JEREMY TOROBIN

Europe’s debt quagmire, a flagging U.S. rebound and slowing growth in China are taking the steam out of Canada’s economic outlook.

Canada’s top policy makers said the country’s prospects for this year and next have deteriorated as a slowing global economy weighs on exporters and cuts into confidence at home.

Consumer and business spending is expected to slow and unemployment is expected to hover close to the current 7.1-per-cent level for years, factors that will likely keep interest rates near emergency levels until as late as 2013.

Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty insist Canada and its top trading partner, the United States, won’t slide back into another recession. However, both suggested that outlook depends on European leaders to contain a debt crisis before it pushes the region into a serious slump.

Mr. Carney on Tuesday left the Bank of Canada’s key interest rate at 1 per cent for a ninth consecutive decision. Canada will feel the effects of weak U.S. growth that will persist until mid-2012, and a “brief recession” in the euro zone, he noted.

The bank chopped its forecasts for 2011 and 2012 and said the Canadian economy will not return to full capacity until the end of 2013, 18 months later than policy makers had projected in July. And Mr. Flaherty said the economic projections that underpinned his latest budget face a “significant downgrade.”

The gloomier outlook comes ahead of a crucial gathering of European leaders on Wednesday and a Group of 20 summit next week in France, both aimed at stemming the euro zone debt mess before it engulfs the continent’s banking system and tips the world economy back into recession. The slowdown is already affecting Canadian financial conditions, consumer and business confidence, and trade, the central bank said, also warning that while its forecast assumes the European crisis will be contained, that notion is “clearly subject to downside risks.”

Even if the European situation doesn’t worsen, through the end of 2012 Canada will see “very modest” growth that’s just enough to “keep the unemployment rate treading water,” said Leslie Preston, an economist at Toronto-Dominion Bank.

The Bank of Canada said the economy will grow 2.1 per cent this year instead of its July call of 2.8 per cent, and 1.9 per cent in 2012, down from 2.6 per cent. In 2013, the economy will grow a healthier 2.9 per cent, roughly equal to the average for the two decades before the crisis.

In the meantime, household spending will “grow relatively modestly,” the bank said Tuesday, as lower commodity prices and volatility in markets weigh on Canadians’ sense of financial well-being. Business investment will continue to grow but will also be “dampened” by the global outlook.

All of which means the bank will likely leave interest rates untouched for much of 2012 and possibly into 2013, economists said. Indeed, despite hotter-than-expected inflation readings in recent months, bank policy makers said Tuesday that the drop in energy prices since the summer and a slowdown in big emerging markets like China will tame inflationary pressures everywhere.

Some Canadian companies say they’ve come to accept that their traditional markets will be lukewarm as governments and consumers unwind the massive debt they incurred in recent years.

“These are marathon issues, they’re not sprint issues,’’ said Tom Schmitt, president and CEO of Purolator Courier Inc., Canada’s largest courier company. “We’re probably talking about years of a little bit of bumpiness along the road.”

Similarly, Don Lang, executive chairman of CCL Industries Inc., a Toronto-based specialty packaging company, said a “pullback” in orders through much of the developed world is still better than a downturn.

“From our perspective, it’s business as usual,” Mr. Lang said. “Positive growth is positive growth, so there are still lots of opportunities for businesses that are well-placed.”

By Dana Flavelle

Canada’s second largest supermarket chain is now offering discount banking services, giving rivals like PC Financial and ING Direct a run for their money.

Sobeys Inc. and BMO Bank of Montreal jointly announced a co-branded service Monday that they say will save the average customer $180 a year in bank fees.

The savings come from waiving BMO’s regular $13.95 a month fee plus providing $25 worth of free cheques when a new account is opened.

Sobeys and BMO had already collaborated on a Club Sobeys Mastercard. Now they’re adding a no-fee chequing account and high interest savings account that pays 1.3 per cent on deposits. Savers must maintain a $5,000 minimum to receive the rate, the same as in a regular BMO savings account.

Account holders can also earn rewards that can be redeemed in Sobeys’ stores.

“Our continued partnership with Sobeys represents an opportunity to offer new products that would appeal to households focused on better managing their household expenses, including grocery,” says Lynne Kilpatrick, senior vice-president, personal banking, BMO Bank of Montreal.

The grocer didn’t rule out adding other services in future. PC Financial and ING both offer other products, such as mortgages, RRSPS and loans.

The move comes as more full-service banks recognize they need to be in the discount banking business or risk losing customers to rivals already in that market, said David McVay, president of financial consulting firm McVay and Associates Inc. PC Financial is backed by CIBC, he noted.

The bank didn’t rule out doing similar deals with other retailers, said Nick Mastromarco, director, retail partnerships and direct sales for BMO Bank of Montreal.

For the supermarket, the deal is likely to produce a new source of revenue, McVay said.

Both firms are Air Miles sponsors so it’s also an opportunity to tie more purchases into the rewards program, McVay added.

“The combination of no fees, high interest earnings and faster reward points accumulation is a fresh idea that will help our customers save money on bank fees and groceries as they manage their financial needs,” said Chris Goodale, Sobeys’ vice-president, loyalty, customer insight and financial services.

Customers can access their accounts at any one of the 900-plus BMO branches and extensive ABM network, the companies said.

Sobeys also plans to install more ABM machines in its stores, boosting the number to 100 by year end.

The program goes by different names in different provinces.

In Ontario and western Canada, the program is called BMO Club Sobeys, while in Atlantic Canada it’s BMO Sobeys Air Miles, and in Quebec it’s BMO IGA Air Miles.

JEREMY TOROBIN

Bank of Canada Governor Mark Carney held his benchmark interest rate at 1 per cent Tuesday, chopping his domestic growth forecast for 2011 and 2012, amid a host of threats including a “brief recession” in the euro zone.

In explaining the decision to leave borrowing costs alone for a ninth consecutive meeting, as expected, the central bank hinted it is not yet considering an interest rate cut, saying there is “considerable monetary policy stimulus” in Canada and the financial system is working well.

Nonetheless, Mr. Carney and his policy team warned that the United States – Canada’s chief export market – will suffer from weak growth through mid-2012, and said while their forecast assumes the European debt crisis will be contained, that assumption is “clearly subject to downside risks.”

Moreover, in a teaser to a quarterly forecast they will release tomorrow, policy makers significantly downgraded their Canadian growth projections for this year and next, as the gloomier global backdrop affects financial conditions, consumer and business confidence and trade.

While the bank now sees faster growth in 2013 than at the time of its last forecast in July, policy makers said the economy will take until the end of that year to return to full capacity – compared with its July prediction of mid-2012. Also, inflation will slow before gradually inching back up to the bank’s 2-per cent target by end of 2013, the bank said.

“The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies,” the central bank said.

“Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year.”

Mr. Carney’s decision comes a day before a crucial summit in Europe aimed at stemming the continent’s debt mess before it engulfs the financial system there and threatens to cause another global recession. Already, the central bank says the euro zone will experience a short downturn, as belt-tightening measures and the sporadic political response to the crisis squeeze consumers and sap business confidence.

Next week, leaders from the Group of 20 nations will meet in France to try and stop the slide in investors’ faith that they can put the global economy back on more solid footing. (Also at the summit, Mr. Carney is expected to be officially tapped to lead the Financial Stability Board, the global body tasked with co-ordinating the overhaul of international banking rules.)

The central bank cut its growth forecast for Canada in 2011 to 2.1 per cent from 2.8 per cent in July, and sliced its 2012 forecast to 1.9 per cent from 2.6 per cent. However, policy makers predict a marked improvement in 2013, with the economy growing at a healthy 2.9-per cent pace.

Household spending, a linchpin through much of the recovery, will “grow relatively modestly,” the bank said, as lower commodity prices and volatility in markets weigh on Canadians and their sense of financial well-being.

Business investment will continue to “grow solidly,” the bank said, as firms take advantage of low borrowing costs and a higher currency that makes it easier for them to invest in state-of-the-art machinery and equipment, but will also be “dampened” by the global outlook.

Indeed, softer global demand is occurring at a time when the currency – which is now hovering around parity with the U.S. dollar again – is also causing headaches for exporters as they try to crack new markets around the world.

Although Mr. Carney and his officials pointed out that there is “considerable” stimulus in place with borrowing costs near historic lows, their inflation forecasts suggest they cannot completely rule out a reduction in borrowing costs. At the very least, they imply that the central bank has the flexibility to leave rates on hold all the way through next year and even into 2013, if necessary.

Despite hotter-than-expected inflation readings in recent months, policy makers said the drop in energy prices since the summer and a slowdown in big emerging markets like China will tame global inflationary pressures, and this will spread to Canada, too.

Canadian core inflation, a measure which strips out items like energy and fresh fruit, will drop through 2012 before returning to target by the end of 2013, the bank said, and total inflation will fall to as low as 1 per cent by mid-2012 before rising.

The central bank, whose next decision is scheduled for Dec. 6, will expand on all of these themes in its full forecast tomorrow, followed by a press conference with Mr. Carney and Senior Deputy Governor Tiff Macklem.

By Ellen Roseman

Shirley has a simple question: “Do you think an 86-year-old should be holding bank stocks? Do you think there is much risk to bank stocks?”

Here’s my answer, starting with the second question first.

There’s risk in holding any stock. You can lose money whenever pessimism about the economy or about specific sectors pushes stock prices down.

If you can’t afford to take any risk, you should stick to bank deposits and government bonds. Yes, the returns are low and you’ll lose ground to inflation. But your capital won’t be in danger of sharp, swift declines.

Canadian bank stocks are safer than most because they’re large, well capitalized and conservative in their business practices. They pay good dividends and have a history of increasing their dividends on a regular basis.

However, this is not a great time to hold bank stocks. The European debt crisis makes the outlook more challenging for the financial sector.

Only one of the Big Five Canadian banks has made money for shareholders in the past 12 months. TD has a positive return (just barely) at at 0.03 per cent since late October 2010.

Meanwhile, Royal Bank is down 13.77 per cent, Scotiabank is down 4.23 percent, CIBC is down 3.65 per cent and BMO is down 2.38 per cent in the same one-year period.

Is the banks’ winning streak in peril? Will they be able to maintain the same success in the future?

“The golden era for the Canadian banks has ended,” says portfolio manager Rob Wessel in an interesting article. He predicts that banks’ total returns of almost 14 per cent a year won’t be around any longer.

Declining tax rates, a favourable macro-economic backdrop and regulatory reform have driven Canadian banks’ growth over the past two decades. But only foreign expansion.will drive growth in the years to come.

“The next five to 10 years are unlikely to contain the same powerful tailwinds as the previous 20,” says Wessel of Hamilton Capital Partners, which manages funds for high net worth investors.

“Rather, an emphasis on foreign expansion will more likely introduce headwinds, making it more difficult for Canadian banks to generate the medium-term double-digit earnings growth to which investors have become so accustomed.”

If banks won’t generate growth of 10+ per cent a year, what will?

I’m a fan of utility and pipeline stocks, which I hold in my own accounts. I know they’re expensive, but they have the results to back their lofty price earnings multiples.

Enbridge Inc., the pipeline based in Calgary, has a one-year gain of 26.37 per cent. Inter Pipeline Fund has a one-year gain of 24.74 per cent.

“Boring utilities have become the sexy stocks,” said a recent blog post, pointing to a 13 per cent gain in the the S&P/TSX utilities index from Aug. 8 to Sept. 30 of this year.

So, should 86-year-olds own stocks? If they already have enough money to live on, why not? 

Holding stocks can help an older person pass along more money to the children and grandchildren. But instead of the Big Five banks, boring utilities may be a better bet for senior savers.

I get hundreds of letters every month asking me if it’s good idea to consolidate one’s consumer debt to their mortgage to save money on interest. The idea of having one single debt and one manageable monthly payment at a good interest rate seems like a no-brainer. But will it save you money?

Since your mortgage is secured by the property, you’re likely to get the best possible rate on your borrowing. And having one payment to deal with sure takes less pressure off your money management skills. But not getting a statement for your line of credit or credit cards – having the debt “hidden” in your mortgage – can lead to a huge sigh of relief and not enough attention to the “consumer” part of the debt.

Having rolled your consumer debt into your mortgage, you shouldn’t relax and reduce your payments. That’ll just drag out the consumer debt for longer, erasing any savings from having a lower interest rate. If your total consumer debt payment (to get out of debt within 3 years) was $430 a month, and your mortgage was $1,550 a month, your new mortgage payment should be $1,980 a month at least till the consumer debt portion is gone.

Having a prepayment option can help get rid of that consumer debt faster too. You can make your regular monthly mortgage payment, and save your “consolidation loan” payments in a savings account, using your prepayment option to apply them once a year.

Remember that when you move your consumer debt, which is unsecured, to your home, you’re putting it at risk if you end up defaulting on payments. And once you’ve consolidated, for heaven’s sake, don’t look at your zero-balance credit cards as an opportunity to indulge. Cut up all but one card and cancel the extra accounts you no longer need because you’re done with debt!

By MoneySense staff

In recent years, homeowners have been feeling pretty smug about their investing prowess as they’ve watched home prices surge. But the costs homeowners face to buy, sell and maintain their homes mean they haven’t made nearly as much as they think.

In this example, we calculated your real profit — after expenses — if you bought a typical home in the Greater Toronto Area 10 years ago, and sold it this year. We assume that it was purchased with a 10% down payment and a 5% fixed-rate mortgage. The home would have cost $248,601 to buy in 2001 and today it would sell for a hefty $456,147.

So does that mean you made $200,000? Not even close.

2011 sale price: $456,147

Subtract:
• $168,434 for the amount still owing on the mortgage; 
• $4,000 for legal fees to buy and sell;
• $22,807 in realtor fees for the sale;
• $159,265 for 10 years of mortgage payments ($1,327 per month for 10 years); 
• $42,000 for 10 years of property taxes;
• $19,000 for 10 years of home maintenance;
• $2,211 for the land transfer tax when the home was bought;
• $24,860 for the original down payment; and 
• $358 in provincial sales tax on the mortgage insurance.

Actual profit: $13,212

Plus, you got a place to live for the last 10 years, of course.

By Romana King | From MoneySense Magazine

Borrow to buy real estate
It was the mid-1980s and D.G. Southen was only 24 years old when he bought his first investment — a house near the University of Western Ontario in London, Ont. He borrowed $20,000 from his parents to put a down payment on an $80,000 house. To pay the mortgage and other costs Southen rented the place out to six other roommates. “I slept in an unheated attic and paid the mortgage from the rent I collected.” After a few years Southen grew tired of living with so many people, so he sold the house for $108,000, paid his expenses and used the net profit for a series of down payments on four condo units near the university. Southen was fortunate: he caught an “updraft” in the housing market and made a lot of money.

Over the years, Southen has continued to borrow to invest in rental properties. These days he no longer looks at buildings with less than 40 units. “I’m older and I need to allocate my time more wisely, but I had to start somewhere.” The part he likes best is that once a property’s mortgage is paid off, it will keep spinning off cash every month from the rent. “Most people will draw from a retirement fund when they stop working and most will deplete that asset as they earn their income,” he says. “Not me. I’ll earn an inflation-adjusted $50,000 from just one of my holdings, and I won’t ever touch the capital.”

Large apartment buildings may be out of the equation, but the good news is that real estate is probably one of the more accessible ways to invest borrowed money, says Talbot Stevens, financial educator and author of Dispelling the Myths of Borrowing to Invest. “It’s a mini-business that doesn’t have a lot of complexity to it. For the average person real estate can be a good strategy.”

To make sure you don’t get burned, the key is to remember that borrowing to buy an asset, called leveraging, magnifies both the gains and the losses. To understand how this works consider what happens if you put 10% down on a property worth $300,000. Your original investment is $30,000. If the house goes up in value by $60,000 and you sell, you’ll make a $30,000 profit (before interest, taxes and expenses). So the house only went up in value by 20%, but the return on your investment was 100%. That’s how leverage juices your returns.

Now consider the downside: What if the house drops in value by $60,000 and you sell? If that happens, you won’t get any of your $30,000 down payment back, and worse, you’ll also owe $30,000 to the bank to pay off what you’re short on the mortgage. In this case, the investment has declined in value by just 20%, but you’re underwater by 100%. You’ve lost more than you invested to begin with.

That’s why the key to building a successful real estate portfolio using leverage is to invest in property that is cash-flow positive. That means the income you get from renting out the property covers all your expenses, including the mortgage, taxes, insurance, maintenance, repairs and a contingency fund. That way your property will be making money for you whether house prices go up or down — so hopefully, you’ll never be forced to sell in a down market.

Borrow to start a business 
More Canadians have joined the ranks of the truly rich by starting their own businesses than by any other means — and almost all of them had to borrow big to do it. But it’s not for the faint of heart. When Toronto bread and gourmet sandwich maker Simon Bradley needed cash to set up a shop in Toronto, he struck a deal with his banker that gave him access to close to $500,000 in funds. But he had to pledge his house as collateral. Seven years and one child later, Bradley (we changed his name to protect his privacy) now owns four successful bakeries, including a flagship store in Toronto’s financial district. He gambled that using leverage to secure high-traffic storefront locations in key areas of the city would pay off, and it did. His profits are soaring and his business is still growing.

The best part is, the richer you get, the easier it is to borrow more. If you borrow enough, eventually the people who lend you money are taking on more risk than you are. “Rich investors, like the Reitmans or the Trumps, borrow aggressively, role the dice and hope to win big,” says Talbot Stevens. “And, if they don’t? They flush the loss and start over again — with someone else’s money.”

If you’re interested in borrowing to start a business, you should start off using leverage in conservative and responsible ways. If you’re like most entrepreneurs, you’ll start with what’s called “love money” — low-interest loans from family and friends, explains Rick Spence, a consultant and founder of the Canadian Entrepreneur blog. Once you’ve burned through that, you’ll likely turn to angel investors — wealthy individuals who enjoy the risks and rewards of a start-up. “You can borrow anywhere from $10,000 to $100,000 with angel investors,” says Spence, but these investors expect a return on their investment, and it often comes in the form of part ownership or a stake in your earnings.

If you need to borrow from banks or other financial institutions, it will come at a steep price. Even in today’s low-interest environment you can expect to pay 12% on a business loan. Instead, consider borrowing against the equity in your home, says Spence. That’s what Mark Pervan did when he launched his renovation business in the midst of the recession. He used a secured line of credit to smooth out cash flows and keep everything on schedule. Two years later, he’s debt-free and so busy he has to turn down work. “Many advise against using this type of leverage because if your business fails then you could lose your house,” says Spence. Still, for many entrepreneurs, it’s the cheapest way to borrow.

By MoneySense staff

Use mortgage brokers and insurance brokers to help you shop for the best deal in their respective areas. Unlike salespeople who represent just a single bank or insurance company, brokers can show you products from several firms and steer you to the best deal.

An insurance broker can compare features of policies from competing companies; similarly, a mortgage broker can offer you deals from dozens of small lenders that you would have otherwise missed.

Financial Post Staff