OTTAWA — The recovery is losing steam fast — and so might the G20 prescription for fiscal tightening to build market confidence.
One week after the vast majority of leaders from the world’s large economies prescribed a dose of fiscal restraint for the global economy, fresh data from all corners of the globe points to a darkening outlook.
Indicators from Europe, North America and Asia were punctuated Friday by jobless numbers from the U.S. that signalled worse than expected growth and heightened risks of a double-dip recession.
The U.S. shed 125,000 jobs in June — although private sector employment gained a modest 83,000 — with hours worked down, earnings lower, and about 650,000 fewer Americans looking for jobs.
Moreover, the U.S. Commerce Department said orders for manufactured goods decreased by a massive 1.4 per cent in May, the biggest drop in over a year.
As for the G20’s key objective of building confidence about the future, the early results are not encouraging.
North American stock markets have been down since the summit, with the Toronto exchange down nearly 100 points Friday, bringing the loss for the week to more than 511 points or more than four per cent.
CIBC economist Meny Grauman said investors have their eyes on economic data.
“We have high hopes from big meetings of world leaders, but the reality is that not much happens,” he said.
“What we’re seeing is the market reacting to new information coming out of China, and also today out of the U.S.”
Canada won’t get a real sense on how it is holding up until next week, when employment for June is released. The country has seen growth sputter in recent weeks including April’s worse-than-expected gross domestic product reading of zero growth.
Most economists say a double-dip recession is increasingly a risk, but still not the most likely outcome.
“One thing we do know, the global economic recovery has lost momentum,” said Sherry Cooper, chief economist with the Bank of Montreal.
“The global economy is deleveraging, not in the government sector, but in the private sector to such an extent that total debt is falling, which inevitably slows growth.”
The G20 has also touched off a furious debate among economists and policy makers about the best course forward for governments.
As head of a global leader in growth and prospects, Prime Minister Stephen Harper believes the danger is sovereign debt reaching unsustainable levels.
Some economists, led by Nobel laureate Paul Krugman, think fiscal restraint too fast, too hard is the real enemy that will keep growth so low, governments won’t be able to grow out of their deficit problems.
Most governments and most economists are siding with Harper.
The outliers are Japan, which has seen a mirage recovery before, and U.S. President Barack Obama, who is signalling he may propose a second round of stimulus spending.
“I’m in the camp that says this is no time for fiscal tightening in the U.S. because the economy is still too shaky,” Cooper said.
“Hopefully, the U.S. will implement deficit-reducing measures next year that are back-ended so the contractionary effects will not occur too soon.”
Royal Bank assistant chief economist Paul Ferley said some high debt countries will be forced to cut spending, but most major economies would be wise to wait for clear signs of a recovery before slamming on the brakes.
Too much money and effort has been spent getting the economy to this point to jeopardize the fragile recovery on a premature exit, he argued.
“In the course of the downturn, fiscal policy had to become very stimulative and at some point that is going to have to be reversed, but I don’t think the policy makers are going to be in such a rush to do so that they jeopardize the recovery,” he said.
Ferley noted that even the Canadian government has said it will keep fiscal stimulus in place until next spring.