its members leave or, in a worst-case scenario, witness a complete failure of the young monetary union.

For example, JPMorgan Chase & Co. issued a research report yesterday that answers 10 questions related to a potential breakup of the group under various scenarios, and it provides its clients for hedging strategies given the extreme volatility in currency markets. Here's a synopsis of the study by John Normand and Arindam Sandilya (I've left out number 10 as it is a lengthy examination of hedges):

1. How the group could split: "The Lisbon Treaty governing the European Union (27-member trade bloc) makes no provision for exiting EMU (17-member monetary union), whether voluntarily or by expulsion. It only provides a mechanism for countries to negotiate their exit from the EU (Article 50). Since monetary union is an explicit, legal requirement for all EU countries except those which have negotiated an opt-out, exiting the EU presumably requires exiting EMU. Thus under current treaty provisions a country could exit the monetary union by withdrawing from the customs union."

2. What successor currencies could look like: "Although some countries outside the euro area use the euro, a weak country that withdrew or was expelled from EMU would need to introduce its own currency. Whether this currency were a legacy currency (drachma) or a newly-minted one is immaterial. The key point is that within that country's borders, something other than the euro has become legal tender, or the mandatory means for settling obligations"

3. Practicalities of replacing the euro: "In a modern financial market dominated by electronic payments and in a zone free of capital controls such as the euro area, the switch to an alternative currency would need to be secretive and practically immediate to be effective. Mere suspicion of a regime switch would be sufficient to drive massive deposit flight into euro accounts in other countries, or conversion into non-euro currencies outside of the region."

4. Costs and benefits: "Any country that leaves EMU regains control of its monetary and exchange rate policy. These benefits matter more for the periphery than the core given the former's loss of competitiveness since EMU entry ... less flexible labour markets and therefore lesser ability to undergo the internal devaluation (reduction in real wages) which Ireland and Latvia managed under a fixed exchange rate. Policy flexibility is less meaningful for core countries such as Germany, Austria and Finland given their wage restraint and resulting current account surpluses."

5. Settling contracts: "Contract settlement under a euro breakup will depend on a number of factors, including the governing law, currency of account or settlement specified in documentation and the nature of the breakup (e.g., the euro continuing to exist despite the withdrawal of a single or multiple countries or the euro ceasing to exist)."

6. How various currencies could move: "Whether a large group of core countries exited or a weak country were expelled, EUR/USD would still collapse due to capital flight related to redenomination risk or the resulting economic depression ... Successor currencies in weak states exiting EMU would probably decline at least 50 per cent versus the euro."

7. Historical precedents: "Over the past century at least a half dozen currency unions have dissolved, but almost all of these relate to the breakup of empires with undeveloped capital markets rather than a highly-integrated trade and investment bloc such as Europe. Between 1992 and 1993 the ruble zone disintegrated progressively following the Soviet Union's breakup in 1991, as newly-independent states introduced national currencies."

8. The odds: "Given that an EMU downsizing involves mutually-assured economic depression for the region, the odds of countries leaving or being expelled are low. Of the two breakup scenarios – exit/expulsion of weak country versus withdrawal of a critical mass of strong countries – exit of the weak is more likely at 10 per cent to 20 per cent. Generalized breakup has odds of less than 5 per cent."

9. What companies and investors should do: "If EMU breakup were a very likely event, then so would be a European depression, a global recession and possibly a global depression. How to manage currency risks – whether from redenomination or sharp moves – is one of several questions which should also include how to manage other inevitabilities such as earnings risk, cash and liquidity risk. For investors, the extreme response includes being overweight cash relative to risky assets and to hedge all exposure in currencies other than [the U.S. dollar]and [the yen] which will appreciate in the event of EMU breakup. For corporates, the extreme response would be to hold sufficient cash to meet a year of liabilities in the event that capital markets shut."

BCE boosts dividend, pays into pension Canada's BCE Inc. hiked its annual divided to $2.17 from $2.07 for next year, and unveiled a $750-million prepaying to the defined benefit pension plan of its Bell Canada unit.

The telecommunications giant, also updating its guidance for the year as a result, noted that today's move marks the seventh dividend increase in three years.

"This reflects our confidence in delivering on our business plan, based on the Bell team's strong execution of our strategic imperatives and reinforced by a healthy balance sheet with ample liquidity," said chief executive officer George Cope. "We have the financial flexibility to reward shareholders, while supporting significant ongoing capital investment in Bell's broadband networks and services."

BCE said Bell will see revenue growth of 9 per cent to 11 per cent this year, and a rise in EBITDA of 8 per cent to 10 per cent. For BCE, the company projected earnings per share, adjusted, of between $3.10 and $3.15.

National Bank hikes dividend National Bank of Canada boosted its dividend to 75 cents from 71 cents as it reported a tiny gain in fourth-quarter results.

The last of Canada's six biggest banks to report, National Bank said it earned $294-million or $1.74 a share, diluted, in the quarter, compared to $287-million or $1.66 a year earlier.

Given the economic and financial uncertainty, especially in Europe, the Bank will remain vigilant in the management of its operations," said chief executive officer Louis Vachon.

Ford reinstates dividend Ford Motor Co. is bringing back its dividend.

The auto maker, alone among its Detroit peers in emerging from the recession without the need for bankruptcy protection, unveiled a quarterly dividend of 5 cents today.

"We have made tremendous progress in reducing debt and generating consistent positive earnings and cash flow," said executive chairman Bill Ford. "The board believes it is important to share the benefits of our improved financial performance with our shareholders. We are pleased to reinstate a quarterly dividend, as it is an important sign of our progress in building a profitably growing company and our confidence in the future."

UBS keen on Enbridge UBS Securities Canada boosted its 12-month price on shares of Enbridge Inc. after the company unveiled its 2012 guidance and hiked its dividend by 15 per cent late yesterday.

The new target set by analyst Chad Friess is $38, compared to the earlier $36.

Enbridge hiked its dividend to 28.25 cents and projected 2012 adjusted earnings per share of $1.58 to $1.74.

Business ticker

In Economy Lab Mario Draghi is not Ben Bernanke. And more importantly, Kevin Carmichael writes, the ECB is not the Fed.

In International Business Yum! Brands, the operator of KFC, Pizza Hut and Taco Bell, plans to become the McDonald's of China, according to its chief executive, Alan Rappeport of The Financial Times reports.

In Globe Careers One of the most difficult issues for any employer when trying to choose the best networking tools and policies for employees is the demographic disparity of the evolving workplace. Richard Donkin of The Financial Times examines the issue.

In Personal Finance Rob Carrick rounds up the best in personal finance reading on the Web.

From today's Report on Business

Report an error
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

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.