Weak economic data grind down recovery hopes

Weak economic numbers are testing the market's faith that the current "soft patch" is just a temporary blip in a grinding but solid global recovery.

Stocks are slumping, pulled down by a disappointing U.S. labour market, fears that Washington won't raise the U.S. debt-ceiling before an early August deadline, signs that China's manufacturing machine may be slowing, and the threat to the European banking system if the debt crisis in countries like Greece spreads.

The market reaction may be more a reflection of an ever-increasing constellation of unknowns than of what's actually happening on the ground. But the danger is that overblown worries about the current state of the global economy could become a self-fulfilling prophecy.

U.S. Federal Reserve Board chairman Ben Bernanke and Bank of Canada Governor Mark Carney have both insisted that growth on both sides of the border will pick up in the second half of the year. Increasingly, though, assurances about the second half of the year from the stewards of the two economies may not matter to investors, who each day are becoming more nervous about what David Watt of RBC quipped Thursday has been a "persistently temporary" slowdown.

"From a pure economic point of view, the markets should not behave like this, but there's a lot of uncertainty from Europe to the U.S., and nobody knows how things are going to end," Henry Mo, vice-president of global and U.S. economics at Credit Suisse in New York, said Thursday in an interview. "Basically, the market is dominated by these news flows. All the uncertainty is feeding into attitudes about the 'soft patch.'" The MSCI All-Country World Index fell more than 1 per cent Thursday, the second daily drop in a row, led by producers of energy and raw materials as well as financial companies. The benchmark Standard & Poor's 500 index - which is down almost 6 per cent since the end of April - also fell, and most stocks in the Dow Jones industrial average suffered losses.

Canadian stocks also fell, and the currency lost as much as 0.9 per cent in value. That was in part because of worries about global growth, but also because oil, the country's biggest and most lucrative export, dropped to below $90 (U.S.) a barrel after the International Energy Agency said it will release 60 million barrels from emergency stockpiles.

The recent turbulence in the U.S. is not as bad as what was experienced last summer, Mr. Mo argues. In a research note earlier this month, Mr. Mo and his colleagues contrasted the 2011 "soft patch" with the "summer swoon" of 2010.

But the softness continues to show up in economic indicators being released by the world's biggest economies. Just one day after Mr. Bernanke acknowledged that the U.S. recovery has been slower than he and his policy team were anticipating, and warned that high unemployment could last well into 2013, the Labour Department said jobless claims rose last week - the same period the agency used to conduct its monthly employment survey.

That suggests job figures for June won't improve on the labour market's lacklustre May performance, when a mere 54,000 jobs were created nationwide.

Plus, negotiations in Washington on how to trim the country's massive deficit and debt load are at a virtual standstill, weeks before a deadline by which lawmakers must raise the $14.3-trillion (U.S.) cap on the government's ability to borrow money, or the United States could face an unprecedented default on its obligations.

Across the Atlantic, European officials and the International Monetary Fund managed to hammer out a new austerity package with Greece Thursday, but it's not yet clear the Greek government will be able to push it through in a vote next week. Greek bond yields - and those from Portugal and Ireland - still soared, and the cost of insuring European sovereign debt from default hit a record after European Central Bank President Jean-Claude Trichet said financial risks in Europe were flashing "red." And in China, the linchpin of the global rebound, a purchasing managers' index released Thursday suggested manufacturing is expanding this month at the slowest pace in almost a year, as global growth sputters and demand for Chinese exports declines.

Still, there are silver linings that belie the gloom and offer hope for a healthier global economy.

Cheaper oil, for instance, means households aren't as squeezed and can devote more of their disposable incomes to consumer goods that they've been forgoing as they pay higher energy bills.

And a factory slowdown in China, if not too sharp or abrupt, suggests inflation is becoming less of a worry, reducing the need for a destabilizing series of interest-rate hikes. It also could be a positive indication of Beijing's efforts to rebalance the economy a little further away from an emphasis on keeping the currency low to boost export sales abroad.

``If the short-term slowdown can be exchanged for a better balance in the economic structure, where they rely less on exports and more on domestic demand, that's good not only for China but also for the whole global economy," Mr. Mo said. "But in the short term, it definitely adds more uncertainty and anxiety for markets, given that China is the dominant force of growth."