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Monday, 28 November 2011

Fat personal debts, euro woe threaten Canada, OECD says

The outlook for Canada's economy has dimmed considerably, but the country will still outpace most of its G7 counterparts for the next two years, according to a new OECD forecast.


Over all, the Paris-based Organization for Economic Co-operation and Development projected today that growth in the economies of the group will slow to 1.6 per cent next year, then rebound to 2.3 per cent a year later. It also projected the jobless rate among those nations to remain at 8 per cent over the two-year period.


But all of this assumes that policy makers take "sufficient action to avoid disorderly sovereign defaults, a sharp credit contract, systemic bank failures and excessive fiscal tightening." That last point certainly would not apply to several of the euro nations that are now in the eye of the storm.


Canada's economy will just about keep pace with that of the United States in 2012 and 2013, the group said, and together will lead growth among the G7.


The OECD projected Canada will see growth of 1.9 per cent next year and 2.5 per cent in 2013, almost at the pace of 2 per cent and 2.5 per cent forecast for the U.S. Japan, whose economy is seen contracting this year, will see growth of 2 per cent next and 1.6 per cent in 2013.


The new forecast calls for growth of 0.6 per cent and 1.9 per cent in Germany, 0.3 per cent and 1.4 per cent in France, and 0.5 per cent and 1.8 per cent in Britain. Italy's economy is forecast to contract by 0.5 per cent in 2012, before recovering to growth of 0.5 per cent a year later.


"The outlook for the Canadian economy has weakened significantly, mainly because of a deteriorating external environment," the OECD forecast said.


"Heightened risks from renewed financial market turmoil linked to the European sovereign debt crisis and high levels of household indebtedness are eroding consumer confidence. While business investment continues to expand robustly, weaker prospects for the global economy and persistent strength of the exchange rate are projected to restrain export performance, tempering the speed of economic growth. Underlying inflation will remain subdued due to continued significant economic slack."


Markets rally
Global markets are rallying this morning, but much of the optimism appears based on rumour and speculation related to the euro debt crisis.


"We are seeing an unusually strong start to the week by recent standards for shares in London," said David Jones, chief market strategist at IG Index.


"Once again it is expectations surrounding Europe driving the rally, although weekend reports that the IMF are discussing a bailout for Italy have been strongly denied by the organization," he said in a research note.


"However, there is still speculation that politicians have a newfound sense of urgency and are stepping up attempts to stem the crisis. Unsurprisingly there is a wave of relief flowing through the financial sector with banks the biggest gainers on the day so far. It will take a few more days of positive moves to convince traders that this rally actually has some solid foundations and is not just a dead cat bounce built on rumour and hope."


Tokyo's Nikkei climbed 1.6 per cent and Hong Kong's Hang Seng 2 per cent. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were up by between 2.1 per cent and 3.8 per cent by about 7:15 a.m. ET.


Dow Jones industrial average YM-FT and S&P 500 ES-FT futures also climbed.


For some observers, there could actually be something behind what's driving the markets today, notably some movement toward easing the euro crisis. Having said that, markets have seen this time and time again over the past two years.


"Another day, another positive start to the trading day," said senior economist Jennifer Lee of BMO Nesbitt Burns.


"Yes, I know, I know. We’ve been down this road before," Ms. Lee said in a report.


"The day starts tentatively higher, then bam! Everything gets tossed out the window shortly after. However, today, there may be something more to this rally. Reuters reported over the weekend that France and Germany are working on a much faster way towards euro zone integration, and instead of involving all 27 EU countries, will start off with a core group of around eight to 10. There is a goal to release details of such a plan by the Dec. 9 EU summit in Brussels, which is the last one for 2011."


Europe under pressure
The euro zone remains under intense pressure again today, amid reports that are all over the map as to what measures its leaders could take.


Borrowing costs are still high, and Moody's Investor Service today issued a warning on the credit ratings of all euro countries.


Belgium, which was downgraded on Friday, paid a high yield of almost 5.7 per cent at a €2-billion auction of 10-year paper, while Italy saw yields on 20-year bonds climb to 7.3 per cent. But that offering was shy of what it had planned to sell.


"Rising yields in Germany (where the two-year has risen from 0.295 per cent on Nov. 15 to 0.46 per cent today, while the 10-year has risen from 1.74 per cent to 2.31 per cent ...) suggests that the market is suddenly pricing in the risk that Europe poses to Germany," said senior currency strategist Camilla Sutton of Scotia Capital.


"Essentially that any ‘solution’ to the crisis lies with a cost to Germany, likely through either closer fiscal ties (which would entail a German-led funding of the more debt-laden countries) or an EMU breakup (which includes the loss of trade ties, uncertainty and an acceleration in the weakening of the European economy)."


Cameco gives up on Hathor
Canada's Cameco Corp. CCO-T has given up its quest for Hathor Exploration Ltd. HAT-T, alowing mining giant Rio Tinto Ltd. to win the spoils of a bidding fight.


“After careful consideration we cannot justify increasing the price beyond our current offer and accordingly, we will let our offer lapse,” said Cameco's chief executive officer Tim Gitzel. “Cameco has remained disciplined through the bid process to ensure that we make the best decisions for our company and its shareholders.”


Rio Tinto upped its friendly bid for Hathor to $4.70 a share earlier this month, topping Cameco's $4.50-a-share bid. The Rio Tinto bid values Hathor at about $654-million, The Globe and Mail's Brenda Bouw writes.


Cameco is the world's biggest uranium producer, and Mr. Gitzel said the decision to bow out of the fight for Hathor won't hurt his plan to double annual production to 40 million pounds by 2018.


“Our plan involves existing assets in our development pipeline and we remain on track to meet our objectives," he said in a statement. "We will continue to explore other growth opportunities, but only where there is a clear benefit to our shareholders."


What to watch for this week
We'll get a sense of the state of the Canadian recovery when Statistics Canada reports Wednesday on how the economy performed in the third quarter and then releases its key jobs reading for November on Friday.


Economists expect to see that the economy rebounded in the third quarter, by about 3 per cent annualized, after stalling in the second. Still, the outlook is dimmer.


"Looking forward, economic momentum is likely to cool as headwinds facing Canadian households grow stronger," said economist Diana Petramala of Toronto-Dominion Bank. "An unsatisfactory pace of job growth - zero net gains in employment since July - in combination with poor consumer confidence and ongoing losses in equity markets are expected to slow the pace of spending growth over the next few quarters."


The employment report, in turn, isn't expected to be as bad as the one for October, when the country lost 54,000 jobs. But the jobless rate isn't expected to come down either.


Economists expect to see job creation of anywhere from 5,000 to 25,000, with the unemployment rate remaining at 7.3 per cent or perhaps ticking up to 7.4 per cent.


"With external uncertainties cited as the main reasons for a more constrained business outlook (as cited in the Bank of Canada’s Business Outlook Survey) the pace of domestic hiring could continue to suffer from dampened expectations for U.S. demand, and the slings and arrows of an escalating euro zone crisis," said Emanuella Enenajor of CIBC World Markets.


Markets will be far more focused on the U.S. jobs report, also on Friday, given the crisis in the U.S. labour market after the recession that threw millions out of work. But there, economists expect to see that about 100,000 jobs or more were gained in November, with, as Sal Guatieri of BMO Nesbitt Burns put it, "companies likely inspired by the recent modest upturn in consumer spending." The unemployment rate is projected to remain around 9 per cent.


There are some key earnings this week, as well, as the major banks begin reporting fourth-quarter results. Among them are Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and Royal Bank of Canada. Bombardier Inc. also reports results.


"We forecast provisions for credit losses to remain stable with risks increasing, while we expect capital markets to remain depressed in the immediate period, with risks tilted to the downside," said UBS Securities Canada.

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