19 Apr

New Biz? Don’t gamble your home

General

Posted by: Mike Hattim

Starting a new business can be a challenging period for your finances. It may be tempting to utilize some of the equity in your home to fund the startup.

“Of course, the entrepreneur is an optimistic person and they’re trying to plan their business for success. They need to be aware failure is something that could happen,” says Chris Gordon, financial advisor at Edward Jones in Mississauga. “More often than not, the reasons for failure are internal, in other words, failures of the business in terms of the experience or knowledge of the entrepreneur as opposed to anything that happened in the economic environment.”

Mr. Gordon suggests exploring other avenues for funding before risking your home for a new business venture.

“Other sources of finance might be a straight business loan or asking your friends or family for money. Depending on the size of the venture, there may be venture capital or angel investors,” Mr. Gordon says. He notes that in Canada there are a variety of federal and provincial programs that the business may be eligible for in terms of loans, grants, subsidies and also intellectual capital or advice.

If, after taking financial and legal advice, you decide that you will use your home to back your business finances, Mr. Gordon says any joint owner of the property, for example your spouse, should obtain independent legal advice so they are aware of the risks.

The type of business you are running, your liability and your cash flow will all help determine whether it is better to obtain a line of credit against your home or to remortgage the property.

“A home equity line of credit is for short-term borrowing. It allows you to get away with interest-only payments, to borrow and pay back very easily,” says Kelly Wilson, a mortgage broker with Invis in Ottawa. “If you’ve got good cash flow coming in, you can make regular deposits without having to limit yourself to particular payments. That will in turn save you interest.”

Ms. Wilson says if you require the money for a longer period, for example if you are paying a lump sum into a shareholder arrangement, then a mortgage against your property may be more cost effective.

“If the loan wasn’t going to be paid back for a long time and there was a certain amount of money coming back to me on a monthly basis, I will generally look at taking a mortgage,” Ms. Wilson says. “The financing is less expensive than a line of credit. A variable rate would be as low as 2.15% versus lines of credit which are generally 3.5% to 4%.”

Mr. Gordon says business owners must check if the loan can be called in at short term or no notice. He says that it is important to have separate accounting of personal and business income and expenses, especially if you are deducting the loan interest against the business income.

“The business owner should make sure they consult with the financial planning, tax and legal professionals if they don’t have that expertise themselves,” Mr. Gordon says. “Plan the venture for success but also to keep in mind the consequences if things don’t go well and make sure that that’s not going to be disastrous for their personal finances.”

19 Apr

Outlook negative: Chance of S&P U.S. downgrade rattles markets

General

Posted by: Mike Hattim

Standard & Poor’s surprised the market with a downward revision of its long-term rating outlook on U.S. government debt. Investors responded promptly by selling stocks and sending bond yields on a rollercoaster ride, demonstrating that they are paying closer attention to the deadlock in Washington.

Analysts warned the downgrade could lead to a weaker U.S. dollar, equity volatility and higher bond yields as the drama plays out. Indeed, with Europe also struggling through its own debt issues, it is another sign that further gains are going to be harder to come by.

“Clearly this was a signal S&P wants something done prior to the next presidential election,” said Mark Chandler, head of fixed income and currency research at RBC Capital Markets. “It’s not good enough just to buy time until we get to the next round of elections.”

Many had expected rating agencies would wait until after the 2012 elections before taking any action. However, S&P’s decision appears to push that timeline forward or at least raise the heat on U.S. policymakers to get their books in order. It affirmed its AAA sovereign credit rating on the United States, but lowered its outlook to negative from stable and warned there is at least a 33% chance of a downgrade within two years.

The U.S. 30-year bond dropped a full point in early trade with yields spiking to 4.54% before ending around 4.45%. Canada’s S&P/TSX composite index fell 96 points, or 0.7%, to 13,702.3 and the S&P 500 declined 14 points, or 1.1%, to 1,305.14.

The U.S. dollar and treasuries usually act as safe havens, but are the very assets under review here, so the financial market implications of S&P’s move are a bit different in terms of risk aversion, according to Douglas Porter, deputy chief economist at BMO Capital Markets. As a result, he said alternatives such as gold, Canadian bonds and the Swiss franc will benefit as investors move away from long treasuries.

With more than two years passed since the financial crisis began, S&P noted that U.S. policymakers have yet to agree on how they will change the course of recent fiscal deterioration or address longer-term pressures. That contrasts with America’s peers such as France, Germany and the U.K., which have begun implementing plans to address their own problems.

Representatives in Washington are working on a deficit reduction plan that would save US$4-trillion to US$5-trillion over the next 10 to 12 years, but the rating agency wants to see a concrete plan in place by 2013.

That timeline could serve as a catalyst for agreement before the next round of elections, while the United States is also due to hit its US$14.3-trillion debt ceiling by mid-May.

“The first step is realizing it’s a problem, and to be honest, I don’t think the United States was really there,” Mr. Chandler said. “It still may not be there after the warning. After all, it is only a change in the outlook.”

The next step, of course, is doing something about it. However, the U.S. political structure will make this a tough task given that it requires sacrifice and co-operation between the Senate, Congress and the Obama administration on hot-button issues such as tax reform, reducing the huge Medicare and Medicaid bills, and addressing the future of Social Security.

The White House plan and that of House of Representatives Budget Committee chairman Republican Paul Ryan remain far apart ideologically, but a so-called “gang of six” Senators are trying to put together a compromise.

“At some point, they are going to have to have some real leadership that tells the people some hard choices have to be made,” said Norman Raschkowan, North American strategist at Mackenzie Investments. “But I’m not sure going into an election year is the time we’re going see that.

In the face of warnings from the IMF and rating agencies, Canada was able to eliminate its $42-billion deficit, pay down billions on the national debt and bring the budget back to a surplus under finance minister Paul Martin in the 1990s. By cutting spending, reforming the Canadian Pension Plan and raising taxes, Canada’s debt-to-GDP ratio became the best in the G7 later that decade.

“The fact that Canada was able to address its deficit issues and bring tax levels down should give investors and American policymakers some confidence that it can be addressed,” Mr. Raschkowan said.

A roughly 15% decline in the trade-weighted U.S. dollar since it peaked in the middle of 2010 has provided some help. The manufacturing sector and export-oriented companies are doing better, while purchasing managers indices are also looking up.
“A weak U.S. dollar is really part of U.S. economic policy,” Mr. Raschkowan said. He noted that the Bank of Canada adopted a similar approach by allowing the Canadian dollar to devalue gradually, which helped keep industry competitive.

“Other countries are paying the price, including Canada in terms of the adjustment process,” Mr. Chandler said. “It is allowing the U.S. to do something that isn’t available to countries like Greece and Portugal, which are in a currency union.”
Whether it is Canada in the mid-1990s or European countries in 2010, governments only tend to embark on meaningful fiscal austerity when global bond markets force them to, noted Colin Cieszynski, market analyst at CMC Markets Canada. As a result of investors’ merciless focus on weighing risk and reward, he sees the tone of fiscal debate shifting from stimulus to how much should be cut and when.

“With inflation pressure rising, lowering the potential for more monetary stimulus, the Street appears to be taking Standard & Poor’s announcement as the ringing of last call at the liquidity party,” Mr. Cieszynski said.

18 Apr

Is 1st half gain 2nd half pain?

General

Posted by: Mike Hattim

Since climbing back from the depths of recession, Canada’s sound economic footing relative to the United States has been a source of national pride and self-congratulation.

But as much as ever, the U.S. economy’s weaknesses become Canada’s own, an inescapable reality that could be made painfully clear in the second half of 2011.

The disappointing start to the year in the United States now threatens to spread north, raising the prospect of an imminent slowdown in Canadian economic growth. Many observers, the Bank of Canada among them, are advising Canadians to lower their expectations.

“We could lapse into this lowgrowth environment, with low productivity and a high Canadian dollar,” said Brian Bethune, chief financial economist for North America at IHS Global Insight. “I’m not sure that’s a very exciting future.” To him, a drop-off in growth is “baked in the cake.”

Last year, the global economic recovery suffered a setback, one significant enough to stoke fears of a return to recession and incite the U.S. Federal Reserve to again intervene by injecting billions of dollars of liquidity.

Whether a similar regression stains 2011 depends on two key questions: Will the Canadian dollar remain high? And will the U.S. recovery, which has so far been a start-stop affair, become sturdy enough to drive demand for Canadian exports?

The answer to the first question is fairly clear, Bank of Canada governor Mark Carney said this week.

The loonie’s “persistent strength” will remain the bane of the Canadian exporter, he said, one of the headwinds that will result in more modest economic growth over the next several quarters.

There is no consensus, however, on the immediate future of the U.S. economy, mainly because the current cyclical recovery in the United States is so historically atypical, said Nigel Gault, chief U.S. economist at IHS.

Unlike almost any other that came before, this recovery is forced to endure without a comeback -or even stability -in the housing sector. “It’s extremely unusual,” Mr. Gault said. “In a traditional robust expansion, housing would have been one of the leading sectors.”

But U.S. housing continues to hit new lows, with possible years ahead before home prices begin to rise substantially.

“That means the economy just can’t come back as quickly as it would in a normal recovery,” Mr. Gault said.

Millions of houses remain vacant, prices continue to fall, and the limited sales activity occurring is dominated by distressed properties.

With new-home construction almost at an “irreducible minimum,” the housing sector could not prove more of a drag on U.S. GDP, Mr. Bethune said. “You’ve got this anchor being dragged along.”

Growth in the first quarter in the United States is likely to come in at about 1.8% on an annualized basis, answering the question of whether a U.S. slowdown should be expected, Mr. Gault said. “We’ve had a pause already. We’re in the middle of it.”

These interruptions in the economic cycle set the current recovery apart in a second sense.

“In most recoveries, once they get going, they really get going,” Mr. Gault explained. “In theory, GDP bottomed out in 2009, and we’ve been growing since then. So we’re almost two years in. Normally at this point, you’d be comfortably above the previous GDP peak.”

That mark, however, was only just reached in the United States in the last quarter of 2010.

But perhaps conventional wisdom does not strictly apply, suggested Michael Gregory, senior economist at BMO Capital Markets. And perhaps decent growth is not predicated on stability in housing, he said.

Mr. Gregory likens the U.S. economy to a Bundt cake. “There’s a hole in the middle, but the cake is still rising.”

As a share of the overall U.S. economy, housing has shrunk to a record low, one factor limiting the havoc real estate volatility can wreak on markets, Mr. Gregory said.

In addition, just as rock-bottom interest rates failed to reignite housing activity, so too will rate hikes avoid further traumatizing the depressed residential sector, he said.

The U.S. recovery will continue despite its perpetual anchor, he said. “To me there’s a pretty sizeable adjustment to come, but that doesn’t bother the economy as much as it did a few years ago.”

Canada, as a result, will escape a second-half pause, Mr. Gregory predicted, “simply because the U.S. is starting to have that self-sustaining momentum.”

If housing is the U.S. economy’s anchor, then manufacturing is its buoy.

In the first quarter of this year, factory production in the United States grew by 9.1% on an annualized basis, a huge bump driven by emerging-market demand in Asia and Latin America.

“The U.S. export machine is humming,” Mr. Gregory said. “They realize where their bread’s buttered. Unfortunately, our bread’s buttered the same way.”

Whereas U.S. manufacturers have the benefit of a depressed greenback, making their prices more competitive on global markets, Canadian exporters have to contend with the challenges of an elevated loonie.

Under the assumption that the dollar continues to trade around US$1.03, the Bank of Canada cut growth estimates in six of the seven upcoming quarters.

Mr. Carney said Canada’s solid first quarter was an anomaly and will give way to 2% annualized growth in the current quarter.

“What we are seeing on the trade side is still quite a challenging situation for our exporters -and it could be more difficult,” he said.

In keeping to its plan for gradual increases in its key lending rate, however, Mr. Carney faces a dilemma.

The interest-rate differential with the United States already attracts higher capital flows, which in turn put upward pressure on the loonie. Further rate hikes, while the U.S. Federal Reserve is expected to hold steady until 2012, will only exacerbate the problem.

“That process becomes self-fulfilling,” Mr. Bethune said. “The capital inflows push the Canadian dollar up higher, which then rationalizes more capital inflows. You get this cycle, which can continue for some period of time.”

Many are anticipating the central bank to raise rates midJuly, at a time when second-quarter results will become apparent. But those results could prove disappointing, Mr. Bethune said. “It could well keep the Bank of Canada on hold through the end of 2011,” he said.

With the absence of substantial inflationary pressures, the central bank at least has the luxury of flexibility in timing its rate increases.

A good thing, since raising rates too soon would simply add another encumbrance to Canadian growth, Mr. Gregory said.

“We have to make sure the U.S. recovery and U.S. economic expansion is self-supporting, it is continuing, it is solid and it is entrenched.”

That might require the U.S. domestic economy to join the burgeoning export sector on the recovery track, Mr. Bethune said. But the U.S. customer has to budget for rising oil and gasoline prices as a result of volatility and war in North Africa and the Middle East.

That means less spending on domestic goods and services. “Any time you have a run-up in oil and gasoline prices like we’ve seen, that has a pretty retarding effect on growth in the U.S., as I’m sure we’ll have in Canada as well,” Mr. Bethune said.

While global oil supply is generally not limited, prices reflect geopolitical risks in a risk premium, he explained. “You’re just going to see a messy repricing of that risk premium every day. We’re dependent on a highly unstable part of the world.”

15 Apr

Loonie up, price gap growing

General

Posted by: Mike Hattim

The loonie may be trading at a three-year high relative to the U.S. dollar, but a report released Thursday says Canadians still pay far more than Americans for common consumer items.

The report by BMO Capital Markets’ deputy chief economist Douglas Porter said that despite the loonie’s surge to US98¢, the average price during the past three months — it closed Thursday at US104.19 — Canadians still pay 20% more than Americans for products ranging from blu-ray movies to running shoes. That difference was only 7% when the Toronto-based bank conducted a similar study in July 2009, even though the loonie was trading below US92¢ at the time.

“There has been precious little movement in underlying relative prices in the past two years despite the currency’s record sprint,” Mr. Porter said.

The loonie has surged 30% in the past two years, which is widely attributed to a retreating U.S. dollar, surging commodity prices and Canada’s growing reputation as a fiscally safe harbor following the global financial crisis.

Unlike 2007, the last time the loonie flirted with U.S. dollar parity, the current trend is here to stay, Mr. Porter believes.

“Canadians should get accustomed to a lofty loonie, and we continue to look for the currency to remain above par through 2012, if not beyond,” he said.

That will help keep inflation low and interest rates steady, the study found. However, the study stops short of explaining why the gap exists despite the higher loonie.

“The reality is that the underlying prices that Canadians pay and Americans pay really don’t change that much over time, but the currency has these huge swings that can make this sort of comparison shopping between Canada and the U.S. go all over the place,” Mr. Porter said in an interview.

“In the last four years we’ve seen our currency as high as US$1.10 and as low as US77¢. That is an enormous, enormous gap and an enormous swing that can affect these price differentials.”
For Canadian retailers, the issue comes down to a practice known as “country pricing,” in which suppliers will charge Canadian retailers more than their U.S. counterparts for identical products.

“We know there are some products sold to retailers in Canada at a markup of 22% compared to retailers in the U.S.,” said Diane J. Brisebois, chief executive of the Retail Council of Canada.
Ms. Brisebois took issue with the BMO report’s comparison of running shoe prices.

“When you show a price of US$101 in the U.S. versus $149 in Canada, what he needs to find out is how much that Canadian retailer paid for that running shoe, and chances are that retailer paid more than US$100,” she said.

BMO has already started to see upticks in cross-border shopping as Canadians seek to take advantage of lower U.S. prices. That will put some downward pressure on prices in Canada, said Mr. Porter, though not enough to ensure the price gap is ever fully closed.

“I’m not sure even if we stayed at par for years and years and years that the spread would ever completely vanish,” he said.

But the longer Canada’s currency stays at or above parity, Ms. Brisebois said, “the sooner consumers will see those savings reflected in the price of goods in Canada.”

14 Apr

After temporary growth spurt, Canadian economy is slowing, says Bank of Canada

General

Posted by: Mike Hattim

The Canadian economy likely expanded by a surprisingly strong 4.2 per cent in the first three months of the year, but it was a temporary burst of activity that is already over, the Bank of Canada says in its new outlook.

The central bank’s new quarterly outlook paints a picture of an economy that is settling down to a protracted period of slow growth, being held back by a high loonie, a tapped-out consumer and government spending restraint.

The bank says the current second quarter will see growth brake to two per cent, less than half what it was in the first, in part because of supply disruptions to Canada’s auto sector caused by the Japanese earthquake and tsunami. The disruption will lessen going forward, however.

On an annual basis, the economy is forecast to slow from 2.9 per cent this year, to 2.6 per cent next year and 2.1 per cent in 2013.

The overall take from the document is that the bank appears in no hurry to start raising interest rates to slow the economy because other factors are doing the job.

The bank doesn’t appear to be overly worried that high oil and food prices might trigger inflation. It briefly notes that inflation may hit three per cent, at the upper end of the bank’s acceptable range, in the next few months, but appears unconcerned.

“The combination of modest growth in labour compensation (wages) and higher productivity is expected to continue to dampen inflationary pressures, with the higher assumed value of the Canadian dollar providing further restraint,” the bank said.

Economists had been pointing to either May or July as the most likely dates for the bank to start raising its policy rate from the current one per cent, which would have the effect of also raising short-term interest rates for such things as variable mortgages.

But the dovish tone of the latest outlook suggests interest rates could remain low longer, especially amid fears that moving aggressively in advance of the United States likely would have the undesired effect of lifting the loonie even higher.

The bank does concede that it has been taken by surprise by the 3.3 per cent expansion in the fourth quarter of 2010, and the likely even stronger 4.2 per cent spurt in the first three months of this year.

That means Canada’s economy will likely return to full capacity by the middle of next year, earlier than previously expected.

But it stresses temporary factors were responsible, including stronger exports and domestic consumption, and that there is still plenty of slack in the economy.

The exports surge is already over, the bank says, and the persistently strong dollar averaging $1.03 US will continue to restrain exports going forward.

“The bank continues to project … that the recovery in exports will be subdued relative to earlier global recoveries, with the higher level of the Canadian dollar assumed in this projection adding to long-standing competitive challenges,” it said.

Consumption may remain moderately stronger than would be assumed, the bank says, in part because high commodity prices are increasing household purchasing power through gains in the terms of trade, the difference between export and import prices. It estimates the country’s gross domestic income will rise by 4.7 this year.

Still, it believes the housing market will continue to cool and that government spending restraint will be a net drag on the economy this year.

The biggest engine of growth remains business investment, it says, in part because the higher Canadian dollar makes investment in foreign-made machinery and equipment less expensive.

Globally, the bank sees little change in the economic outlook, although it continues to stress risk factors such as high debt both among households and governments in the advanced economies, the Japanese crisis, turmoil in the Middle East and high commodity prices, especially oil.

Despite the risks, it says the global recovery is becoming more rooted and that even growth in troubled Europe is strengthening.

“The global economic recovery is projected to proceed at a steady pace over 2011-13,” the bank says, projecting growth of 4.1 per cent this year and 3.9 per cent next.

The bank has slightly lowered its forecast for U.S. growth this year to three per cent, from its previous 3.3 per cent call four months ago.

13 Apr

BoC ups growth, stands pat on rates

General

Posted by: Mike Hattim

The Bank of Canada boosted its growth forecast Tuesday but threw a curve ball at Bay Street expectations for a July interest-rate hike by warning the “persistent strength” in the loonie could cause even greater headwinds for the economy.

While some analysts still expect the central bank to start raising rates in July after leaving them unchanged on Tuesday at 1%, others said the statement indicated the bank is in no hurry and could wait until the fall at the earliest.

“It will be difficult to pin down when the next hike will be when you have a central bank that takes the currency into account when making its policy decision,” said Avery Shenfeld, chief economist at CIBC World Markets. “And we have a currency that’s volatile right now.”

Mr. Shenfeld said the central bank would prefer a “softer currency” before it opts to raise rates again. He added that could unfold in July, if commodity prices take a breather.

That is what happened Tuesday as commodities — and the loonie — slumped on global growth fears. The currency ended the day at US$1.0383, down US0.72¢.

As expected, Bank of Canada governor Mark Carney and his colleagues boosted the outlook for 2011 real gross domestic product expansion by a half percentage point, to 2.9% from 2.4%, while paring back growth in 2012, to 2.6% from 2.8%. With the improved outlook, it said economic slack would be absorbed more quickly than expected, with the economy reaching full potential by mid-2012.

Inflation is expected concurrently to converge to the bank’s preferred 2% target.

The central bank is expected to go into more depth about its slightly rosier outlook when it releases its quarterly economic outlook on Wednesday.

But the improved economic outlook comes with a caveat: a heightened warning about the Canadian dollar. The currency is trading near a three-year high, and could prove to be a drag on net exports – which is now a key driver of GDP growth, along with business investment, as household indebtedness and rising energy prices keeps consumers at bay.

“The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices,” the Bank of Canada said.

Analysts and fund managers interpreted the bank statement in different ways.

One camp believes the upgrade in GDP growth coupled with a quickly narrowing output gap suggests the central bank is gearing toward a hike in July.

“They are more bullish,” said Denis Senécal, vice-president of fixed-income and cash for State Street Global Advisors Canada, adding increases in the policy rate could begin in July.

Notwithstanding comments about the Canadian dollar, the bank is “more upbeat and positive about the Canadian economy.”

Mr. Senécal said what’s holding the central bank back is clarity as to how and when the Federal Reserve ends its US$600-billion asset purchase plan, which has exerted downward pressure on the U.S. currency — prompting traders to go elsewhere, like Canadian assets, for yield and driving the loonie upward.

Others, however, said the central bank’s concern about the loonie points to a rate hike no earlier than the fall – and maybe beyond.

The statement “suggests the strong potential for policy neutrality for some time,” said analysts at Scotia Capital.

They said the central bank “aggressively and explicitly trumpeted” the risks posed by loonie compared to previous rate decisions, signaling it is worried about the impact on export growth – a concern Scotia Capital shares.

Trade data released Tuesday indicated Canada’s trade surplus narrowed significantly from roughly $400-million to $33-million on sharp declines in exports and imports. This result suggests that the central bank’s “concerns about lost competitiveness [among Canadian companies] stemming from poor productivity growth and an elevated Canadian dollar are vindicated,” Scotia Capital said.

12 Apr

IMF boosts outlook for Canadian economy

General

Posted by: Mike Hattim

The International Monetary Fund boosted its expectations for Canadian economic growth this year as it warned the world is facing new threats from surging oil prices, Mideast turmoil, higher inflation in China and Europe’s debt woes.

In a new economic forecast Monday, the organization raised its projection for Canadian growth of 2.8 per cent for 2011, up from an earlier forecast for 2.3 per cent.

The Canadian economy grew 3.1 per cent in 2010.

“Economic developments in Canada last year mirrored those in the United States, with the pace of economic activity moderating in midyear,” the report said.

“The deceleration reflected not only the drag on Canadian exports from weak U.S. activity and strong import growth from investment spending amid an appreciating currency, but also a cooling of some domestic activity.”

The IMF also lowered its expectations for Canada for 2012 to 2.6 per cent compared with 2.7 per cent in an earlier forecast. The report suggested the risks in Canada for 2011 are tilted to the downside.

“The main domestic risk being deterioration of housing markets and household balance sheets,” the IMF said.

“Key external risks are lower-than-expected activity in the United States and renewed sovereign strains in Europe.”

The IMF said the global economy should grow 4.4 per cent this year. That compares with global growth of five per cent last year. The IMF projects industrial countries will grow 2.4 per cent while developing countries, a group that includes China, will grow more than twice as fast at 6.5 per cent.

“The world economic recovery is gaining strength, but it is unbalanced,” Olivier Blanchard, the IMF’s chief economist, told reporters.

He said it would be critical for countries running large government deficits such as the United States to make progress in getting those deficits under control. At the same time, countries with large trade surpluses, such as China, will need to do more to boost domestic demand and not rely so heavily on exports to generate economic growth.

The IMF’s new growth forecast was prepared for spring meetings of the 185-nation IMF and its sister lending agency, the World Bank.

Before those discussions Saturday, finance ministers and central bank presidents of the Group of 20 major industrial and developing nations will hold closed-door talks on Friday.

The finance officials will try to assess how big a threat the rise in energy and food prices will be and also what they can do collectively in response to the political turmoil in the Middle East and North Africa.

The United States is expected to keep pressing China to move more quickly to allow its currency to rise in value against the dollar as a way of making U.S. goods more competitive in China.

China, the largest foreign holder of U.S. government debt, will be seeking assurances that Washington is moving to put in place a credible plan to deal with soaring federal budget deficits.

At their last meeting in Paris in February, the G20 officials struck a watered-down deal on a group of technical indicators to track global imbalances. But the G20 left the tricky question of what to do if the balances become dangerous for later discussions.

The IMF, in its new “World Economic Outlook,” left unchanged its January projection that the global economy will grow 4.4 per cent this year and 4.5 per cent in 2012.

In 2009, the global economy shrank by 0.5 per cent, its worst downturn since the Second World War, with growth rebounding in 2010 to 5 per cent.

The 2.4 per cent growth forecast for the advanced economies was down 0.1 percentage point from January. The IMF expects these countries to grow 2.6 per cent in 2012.

“New downside risks are building on account of commodity prices, notably oil, and relatedly, geopolitical uncertainty as well as overheating and booming asset markets in emerging market economies,” the IMF said.

Growth in the United States was forecast to be 2.8 per cent, down 0.2 percentage point from January, reflecting primarily the drag from higher oil prices. The IMF’s forecast is in line with private economists.

Japan, which was hit by a devastating earthquake and tsunami on March 11, was forecast to grow 1.4 per cent this year, down 0.2 percentage point from the January forecast. The expectation is that the world’s third largest economy will be slowed at first by the natural disasters but then receive a boost from the reconstruction efforts.

China, now the world’s second largest economy, was projected to grow 9.6 per cent this year, a forecast that was unchanged from January. Beijing is raising interest rates to deal with rising inflation risks.

All emerging market economies, a group that includes China, India and Brazil, are expected to grow 6.5 per cent this year and next year.

Developing countries are doing better because they emerged from the recession in much better shape than many industrial countries.

“Economies that are running behind the global recovery typically suffered large financial shocks during the crisis, often related to housing booms and high external indebtedness,” the IMF said.

Economic growth in the 17 countries that use the euro including Germany, France and Italy was projected to be 1.6 per cent this year and 1.8 per cent next year, an anemic recovery that reflects continued worries that debt problems in Greece, Ireland and Portugal will spread to other countries.

12 Apr

Gas-price hike doubly painful

General

Posted by: Mike Hattim

The long upward march in gas prices since late 2010, which has helped keep Canada’s resource-based economy chugging, is also costing Canadians the equivalent of 7% of their income tax bills in 2011, a CIBC World Markets report said Monday.

While flashbacks to the last price spike in the humid summer of 2008 suggest the short-term impact on the Canadian economy will be neutral, the big difference is if those elevated prices linger — a real prospect if the current conflict in the Middle East spreads.

“It’s not just a spike but how long it lasts. I wouldn’t say the spike last time triggered the recession but it certainly wasn’t helpful,” Sal Guatieri, senior economist with BMO Economics, said Monday. “The big risk this time is if we see a sustained increase, that will do serious damage in both the United States and Canada.”

Mr. Guatieri warned that the current run-up in gas prices will shave at least half a percentage point off annual GDP growth in the United States. If crude oil prices surge to US$150 a barrel, then the United States will lose a full percentage point in growth, lifting unemployment rates and dashing hopes of a housing recovery.

“If the U.S. economy stalls Canada’s won’t be far behind,” he said. “The United States is just not robust enough to withstand a spike to US$150.”

Benjamin Tal, deputy chief economist with CIBC World Markets, said consumers are already spending at levels close to those in 2008.

“As a share of disposable income, spending on gasoline is now estimated to be less than half a percentage point shy of the peak seen in 2008, and it has already reached that peak when measured relative to total retail sales,” he said. “Households account for a third of total energy consumption in the Canadian economy, and about half of what they consume is in the form of gasoline. So the recent increase in gasoline and heating oil prices, although not accompanied by a similar increase in electricity and natural gas prices, are significant enough to impact overall consumer spending materially.”

In 2010, total spending on energy by Canadian households came in at more than $88-billion. However, if the recent run-up of energy prices continues then spending will rise by more than $12-billion or almost $950 a household, equal to a 7% increase on the average income tax bill.

Gas prices in Canada have risen 23% since September 2010, compared with a 32% spike in the United States. The rising loonie, up 8% in that same time period, has helped to offset some of the pain for consumers in Canada.

However plenty of Canadians, especially those in non-oil-and-gas regions Ontario, Quebec and the Atlantic provinces, have already become quite worried about what a whole summer or more of high gas prices will do to their household budget.

In the latest quarterly Canadian Consumer Outlook Index from Royal Bank of Canada, released Tuesday, 45% of Canadians surveyed said rising gas and food prices have had a significant impact on their budget while another 38% said they have had to cut back on other expenses. In Ontario, 51% of respondents said prices had a big impact.

However, this does not mean consumers will use less gas, at least in the short term.

“If history is any guide, higher prices will not impact demand for gasoline in the near term,” Mr. Tal said.

Between October 2007 and July 2008, when prices jumped 40%, Canadians continued using 3.5 billion litres of gas a month even as prices climbed to $1.40 a litre from $1.

Instead, consumers will avoid eating out, especially at restaurants that are far away, in favour of more groceries — and discount groceries at that. He figures the increase in gas prices will cut the net price paid on each item between 2% and 3%.

11 Apr

Escaping from mortgage prison

General

Posted by: Mike Hattim

Let’s just say you owed somebody a ton of money but there was no legal way to force you to pay it back?

Would you? What if it was one of those evil corporate banks that make for an easy target? Did the answer just get a little easier?

Not for 60% of Americans who say it is never OK to simply stop making payments on your home, according to a survey by Eagan, Minn.-based findlaw.com, a free legal information website.

Another 34% say it’s OK to walk away from a mortgage, but only if you can’t make the monthly payments. Only 3% believe you should be able to walk away from a mortgage anytime you want, according to the survey, which interviewed 1,000 American adults and had a margin of error of plus or minus three percentage points.

It’s an interesting survey given that U.S. law in a number of states allows consumers to simply hand over the keys to their homes without the lender going after their other financial assets -something that is all but impossible in Canada.

That is not to say that walking away from a mortgage isn’t affecting the credit of Americans who do so. They might not be able to buy another house for years unless they do so with cash.

Despite what the survey says, Americans have been walking away from mortgages in droves because it makes financial sense.

Think about it. You have a home with a $500,000 mortgage on it. The present value of it is $250,000. Why would you not walk away, if you could?

“We just asked people what do you think of the idea, not would you do it yourself or have you thought about doing it yourself,” said Leonard Lee, the researcher behind the survey. “There is a practical argument, but there’s a whole philosophical argument.”

If you were shareholder in a company that owned a $250-million building but kept making payments on a $500-million mortgage even though the company had the ability to walk away from the debt, how would you feel? Would the executives be breaching a fiduciary responsibility?

The U.S. real estate industry even has a term for all this: strategic default. “You are asking at some point, doesn’t it make more sense to walk away from the mortgage where you are unlikely to recoup your original investment,” Mr. Lee says.

Ted Rechtshaffen, certified financial planner and president of TriDelta Financial, says once you put aside the moral issues, it would come down to a simple choice.

“It will impact your credit rating, but from a financial perspective, why wouldn’t you do it? You are getting a $250,000 head start. Another investment is probably going to be better than your current house,” Mr. Rechtshaffen says.

But Benjamin Tal, deputy chief economist with CIBC World Markets, says while it might not make economic sense, there is evidence Americans are not actually walking away from property as much as they probably would if they were listening to a financial advisor.

“Whatever the default rate is now in the U.S., people say it’s 8% and that’s extremely high. I say that’s surprisingly low,” Mr. Tal says. “You have up to six to seven million households that could default any day, namely because they are in a negative equity position.”

What’s in it for them to keep paying? There is something to say for wanting to stay in your home where you have been living and raising a family. There is also a stigma that comes with somebody slapping a foreclosure sign on your property -suddenly your neighbours know a little more about your financial situation.

“At the end of the day though, that’s the rational thing to do. You are talking about houses that are under water more than 20%. Based on an economics textbook, that would be the rational thing to do,” Mr. Tal says.

In Canada, it’s pretty tough to do. For starters, if you have an insured mortgage backed by the government, the bank will get paid off for its loan. But the insurance company, whether it’s Canada Mortgage and Housing Corp. or a private insurer, will go after you for any deficiency created by proceeds from the property being less than the mortgage.

It’s the case in most of the country for uninsured mortgages, too, says John Turner, director of mortgages for Bank of Montreal. Rules are slightly different in Alberta and are designed to protect consumers, but Mr. Turner says banks can elect to go after other assets in some circumstances.

There’s also the scenario where you might have bought a condominium as an investment before it was built and put down, say, a 20% payment. If you think you can walk away if prices dropped by 50% once the building is up, forget it. You’ll be sued.

“As lawyers, we can’t advise someone to break a contract. The law is not you don’t have to obey it, the law is the consequences of not obeying [the contract],” says Calgary lawyer Jeff Kahane. “You haven’t broken the law, you’ve broken your promise. Is it any different than saying why would I want to pay for a chocolate bar at 7-11 when I can put it into my pocket and steal it if I can get away with it.”

11 Apr

No new jobs created in March as robust economic growth shows signs of slowing

General

Posted by: Mike Hattim

Canada’s economy unexpectedly shed 1,500 jobs last month, the first fall-back since September that analysts interpreted as a sign growth is moderating from the rapid pace of recent months.

The disappointing report from Statistics Canada was not all bad — full-time jobs shot up by 90,600, hours worked rose a significant 0.5 per cent, and wages increased. Those are all signs the recovery is gaining strength.

As well, the official unemployment rate edged down one-tenth of a point to 7.7 per cent, although that was only because more Canadians stopped looking for work.

On the other side, 92,100 part-time jobs vanished in March, and if self-employment is discounted, the number of employees in Canada fell by 18,900.

Most analysts saw it as a negative signal — although a slight one — given that the economy had been pumping out new jobs at the rate of 38,000 a month since December.

As well, the United States has seen a revival in the labour market this year that many expected to be carried over into Canada, its main trading partner.

“The weaker employment performance is consistent with the view that real gross domestic product in March will be softer than in the prior two months,” said TD chief economist Craig Alexander.

But he added that moderation in growth was expected after a strong fourth quarter wrapping up 2010, and an even stronger start to 2011.

The OECD economic think-tank forecasts the first three months of 2011 will produce a 5.2 per cent jump in economic activity in Canada — the strongest in the G7 — which analysts say cannot be sustained.

The implications for federal political parties campaigning for the May 2 election are likely uncertain. There is enough ambiguity in the numbers that both the government and opposition parties can make a case for their side, said Douglas Porter of BMO Capital Markets.

“Where you stand on this report depends on where you sit,” he said. “It’s definitely a mixed bag.”

While March ended three positive months of job creation, the economy has produced more than 300,000 new jobs in the last year, 251,000 of which were full-time.

Economists were of one mind that the jobs report would also have no impact on next week’s interest rate decision from the Bank of Canada.

Most see the bank keeping the policy rate at one per cent until at least the end of May, and more likely through to July. However, that has not stopped some banks from beginning to hike mortgage rates in advance of a central bank move.

In another economic indicator released Friday, the Canada Mortgage and Housing Corp. said housing starts rose to a better-than-expected 188,800 units annualized in March, with dwellings of multiples such as condos leading the way.

Scotiabank economists said the housing figure was positive but won’t add much to the country’s economic growth, given that multiples are not valued as highly as single dwelling construction.

In March, Statistics Canada said most of the employment gains came in the accommodation and food services sector, up by 36,000 jobs, and construction, up by 24,000.

Meanwhile, 17,000 jobs vanished in the health care and social assistance sectors and 13,000 in public administration. Manufacturing also saw a reversal of fortune, with a decline of more than 9,000 jobs.

The agency said men fared better than older women and youth during the month. Employment among males 25 and over increased by 32,000, while work among women over 55 fell by 17,000, the same number of jobs decline that occurred among youth aged 15 to 24 years old.

Regionally, the big change was in Quebec, where 14,700 jobs were lost during the month. Prince Edward Island saw a significant pick-up relative to its population of 1,400. In Ontario, 63,000 new full-time jobs were mostly offset by the loss of 58,000 part-time employment