Jim Bourg
The global recovery just got a sobering reality check, and this time only part of it came from across the Atlantic.
Two months of encouraging momentum in American private-sector employment came to a screeching halt in May, U.S. Labour Department data showed Friday, sending fresh shockwaves through financial markets just as investors were absorbing new signs that the European debt crisis that started with Greece is widening.
The troubles abroad overshadowed Canada's fifth-straight monthly job increase, underscoring Bank of Canada Governor Mark Carney's warning this week of an "increasingly uneven" rebound elsewhere in the world, and pushed the Canadian dollar down despite the much rosier picture on this side of the border.
"Outside of Canada's border, boy, it certainly looks like a bumpy ride," said Pedro Antunes, the Conference Board of Canada's director of national and provincial forecasting. "The U.S. economy and the global economy depend on the U.S. consumer, and how can you sustain U.S. consumer spending if you don't get stronger employment growth?"
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But in the interconnected world, even Canada's rapidly rebounding economy could be at risk should conditions in the U.S. or Europe deteriorate because of the effect that could have on Canadian stocks and commodity prices, and on demand for Canadian exports.
Stocks and commodities from the United States, Europe and even Latin America plunged, after the U.S. jobs report sparked fears the recovery is more fragile than had been believed. The euro fell below $1.20 (U.S.) for the first time in more than four years, after a Hungarian official said that economy is in a "very grave situation" and the country - which just two years ago received a loan bailout from the International Monetary Fund - is conceivably at risk of default.
Private-sector employment growth in the United States, Canada's most important export market, slowed dramatically in May, with almost all of 431,000 new jobs linked to a surge in hiring of temporary federal workers to conduct the 2010 census.
U.S. companies hired a mere 41,000 workers during the month, far fewer than the 180,000 economists anticipated and a sharp drop from the 231,000 private jobs added in April.
The unemployment rate fell to 9.7 per cent from 9.9 per cent, but only because the labour force shrank as hundreds of thousands of Americans gave up on their job search or abandoned unsatisfying stopgap gigs they had been forced to take to make ends meet after the recession.
In response, the Standard & Poor's 500 index dropped more than 3 per cent and the Dow Jones industrial average fell below 10,000, as the jobs report cast doubt over U.S. companies' earnings projections. The MSCI World Index of stocks in 24 developed countries fell almost 3 per cent, the most in two weeks, and crude oil plummeted the most since early February to below $72 (U.S.) a barrel. Investors once again flocked to the safety of U.S. Treasuries, causing the loonie to drop.
Employers in Canada, meanwhile, added 24,700 jobs in May, Statistics Canada said Friday. Some 310,000 jobs have been created since the labour market started healing in July, 2009, meaning most of the losses from the recession have been recouped. Virtually all of the growth since July has been in full-time positions, and private-sector hiring has picked up in recent months.
The jobless rate stayed at 8.1 per cent, but that's because more people entered the labour market in search of work, which can be interpreted as a sign of increasing confidence in the economy.
Still, 1.5 million of Canada's eligible workers remain jobless.
The lingering joblessness in advanced economies reflects a recent report from the IMF, which said unemployment in the developed world, where economies are growing more slowly than in emerging markets such as China and India, will likely stay high through the end of 2011.
The average unemployment rate of a group of 14 rich nations including Canada will be around 9 per cent at the end of next year, compared with closer to 6 per cent in late 2008, the IMF said.
Unemployment in the euro region is currently higher than 10 per cent, according to the latest available figures. In Spain, another nation with staggering debt, the jobless rate is 20 per cent.
Jonathan Wadsworth, a professor at the London School of Economics' Centre for Economic Performance, noted that European companies did not cut their work forces as severely as did their counterparts elsewhere, so the persistently high jobless rates may be a function of companies having fewer positions to refill.
"If there's been less of an employment shakeout in the downturn, there's going to be less of an employment upturn come the recovery," Prof. Wadsworth said.
Nonetheless, he said, the turmoil in markets as European governments scramble to show investors they're serious about cutting their debt loads "shakes confidence in hiring and a willingness to invest in capital spending," both in Europe and in the U.S.
"Firms won't take on labour if they think the recovery's uncertain - they will make their existing work force work longer."
With files from Bloomberg News