Dec
03As a result of excessive deficit and debt problems, many countries in Europe are taking deliberate action to trim their public sectors. However, greater austerity by means of reduced government spending is not the total answer to the problem. There is a need to promote growth.
Healthy advances in GDP lead to a natural increase in tax revenue that can more quickly reduce a budgetary shortfall. With respect to Greece and Portugal, it is skepticism about economic growth prospects that is scaring away investors. Leadership in most at-risk countries has recognized the need for structural change to become stronger at home and in foreign markets.
The target for much of the restructuring is labor markets. Some of the common measures being enacted are public sector layoffs, minimum wage reductions and extension of the retirement age beyond 65. Even relatively well-off France has joined the movement. This is not sitting well with local labor movements. In almost all instances, massive marches are being held in protest.
The purpose of the labor reforms is to make industry more competitive in a tougher world environment. Canada and the U.S. need to watch these changes carefully and be prepared to adapt accordingly. It is against some of the companies based in the euro zone that we will be vying for sales. From a construction standpoint, it’s all about competition for investment dollars.
Not all European countries are dealing with the same labor market dynamics. While Spain has a high unemployment rate of 20%, Germany is currently experiencing the lowest number of unemployed workers in 18 years. That nation’s unemployment rate is 7.5%. The euro area as a whole has a jobless rate of 10.1%, not that much different from the 9.6% level in the U.S.
Whether or not the bailout relief extended to Ireland will be sufficient to stem the speculative tide now threatening Portugal and Spain remains to be seen. The biggest worry is that the 440 billion-euro safety reserve may not be big enough to meet Spanish funding requirements over the next three years. According to some authorities, the full 440 billion is not really the true figure.
The rescue fund itself is based on selling bonds. To carry out a successful bond issuance will require a certain portion of the total be set aside as cash in order to secure an AAA rating. The placement will also need backing by the creditworthiness of member states, headed by Germany.
There is one way in which Europe may catch a break. The governments of neither Spain nor Portugal are immediately desperate for cash in the form of debt rollovers. The next major round of bond redemptions is not scheduled until April of next year. By then the prospects for economic growth in the U.S. and even in Europe may appear considerably brighter.
Due to the uncertainty in Europe, the U.S. dollar has been advancing versus the euro. The best news for Europe may be that the U.S. is finally giving indications of coming out of hibernation. There are first stirrings of employment improvement. Retail sales are on the mend. Corporate profits are at record highs. Third quarter GDP growth has been revised to +2.5% from +2.0%.
Black Friday after Thanksgiving in the U.S. this year saw a mild increase in shopping activity versus last year. Internet sales soared. The term “black” is based on accounting terminology. It marks the defining day in the year when many retailers shift from “red ink” into profitability.
The last time the euro fell into decline versus the greenback (i.e., this past spring during the Greek financial crisis), Germany’s export sales surged. With a stronger U.S. economy this time around, the boost to products with euro-denominated prices may be even more pronounced.
Where does this leave Canada? GDP results for the world’s 10th largest economy were reported on Nov. 30 by Statistics Canada. The quarter-to-quarter annualized change was +1.0%, a slowdown from Q2’s level of +2.3% (upwardly revised from a previously reported +2.0%).
Canada’s fastest post-recession rates of growth occurred in 2009’s fourth quarter (+4.9% annualized) and 2010’s first quarter (+5.6%). The slowing of the pace has very much been a function of the sluggish recovery in the nation’s largest trading partner, the U.S.
The fact that Canada’s final domestic demand (which omits the international sector) in this year’s third quarter grew 3.8% annualized places almost all of the blame for the weak +1.0% overall gain on foreign trade. The Canadian dollar has been close to parity with the U.S. dollar for most of this year, encouraging import purchases but making export sales more difficult.
Annualized goods export sales were -5.1% while imports racked up a 9.9% advance. Business machinery and equipment purchases have been strong over the past three quarters (+17.8% in Q1; +32.7% in Q2 and +28.7% in Q3). However, a large proportion of means-of-production orders are placed with sources outside the country, contributing to the offsetting import strength.
Investment in residential structures tailed off (-5.3% annualized) as housing starts have exhibited a downward trend for the past six months. But investment in non-residential structures was notably positive (+10.9% annualized). There is a big question mark concerning what happens to non-residential construction once federal stimulus spending ceases at the end of March 2011.
Mining contributed to overall growth led by copper, nickel, lead and zinc. Export sales of natural gas to the U.S. have been a disappointment all year. Corporate profits registered a mild gain (+0.7%) after a slight decline in the second quarter (-0.6%). Year-over-year, they were +16.0%.
Bank of Canada governor Mark Carney was faced with a dilemma upon the release of October’s inflation rate. It jumped to 2.4% from 1.9% in September, causing some speculation that interest rates might begin to climb again. The weak GDP numbers suggest otherwise. The current level of 1.00% for the overnight rate will likely stay in place until at least the second quarter of 2011.
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