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Tories block economists from hearing: Why cause 'worry'?

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Flaherty, Carney called to testify Some Tory MPs on the Commons Finance Committee don't want Canadians to "worry" needlessly that the economic recovery is sputtering.

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They'd much rather hear only from Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney, and exclude private economists from a meeting Friday to discuss the global debt turmoil and what it might mean for the country, The Globe and Mail's Bill Curry reports.

Seriously. Here's what Shelly Glover, Mr. Flaherty's parliamentary secretary, said about the Tories on the committee blocking opposition attempts to hear from private economists as well: "It's imperative, in my opinion, that we not do anything that might worry Canadians. And I think that hearing from the Minister of Finance and the Bank of Canada will help to reassure them, as they should be, that there is concern, but that we are proceeding, as parliamentarians, in their interests."

And, ouch, here's what Tory MP Randy Hoback added: "I want to make sure that we don't have people coming into this meeting and start speculating and start giving their opinions and their impressions which are based on what? A crystal ball?"

Mr. Hoback may forget that Mr. Flaherty has relied on said crystal balls for years.

Mr. Flaherty's spokesman, Chisholm Pothier, said that as he understands it, Friday's hearing is to see what Mr. Flaherty and Mr. Carney have to say to Canadians in the midst of the global turmoil, and that the panel will hear from economists during pre-budget consultations.

"It's really not that hard to hear from economists," he said. "A fella can pick up the phone or check out their latest bank issued report. But that's not what Friday's meeting is for, and the Conservative members aren't going to let Friday's meeting get hijacked by partisan political theatre, when there's a serious purpose to be achieved."

Avery Shenfeld, the chief economist at CIBC World Markets, said he expects Mr. Flaherty to reassure the country that he plans to stick with his deficit-cutting plan unless there's a recession, and he doesn't see such a slump on the horizon. (Nor do those crystal ball economists, by the way.)

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"Flaherty has been playing a balancing act between trying to maintain confidence while acknowledging troubles abroad," Mr. Shenfeld said.

As for Mr. Carney, his testimony "will likely go some way to validating recent market expectations for a delay in any additional rate hikes."

If anyone thinks they're not going to get the straight goods from Mr. Carney, who will be speaking publicly Friday for the first time since the Federal Reserve's extraordinary meeting last week, they're sorely mistaken.

Mr. Carney is an exceptional governor, who helped guide Canada through the recession. And he didn't do that by soft-pedalling.

Sarkozy, Merkel propose new measures The leaders of Germany and France met today to try to solve the ills of the euro zone, and called for broader co-operation among the 17 countries of the monetary union, in addition to a financial transactions tax.

Angela Merkel and Nicolas Sarkozy said after their meeting that they want a euro zone economic council, a financial government, if you will. It would meet twice a year and would have its own president. They also want governments to include a deficit limit in their constitutions. But they don't see the need for a heftier rescue fund, and they didn't bow to pressure to agree on a euro zone bond.

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I'm not sure they're going to calm the market angst all that much. It looks initially like more meetings and more commitments, which the euro zone leaders are awfully good at, though there could be something more substantive in the push for a tax. Each government, of course, has its own issues, and Germans are becoming increasingly troubled by the bailout efforts.

"As is the norm with these meetings they promise much but fail to deliver when it counts," said CMC Markets analyst Michael Hewson.

"The outcome of the meeting while useful in determining the intended destination with respect to a convergence roadmap did nothing to alleviate the immediate concerns with respect to the current crisis right now," he said via e-mail.

"Some of the proposals are fraught with difficulty, especially with respect to the harmonization of corporation tax. It's hard to see Ireland accepting that proposal. As things stand it's like choosing your destination for a trip of a lifetime and then not telling people how you're going to get there."

The meeting came amid fresh signs that Europe's economy is stumbling, and that Germany itself may no longer be the Old World's great hope.

Growth in the economies of the 17-member euro zone and the wider 27-nation European Union slowed in the second quarter to just 0.2 per cent, according to the Eurostat statistics agency. Notable in today's Eurostat report is the fact that growth in Germany, Europe's economic engine, expanded in the second quarter by a measly 0.1 per cent. Last week, France reported no growth.

Europe is on the ropes, now grappling not only with a widening debt crisis but also slower growth and high unemployment, which in the euro zone is 9.9 per cent and in the wider EU 9.4 per cent. Governments have rushed to bring in austerity measures, having run up tremendous debts, in turn sparking ugly protests.

Today's numbers sent new shivers through global markets, and raised questions about whether Germany and France can together solve the ills of the Old World.

"The underlying issue has been left unresolved, the market doesn't care right now about future intentions with respect to euro zone governance," Mr. Hewson said. "It wants to know how EU leaders intend to bridge the gap between the size of the [bailout fund]now and how leaders intend to deal with possible contagion to Spain and Italy."

Until today, Germany had stood apart from the other countries of the embattled monetary union. But that's changing now.

"The soft quarter and revisions will prompt sharp cuts to Germany's 2011 growth forecasts," said Benjamin Reitzes of BMO Nesbitt Burns.

"The question now is how much will the recent turmoil weigh on Q3? If momentum was negligible entering the current quarter, there's little reason to expect much acceleration considering ongoing debt worries and the weakened state of global financial markets."

He wondered whether it will take a crisis that possibly threatens the euro itself before the group's leaders take truly "bold" measures.

Less austerity, more jolt? Maybe, as Robert Reich puts it today, it's time to consider less austerity and more juice as the global recovery fizzles.

Mr. Reich, the former U.S. Labour Secretary and the Chancellor's Professor of Public Policy at the University of California at Berkeley, is not alone. Christine Lagarde, the former French finance minister and the new chief of the International Monetary Fund, also weighed in, though somewhat differently.

There have been mounting fears about a double-dip recession, though most economists certainly don't see that at this point. But the indicators of late have been weak, notably today's readings of GDP in Europe that show growth is tepid and that Germany, the continent's powerhouse, has stalled.

The global slowdown, Mr. Reich said today via Twitter, could turn into a recession unless Europe and the United States bring in more "expansive" fiscal and monetary policies. "This is no time for austerity," he warned.

Does that jibe with the market focus on fiscal policy, as Europe sinks ever deeper into a debt crisis and U.S. politicians bicker about how to cut back?

It certainly can. As Ms. Lagarde writes in The Financial Times, "slamming on the brakes too quickly" will harm the recovery and hurt job prospects even more amid terribly high levels of unemployment.

"So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow," she says in her newspaper piece.

"Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs.

"By the same token, support for growth in the near term is vital to the credibility of any agreement on consolidation. After all, who will believe that commitments to cuts are going to survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?"

This comes against the backdrop of slower growth and the increasing failure of policy makers, notably in Europe, to do much about it.

As Julian Jessop, the chief international economist at Capital Economics in London, notes today, policy makers may be growing "increasingly impotent" in how they fight. Interest rates are close to zero, so further stimulus there is limited, he said, while there's only the "distant prospect" for further quantitative easing in the United States.

"In this environment there is still plenty of scope for nasty surprises," Mr. Jessop said in a report.

"Policy makers may appear to have stabilized markets in the euro zone with some short-term fixes, including large purchases of government debt and temporary bans on shorting of financial stocks. But in the meantime even the core economies, including Germany, appear to be stalling. And in the U.S., the risk of a lurch towards protectionism will surely increase ahead of the presidential election next year, especially if unemployment remains high."

Fitch holds firm on U.S. The Fitch ratings agency has left the United States with its triple-A rating, citing its "exceptional creditworthiness."

Standard & Poor's may have downgraded U.S. debt to double-A, but Fitch sees America's outlook as stable.

"The affirmation of the U.S. 'AAA' sovereign rating reflects the fact that the key pillars of U.S.'s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base," Fitch said. "Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks."

The ratings agency appeared exceptionally keen on the U.S., though there were caveats.

"The U.S. economy remains one of the most productive in the world, reflected in levels of income per head that are substantially higher than the 'AAA' median and other major 'AAA' sovereigns. The institutional, legal and financial infrastructure supports business growth and innovation and Fitch continues to forecast that the U.S. economy (and tax base) will, over the medium term, be one of the most dynamic amongst its high-grade and 'AAA' peers and support the stabilization and eventual reduction in government indebtedness. Fitch's current assessment is that the US economic recovery will regain momentum and that a period of above trend growth will subsequently be followed by growth of at least 2.25% over the long term."

Fitch said it will review its projections after a U.S. supercommittee reports later this year on how to slash the deficit, and based on the U.S. economic outlook. It warned things could change depending on the outcome.

"An upward revision to Fitch's medium to long-term projections for public debt either as a result of weaker than expected economic recovery or the failure of the Joint Select Committee to reach agreement on at least $1.2-trillion of deficit-reduction measures would likely result in negative rating action," it said.

"The rating action would most likely be a revision of the rating Outlook to Negative, which would indicate a greater than 50-per-cent chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade."

Manufacturers struggle Canada's factories continue to struggle with softening sales.

Manufacturing sales fell in June by 1.5 per cent, to their lowest level since November 2010, Statistics Canada said today. "Sales have declined for three consecutive months after growing steadily since May 2009," the federal statistics gatherine agency said.

Sales slipped in 15 of the 21 industries measured, which together represent more than 75 per cent of the sector.

Oil and coal industries suffered the most, marking a sales drop of 6.6 per cent. "The decrease reflected price declines of 2.6 per cent and lower volumes as a result of ongoing shutdowns for retooling at various plants, Statistics Canada said.

"Today's report reflects the continued deterioration in global conditions in the second quarter," said economist Francis Fong of Toronto-Dominion Bank.

"After increasing by almost 25 per cent from May 2009 to January 2011, manufacturing sales have now fallen by 2.6 per cent," he said in a research note.

"The fact that the sector seemingly shrugged of the high Canadian dollar for most of 2010 indicates that the gains made that year were mostly demand driven as both the U.S. and global economic recoveries began gaining traction. Going forward, the overall weak profile for economic growth among Canada's key trading partners over the next few months is likely to weigh heavily on the manufacturing sector. "

After climbing for a year, inventory levels remained the same in June, sitting at their highest since April 2009. The inventory-to-sales ration rose to 1.39 in June from 1.37 to mark the highest since December 2009. Unfilled orders climbed 3.4 per cent, the sixth increase in a row.

"The data captured the earlier weakness in exports, and included hits to petroleum/coal products due to retooling shutdowns at refiners, but also included weakness in machinery," said Avery Shenfeld, chief economist at CIBC World Markets.

"June now looks to be a weak month for the Canadian economy, and will play into Q2 being a slightly negative quarter overall, although we expect the goods sector to add to growth again come Q3 due to pick-ups in autos and energy products. The weaker data will reinforce expectations for the Bank of Canada to remain on hold for the next couple of quarters."

Observers believe the central bank won't raise rates for some time yet, given a bleaker outlook for the U.S. economy and the Federal Reserve's extraordinary announcement that it doesn't expect to hike its benchmark rate for another two years.

CREA boosts forecasts, but markets to tame Canada's real estate industry has slighty boosted its 2011 forecast for sales and prices given a better-than-expected second quarter. But expect things to slow down a bit going forward.

The Canadian Real Estate Association now expects housing sales of 450,800 this year, up by less than 1 per cent from 2010 but better than the slight decline it had originally forecast. However, it added in a statement today that "erosion in affordability due to higher prices has prompted a small downward revision to the outlook for sales in 2012."

CREA said it expects the national average home price to climb 7.2 per cent this year to $363,500, largely because of the action in Vancouver and Toronto.

"The national average home price is expected to moderate in the second half of 2011, returning to normal following a heavily skewed start to the year."

On a monthly basis, CREA reported today that sales dipped in July by 0.1 per cent from June, while prices dipped 0.3 per cent and listings rose 0.9 per cent.

"While national sales have been edging lower on a trend basis since the beginning of the year, resale prices seem to have leapt on the bandwagon," said Toronto-Dominion Bank economist Sonya Gulati.

"This is not surprising given the two- to three-quarter lag often seen between resale activity movements and changes in resale home prices," she said in a research note.

"Less favourable economic fundamentals, combined with new mortgage rules in place, are beginning to clip the wings of the Canadian housing market activity. With uncertainty permeating markets regarding the state of the global economic recovery, we continue to expect that real estate activity with temper over the next 18-24 months."

Noting that the Bank of Canada isn't expected to hike interest rates by much any time soon, Ms. Gulati said low borrowing costs will support the industry. But that only pushes back an expected "adjustment" in the market.

"With their recent build-up in housing activity and prices, Toronto and Vancouver are thought to be particularly vulnerable relative to other major markets," she added.

"In July, we saw sales and prices stay flat or retreat in both of these two urban centres. Going forward, a correction is ripe for these cities in order to bring both markets in line with balanced territory. However, we expect such a retreat in prices and sales to be gradual in nature taking place over several quarters, with the brunt occurring in late 2012 into early 2013."

Canaccord eyes British firm Canaccord Financial Corp. , hot off an international expansion, now has its eye on a British firm, Streetwise columnist Boyd Erman reports today.

Canaccord said it has held preliminary talks with Evolution Group PLC about a possible offer. Evolution's banking business would fit well with Canaccord's London business.

Evolution is already in talks with Investec, another suitor, and its stock surged today on Canaccord's announcement.

Statoil find said to be huge Statoil ASA says it may be sitting on one of the biggest oil discoveries ever on the Norwegian continental shelf.

The discoveries in the North Sea, known as Aldous and Avaldsnes, may be part of a structure of between 500 million and 1.2 billion barrels of recoverable oil, the company said in a statement today.

"If the upper part of the interval strikes pay dirt, the discovery will be one of the 10 largest oil finds on the Norwegian continental shelf," said Statoil, which has a 40-per-cent stake in each of the licences.

Love may not be in the air Some raunchy photos making their way through Cyberspace has delayed the next phase of a Cathay Pacific ad campaign, The Economist reports today.

That's likely because the campaign's theme was "Meet the team who go the extra mile to make you feel special."

Well, a pilot and flight attendant lost their jobs seemingly for going an extra mile, as photos showed them in what the airline deemed "compromising situations," though on the ground.

"To much sniggering, the airline duly suspended the next phase of the advertising campaign, which had been due to start on Sept. 1, for a month," The Economist said.

"Of course travellers with a more robust sense of humour might decide that the imbroglio rather brightens up the dreary world of commercial aviation. Cathay won't, one suspects, lose too many passengers because of this."

In International Business today A consortium of large U.S. companies including General Electric, Goldman Sachs, Coca-Cola and Dow Chemical is backing a new initiative to help manage water supplies in regions threatened by shortages, reflecting growing concern about the importance of water to businesses. Ed Crooks of The Financial Times reports.

In Economy Lab today Oil price would have to fall to $60 to delay projects in the oil sands, according to The Financial Times Lex blog.

In Personal Finance today Scotiabank's Moneyback account pays cash for your Interac debit transactions.

From book rentals to digital versions, demand for cheap alternatives has inspired innovative solutions among buyers and sellers alike.

Tossing toonies and loonies in a jar is a great way to save for a special treat

From today's Report on Business

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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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