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Mark Carney warns of hit from 'lower wealth and incomes' Add to ...

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Carney paints bleak picture Bank of Canada Governor Mark Carney came out today with guns blazing, painting a bleak economic outlook and warning of troubles in the United States and Europe. But for Canada, the central bank still expects growth to pick up in the second half of the year. Still, don't expect interest rates to rise until late next year.

As it held its benchmark overnight rate steady at 1 per cent, the Bank of Canada also signalled a long pause on any rate hike, The Globe and Mail's Jeremy Torobin reports.

"In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished," Mr. Carney and his colleagues said in their statement.

They cited a deteriorating global outlook, troubled by the escalating debt crisis in Europe, recent indicators that point to slower growth globally, and market volatility.

"All told, today’s statement confirms our view that a downgraded growth outlook both at home and abroad, combined with worsening sovereign debt risks, necessitates an exceptionally accommodative monetary policy stance for longer than previously thought," said Toronto-Dominion Bank economist Leslie Preston.

"We don’t expect the bank to raise rates until the latter half of 2012, which implies a flat overnight rate for almost two years – an unprecedented situation which underscores the fragility of the economic recovery."

In the United States, particularly, U.S. growth will be weaker than expected, Mr. Carney and his colleagues said. And they had a warning for U.S. politicians dickering over budgets.

"The bank expects that American household spending will be even more subdued in the face of high personal debt burdens, large declines in wealth and tough labour market conditions," the central bank said. "Fiscal stimulus in the United States will also soon turn into material fiscal drag."

And some of advice for Europe's politicians: "Acute fiscal and financial strains in Europe have triggered a generalized retrenchment from risk-taking and could prompt more severe dislocations in global financial markets. Resolution of these strains will require additional significant initiatives by European authorities."

Emerging markets are showing robust growth, the bank said, although even there "its rate and composition will be affected by weakness in major advanced economies."

Growth in Canada stalled in the second quarter, the central bank noted, but that was due largely to temporary factors.

"The bank continues to expect that growth will resume in the second half of this year, led by business investment and household expenditures, although lower wealth and incomes will likely moderate the pace of investment and consumption growth," the statement said.

"The supply and price of credit to businesses and households remain very stimulative. However, financial conditions in Canada have tightened somewhat and could tighten further in the event that global financial conditions continue to deteriorate. Net exports are now expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges, in particular the persistent strength of the Canadian dollar."

Flaherty seeks probe Canada's Finance Minister Jim Flaherty says he shares the irritation of Canadian shoppers who wonder why a higher loonie isn’t translating into lower prices at home.

In a letter to the Senate national finance committee, The Globe and Mail's Bill Curry reports today, the finance minister is requesting that Senators take a closer look at the issue to find out what is going on.

“Canadians are rightly irritated that when they see large price discrepancies on the exact same products being sold on different sides of the border,” the minister wrote. “I share their irritation.”

Court backs bailouts Germany's constitutional court ruled today that the country's bailouts of its ailing neighbours were legal. But, as our European correspondent Eric Reguly reports, it attached conditions that will make any future bailouts more cumbersome, ruling they must first be approved by the budget committee of the Bundestag.

While the decision marks a victory for German Chancellor Angela Merkel, it's the court of public opinion that will play a greater role in how Germany helps the troubled countries of the 17-member euro zone.

Ms. Merkel's party has already lost several regional elections, and opposition to being Europe's banker runs high in Germany.

"For now, the markets rejoice that the aid package wasn’t quashed, but I suspect we’ll be revisiting this ruling in future and in the context of the sharp deterioration in German politics with Chancellor Merkel’s coalition government having lost every state election thus far this year – and poised to lose Berlin in less than two weeks," said Derek Holt of Scotia Capital.

"Red or blue bond proposals, a eurobond issue, greater fiscal ties, and future aid packages are all facing lessened probabilities of occurrence as Merkel herself marches toward her own re-election bid by 2013. Add to this the fact that she is attempting to contain rebellion from within her own CDU party on the eve of Monday’s failed test vote."

Whither Europe Ms. Merkel is wont to say that if the euro collapses, Europe collapses. Someone should tell the chancellor that the euro is indeed on its way to collapsing.

After today's court ruling, Ms. Merkel again rejected the idea of a euro-wide bond, saying that's the road to a "debt union" when what's called for is a "stability union."

Whether or not a pan-Europe bond is the way to go, there's no stability in the 17-member euro zone, and there's certainly no unity. Attempts at quick fixes have failed time and again.

For example, in Italy today, a day after a crippling strike against austerity measures, Prime Minister Silvio Berlusconi puts his revamped austerity package to the test in a confidence vote in the Senate. In Athens, Greek bond yields hit a fresh record high. And Finland's prime minister warned his government may not take part in another Greek bailout if collateral issues aren't met.

Markets on rise Stock investors are in a better mood this morning, buoyed by a German court ruling backing the country's efforts in bailing out euro zone nations, reports of a $300-billion (U.S.) jobs plan in the United States and a pop in shares of Yahoo Inc. .

Tokyo's Nikkei gained 2 per cent, and Hong Kong's Hang Seng 1.7 per cent. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were up between 1.8 per cent and 2.7 per cent by about 8:30 a.m. ET.

Dow Jones industrial average and S&P 500 futures also rose.

"Improved prospects for global growth helped buoy commodity prices in general, and lift the London index from the outset today, but it’s arguably been the fact we’ve seen no real surprises from Germany, with the country’s constitutional court supporting the Greek bailout measures, that has helped lock in these gains," said IG Index sales trader Ben Critchley in London.

"Interestingly, however, the subtext here is that it’s going to be much more difficult for Germany to engage in such support going forward, so whether the positive sentiments here can be sustained remains to be seen."

Saab story Sweden's Saab Group filed today for court protection, pinning its hopes on fresh funds from two Chinese auto companies that plan to buy a majority interest in the auto maker. But that deal with Pangda Automobile Trade Co. and Zhejiang Youngman Lotus still has to be approved in China.

“While the voluntary reorganization process will no doubt present us with a number of tough issues and decisions, I believe that Saab Automobile will emerge stronger from this process," chief executive officer Victor Muller said in a statement.

In Economy Lab Mike Moffatt doubts Switzerland's currency peg will hold. Rather, he believes it will be tested by currency speculators, and the speculators will be successful.

In International Business In a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings, Martin Wolf of The Financial Times writes. Markets are loudly saying exactly this. So listen.

In Globe Careers Trying to motivate employees without knowing what they want is like operating in a vacuum. So, writes Rajeev Peshawaria, stop trying to tell them what you want and start asking what they want.

From today's Report on Business

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