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Obama's dilemma: Victory doesn't change bleak economic outlook Add to ...

These are stories Report on Business is following Wednesday, Nov. 7, 2012.

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Four more years
President Barack Obama put it well in his victory speech: “I’m not talking about blind optimism, the kind of hope that just ignores the enormity of the tasks ahead or the roadblocks that stand in our path. I’m not talking about the wishful idealism that allows us to just sit on the sidelines or shirk from a fight.”

Indeed, it’s going to take four more years, and then some, to fix what ails the U.S. and global economies.

Market reaction to the Obama victory started off muted. But stocks sank sharply amid fears over the so-called U.S. fiscal cliff and continuing woes in Europe, where a new forecast today painted a troubling picture.

This was an election all about the economy, and the president played it well, convincing Americans he’s still the best person for the job.

But the U.S. recovery is soft, and unemployment is high, at almost 8 per cent, Europe is in recession, and the world’s troubles are washing up on Canada’s shores.

“As it slowly became apparent that the outcome of the U.S. election was going Obama’s way the U.S. dollar slowly started to slide back after the strength of recent days as markets slowly adjusted to the fact that there would be continuity with respect to the economic policies of the last four years,” said senior analyst Michael Hewson of CMC Markets in London.

“What it doesn’t change is the problems facing the U.S. economy, and the roadblock that is the fiscal cliff. Once the euphoria of an Obama win has died down, this is likely to be the one thing that markets and investors focus their attention on.”

The fiscal cliff refers to the combined hit higher taxes and cutbacks if there’s no budget deal by the beginning of next year, which some fear would plunge America into another recession.

"With neither party gaining much political capital during the elections, both have little choice but to strive for a compromise that prevents the hikes in taxes and cuts in government spending that are due to start sucking $600-billion, or 4 per cent of GDP, out of the economy early next year," said Paul Ashworth and Paul Dales of Capital Economics.

As The Globe and Mail’s Brian Milner writes today, that cliff edge now looms larger given the divisions in the U.S. Congress.

"By adding four more years to Obama’s tenure, voters have opted for a known horse over a less familiar one," said economists Peter Buchanan and Emanuella Enenajor of CIBC World Markets.

"However, the Republicans’ retention of the House, the Democrats the Senate, means Obama will face the same fractured landscape that impeded legislative progress during the last two years of his term. That leaves markets with significant policy uncertainty leading into the fiscal cliff and debt ceiling discussions."

The CIBC economists were referring to the fact that the government is on track to reach its debt limit of $16.4-trillion by the end of the year, setting the stage for a battle.

"The current House Speaker [John] Boehner indicated that any increase in the ceiling would need to be met with offsetting cuts," said Mr. Buchanan and Ms. Enenajor.

"Obama, the House and Senate will be under pressure to come to an agreement to avoid a repeat of the mid-2011 brinksmanship game, although any deal involving new cuts to spending would only layer onto existing fiscal austerity."

They also noted that even as these "immediate challenges" are dealt with, there are major longer-term fiscal issues, though economic growth will probably "track slightly higher than what a Romney presidency would have seen, given Obama's preference for reducing the deficit via tax increases rather than cuts to government spending."

The election results also suggest the Federal Reserve will continue its aggressive campaign to juice the recovery and bring down unemployment. The U.S. central bank is now working through an asset-buying program known as quantitative easing, and has pledged to hold its benchmark rate at its emergency low level through 2015.

There had been speculation that Republican challenger Mitt Romney would have installed a new, less aggressive central bank chief when Ben Bernanke’s term ends, had he won.

In the end, it's all about the fact that the election results don't change the economic or fiscal picture, said Mr. Ashworth and Mr. Dales.

"Over the next couple of years the U.S. economy will remain saddled with an uncomfortably high unemployment rate and will struggle to grow by more than 2 per cent a year," they said.

"And at some point, some combination tax hikes and spending cuts will be needed to prevent Federal government debt from spiraling towards 100 per cent of GDP."

Europe sinks deeper
As if to underscore these points, the European Commission painted the ugliest of pictures in a new forecast today, projecting intolerable levels of unemployment in some countries and an extremely hard climb back from the depths.

"Unemployment in the EU is expected to remain very high," the group said in its autumn forecast. "The large internal and external imbalances that built up in the pre-crisis years are being reduced, but this process continues to weigh on domestic demand in some countries, and economic activity diverges significantly across member states."

The EC now projects economic growth of just 0.5 per cent next year for European Union, and no growth for the smaller, 17-member euro zone. Growth is forecast at 1.5 per cent for both in 2014.

"The weak short-term growth outlook raises concerns for the labour markets, where a further rise in the already high unemployment rate next year appears likely," said Maro Buti, the group's driector general of economic and financial affairs. "Bold reforms are needed to prevent a prolonged period of high unemployment, which would bring social hardship and a destruction of human capital detrimental to longer-term growth."

The weaker members of the monetary union remain the focus, of course, with dire outlooks. Greece's economy, for example, is expected to contract by 6 per cent this year and 4.2 per cent next, with growth not resuming until 2014, and only at 0.6 per cent. Greece's jobless rate is projected at 24 per cent next year, easing only slightly a year later.

Spain, where more than half the youth population is without work, will also continue to sink deeper, with a projected jobless rate next year of a stunning 26.6 per cent.

For the euro zone as a whole, unemployment is forecast to hit 11.8 per cent next year.

Just sayin’
Voters in Colorado and Washington have approved legalizing some marijuana use, The Globe and Mail’s Josh Wingrove reports.

And the Canadian dollar is above parity.

A new twist on cross-border shopping?

Bombardier delays first flight
Bombardier Inc. is delaying the first flight of its new C Series jet to June of next year, The Globe and Mail's Bertrand Marotte reports.

The Montreal-based aerospace giant had previously indicated it was on track for the inaugural flight of the 100-seat transatlantic jet by the end of this year. Now, it's looking at mid-2013.

The C Series program has “encountered certain issues, mainly related to some suppliers,” the company said in a statement as it reported a gain in third-quarter profit to $212-million (U.S.) or 12 cents a share from $192-million or 11 cents a year earlier.

Revenue slipped to $4.3-billion for the three months ended Sept. 30, from $4.6-billion in the year-earlier period.

Agrium profit sinks
Agrium Inc. profits plunged in the third quarter of the year, the company said today, hit by expenses for share-based payments and other factors.

The Canadian agribusiness giant earned $129-million (U.S.) or 80 cents a share in the quarter, down from $293-million or $1.85 a year earlier.

Without the various hits, it said, profit would have been $215-million or $1.34 a share.

“Agrium’s third quarter results demonstrated our competitive strengths in nitrogen and the ability of our Retail business to deliver solid earnings, even given the early spring season and after experiencing one of the worst droughts in U.S. history,” said chief executive Mike Wilson, though he noted a weaker potash market as talks with Chinese and Indian buyers drag on.

WestJet flies higher
With higher demand and simply more passengers filling up more seats, WestJet Airlines Ltd.'s profit soared 80 per cent in the third quarter, The Globe and Mail's Guy Dixon reports.

The airline's passenger load factor, meaning the amount of available seats taken on planes, had its highest quarter ever, rising to nearly 85 per cent, from 80 per cent a year ago.

This helped the company post a profit of $70.6-million, or 52 cents a share, compared with only $39.3-million, or 28 cents a share, in the third quarter last year.

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