HIGHLIGHTS OF THE WEEK
• Germany ratified the terms of the second Greek bailout package on Thursday. That may have bought Europe more time, but the reality is Greece will need to default.
• A redefinition of the euro area would be ugly for everyone, most of all Greece. Given the social and economic consequences of such an outcome, it is likely that European politicians would opt for some sort of fiscal transfer union among the zone’s member states.
• Whatever the outcome in Europe, the U.S. won’t be immune from the fallout. But the country will have a better chance of holding onto market confidence if it continues working towards a credible plan for medium-term deficit reduction while avoiding a premature tightening of the public purse strings.
• The Canadian dollar continued to get caught up in the cross-fire this week, as jittery global investors continued to flee commodity-oriented markets in droves, sending the currency to a 12-month low.
• Even a dose of good economic news coming from this morning’s release of real GDP for July failed to buoy the currency materially in early morning trading, which remained below the US$0.96 mark.
• The back-to-back monthly GDP increases suggest that a second consecutive contraction in GDP in the third quarter is likely not in the cards. Still, investors might take little comfort from the backward-looking July data.
• We stand by our relatively muted Canadian real GDP growth forecast of 1-1.5% (annualized) in Q4, but frankly the risk of a slip back into a recession – albeit a relatively shallow one compared to 2009 – remains heightened.
It will be quite intersting how this all plays out shortly.
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