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The Week

Atlantic Canada at risk of stagflation, Moody's warns Add to ...

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Whither the east Moody's Analytics forecasts a nice soft landing for the Canadian economy this year, but raises the prospect of a bout of stagflation for the eastern provinces.

"The Atlantic provinces continue to underperform the rest by a large margin," said Mark Hopkins, the senior Canadian economist for Moody's in the United States.

"Tourism, an increasingly important driver of these economies, has suffered because of the strong currency and weak U.S. economy," Mr. Hopkins said in a new report Friday.

"But persistently high unemployment has also encouraged outmigration and discouraged investment, limiting long‐term growth prospects. As a result, the Atlantic provinces face an increasing threat of stagflation, with rates of unemployment and inflation among the highest in the country."

The report covered Canada as a whole, but Mr. Hopkins did touch on the risks to Atlantic Canada of stagflation, slow growth, high unemployment and rising inflation.

Unemployment rates in the four eastern provinces top the national average of 7.5 per cent, ranging from 7.8 per cent in Nova Scotia to 12.8 per cent in Newfoundland and Labrador. So, too, do annual inflation rates, from a low of 2.9 per cent in Nova Scotia and Prince Edward Island to a high of 3.3 per cent in New Brunswick, compared to the Canadian pace of 2.3 per cent.

"The regional disparities of unemployment and inflation will challenge policy makers over the coming year," Mr. Hopkins said.

"The federal government, focused on eliminating the budget deficit before the end of 2016, is not likely to engage in aggressive economic development plans, and cash-strapped provincial and local governments, confronting deficits of their own and rising long‐run costs of healthcare, have little room to do so either. Managing inflation across the western and eastern halves of the country will also be a challenge for monetary policy makers at the Bank of Canada, as the distance between the western and Atlantic provinces limits labour mobility."

RIM chief sees no major shift Thorsten Heins could have told investors something like: "We're going to turn this ship around." Instead, he opted for: Don't expect "seismic changes."

I'm not sure how Mr. Heins and the RIM board thought that would go over, but I'm willing to bet they didn't get the reaction they'd hoped for as shares of Research In Motion Ltd. tanked on Monday.

This all began last Sunday night when RIM announced that Mike Lazaridis and Jim Balsillie were stepping down from their shared roles as CEOs and chairmen, to be replaced by Mr. Heins as chief executive officer and by Barbara Stymiest as chair.

The shakeup at the top was dramatic, given how Mr. Lazaridis and Mr. Balsillie have been synomyous with RIM over time. But the plans for the BlackBerry maker appear to be anything but, given the pledge by Mr. Heins to stay the course.

It's not just his approach. Analysts also questioned whether Mr. Heins, able though he may be, is the right man for RIM at this particular time. The stock sank at the beginning of the week, rebounded on Wednesday, and then again on Friday with word that RIM director Prem Watsa and his Fairfax Financial Holdings Ltd. boosted their stake to more than 5 per cent.

Mr. Heins also said he was putting his focus on new models to run on a new operating system, and he has no plans to break up or sell the company, but that he would listen to anyone who wants to licence the new BlackBerry 10 system.

Of course, the former Siemens executive hasn't had a chance yet, and it's worth noting that the planned upgrade for the PlayBook tablet is winning some rave reviews.

"On the one hand, this appears a positive step, as Messrs. Lazaridis and Balsillie are stepping away from the co-chairman, co-CEO structure which some investors have highlighted as one source of RIM's current problems," said analyst Mike Abramsky of RBC Dominion Securities.

"Plus the current arrangement provides for both change and continuity. But is it enough? On the other hand it’s unclear to what extent the new CEO will be able to materially impact the vision and direction of the company in light of rapidly changing competitive conditions, and correct RIM’s seeming inability to navigate these challenges."

Apple shines The exceptional earnings report from Apple Inc. this week stood in stark contrast as developments at RIM played out.

Apple blew away all expectations as its first-quarter profit climbed to $13.06-billion (U.S.), or $13.87 a share, from $6-billion or $6.43 a year earlier. Revenue surged to $46.33- billion from $26.74-billion.

Apple sold 37.04 million iPhones in the quarter, up 128 per cent, 15.43 million iPads, up 111 per cent, 15.4 million iPods and 5.2 million Macs. It also forecast second-quarter revenue of $32.5-billion and earnings per share of $8.50.

Apple also gave no hint of what it plans to do with its amazing hoard of almost $100-billion in cash. Some observers believe Apple could soon start paying a dividend, though there was no sign of that.

There were bruises, as well, however. The New York Times took a fascinating in-depth look at the conditions at Chinese plants building such devices like these.

According to Fortune, chief executive officer Tim Cook responded forcefully in a memo to staff: "We care about every worker in our worldwide supply chain. Any accident is deeply troubling, and any issue with working conditions is cause for concern. Any suggestion that we don't care is patently false and offensive to us."

Rates to stay low, for long The Federal Reserve has set a new, very low bar in its efforts to heal the U.S. economy.

As The Globe and Mail's Kevin Carmichael reported, the U.S. central bank this week extended its timeline to tighten monetary policy by more than a year, projecting its benchmark rate would remain at its low of near zero until late 2014. It cited stubbornly high unemployment and a depressed housing market as it signalled a still elusive full recovery.

The Federal Open Market Committee, the policy-setting panel, also unveiled changes to economic projections. The so-called central tendency, which strips out the three highest and the three lowest of the projections, now calls for economic growth of 2.2 per cent to 2.7 per cent this year, 2.8 per cent to 3.2 per cent in 2013, and 3.3 per cent to 4 per cent a year later.

Unemployment is forecast at 8.2 per cent to 8.5 per cent for 2012, 7.4 per cent to 8.1 per cent next year, and 6.7 per cent to 7.6 per cent in 2014.

"If Mario Draghi’s European rescue plan involves following the FOMC’s example in pushing the boundaries of monetary policy accommodation, not only to ease the liquidity and funding crises in the European financial system but also by using a weak(er) euro to help offset fiscal austerity, then his job isn’t getting easier," said Kit Juckes, the foreign exchange strategy chief at Société Générale.

"The Bernanke Fed is the king of easy money, always looking for new ways to say ‘lower for longer’ and always ready to reinforce the point that nothing as banal as slightly better economic data will get in the way of hyper-accommodation," Mr. Juckes added, referring to somewhat stronger indicators of late.

CP promises improvement As The Globe and Mail's Brent Jang puts it, Fred Green can't move mountains, but he is pushing for change.

The chief executive of Canadian Pacific Railway Ltd. is under pressure to boost the company's performance, as a proxy battle looms with Bill Ackman of Pershing Square Capital Management, who wants to put the former CEO of rival Canadian National Railway Co. in his place.

The differences between the two railways came into even sharper focus this week as both reported quarterly results.

CP profit climbed 19 per cent in the fourth quarter to $221-million, or $1.30 a share, diluted, from $186-million, or $1.09, a year earlier. CN, in turn, posted a profit of $592-million, or $1.32 a share, compared to $503-million, or $1.08. It also hiked its quarterly dividend by 15 per cent.

Here's the comparison: CP's operating ratio, which looks at costs as a percentage of revenue, rose last year to 81.3 per cent, the least attractive among railways in North America. CN, in turn, has the best, at 63.5 per cent.

Mr. Green pledged better times as the railway pushes ahead with its multiyear plan: "Given our recent market successes and operating trends, we can now with confidence, narrow our target operating ratio range to 70 to 72 per cent in three years and we have no intention of stopping there.”

And he noted the geographical differences that play into it. CP hauls freight through the Rocky and Selkirk mountains, while CN has an easier western route.

Japan a trade deficit nation Japan is now in a trade deficit for the first time in about three decades, hit by natural disasters and stung by a strong yen.

Japan this week reported a deficit of ¥2.5-trillion, or $32-billion (U.S.). As The Globe and Mail's Greg Keenan reported, just about everything that could go wrong for Japan did, beginning with the March earthquake and tsunami and continuing on with the persistently high currency.

There are fears that this will continue.

"The causes, namely high energy prices and depressed demands for Japanese goods in the U.S. and in Europe, are likely to remain in place, and a trade deficit should become a chronic feature of Japan’s trade balance in the next few years," said Takuji Okubo of Société Générale.

"With its public finance arguably in worse shape than that of peripheral European countries, can Japan cope with a twin deficit in its fiscal balance and trade balance? While we expect the large surplus in the income balance to help keep Japan’s current account balance in surplus for many years to come, the endurance of Japan’s income surplus will be a critical issue for its financial stability before global demand for Japanese exports recovers."

Thirteen things 1. A wing and a prayer no longer: Alaska Airlines plans to end its 30-year practice of handing out prayer cards in first class after some travellers complained, writes Melissa Allison of The Seattle Times. The idea of praying on a plane doesn't sit well with me, either, because I'd wonder why the pilot thinks I should.

2. Everyone had some fun with numbers this week after Apple Inc.'s stellar earnings. Here's mine: Apple has enough cash to buy Canada's major phone companies and give us a break on fees, based on their combined market cap of some $70-billion. But for the Canadian ownership restrictions. It could also buy two major Canadian banks, and give us a break on fees. But for the ownership restrictions. (Sean Silcoff also takes a look at Apple's larger-than-life numbers.)

3. From Statistics Canada this week: "In 2009, roughly 58.3 million litres of liquid gasoline evaporated from 11,200 retail gasoline outlets across Canada. This is equivalent to the evaporation of the contents of one full tanker truck every eight hours."

4. Tweet of the week, from @jasonlietaer: "#RIM should have called their new CEO 'THOR' in news releases, rather than 'Thorsten.' I mean, who bets against the God of Thunder?"

5. Runner up tweet of the week, from @LaMonicaBuzz, Paul LaMonica of CNNMoney: "I think Kim Kardashian's marriage didn't last as long as this Bernanke press conference."

6. Third place for tweet of the week, and it's a telling one, from @asaunders, or Alec Saunders, RIM's VP Developer Relations: "Ran into a couple of Bay St 'analysts' at the porter terminal discussing RIM. Lively discussion, but out to lunch on our new CEO."

7. Of all the notable events this week - RIM shakeup, Oscar nominations, etc. - some might have missed this on Tuesday from History.com: "Canned beer makes its debut on this day in 1935. In partnership with the American Can Company, the Gottfried Krueger Brewing Company delivered 2,000 cans of Krueger's Finest Beer and Krueger's Cream Ale to faithful Krueger drinkers in Richmond, Virginia. Ninety-one percent of the drinkers approved of the canned beer, driving Krueger to give the green light to further production."

8. Quote of the week, from Paul Rivett of Fairfax Holdings after the company boosted its stake in RIM: "We are excited to be buying below book in this great company."

9. "It's the last wakeup call that this red trend has to be inverted very, very quickly if we want to safeguard European soccer," Gianni Infantino, the chief of UEFA, said this week as the soccer body released a report showing losses were growing among the top clubs amid debts of almost €8.5-billion. That comment is eerily similar to those of euro leaders over the past two years.

10. God bless hedge fund managers. Here's what George Soros said Friday to Bloomberg Television: “I really think it matters for all of us, for humanity, for hedge fund managers as other human beings, that our civilization should survive. I am right now on the side of the angels. Not an easy role to play."

11. Who knew gongs could be an economic indicator? Yeah, the kind you bang. The Wall Street Journal reports that gong sales surged in the pre-recession days - "Sales people seem to like making customers bang gongs to ease the pain of buying something they might not be able to afford" - but that has changed now.

12. "I have always been interested in economics and world events. I now find myself being used as a political football and there has been a lot of comment about my political allegiances which are inaccurate." So said Mick Jagger, the great rocker and former London School of Economics student, as he pulled out of an event at the World Economic Forum in Davos that was organized by the British government.

13. Even the kitchen sink: Canada's trade watchdog is investigating whether stainless steel sinks from China are being dumped in the Canadian market, The Canadian Press reported.

Ups and downs UBS Securities Canada analyst Brian MacArthur this week cut his 12-month price target on shares of Potash Corp. of Saskatchewan to $60 (U.S.) from $65, and held his rating at "buy" after the potash giant's earnings: "North American potash volumes were down substantially while offshore pricing decreased as more sales were made to lower-netback regions. However, contributions from its potash investments (worth $10/share) increased." CanaccordGenuity's Keith Carpenter cut his Potash target to $58 from $60, but still rates the stock a "buy."

Analysts at UBS and Desjardins raised their price targets on shares of Canadian Pacific Railway Ltd. following its results. Benoit Poirier of Desjardins hiked his target to $76 (Canadian) from $70, but held his rating at "hold," while Hilda Maraachlian of UBS boosted the target to $75 from $73, with a "neutral" rating. "We are confident that CP can drastically improve its operating ratio over the coming years, as the involvement of Bill Ackman - regardless of whether he succeeds or not - should bring a renewed operational focus to CP," said Mr. Poirier, referring to Mr. Ackman's Pershing Square Capital Management, which is seeking to bring in a new CEO.

RBC analyst Walter Spracklin trimmed his price target on shares of Canadian National Railway Co. to $84 (Canadian) from $85, holding his rating at "sector perform" after its results.

CanaccordGenuity's Robert Young cut his target on shares of Celestica Inc. to $10 (U.S.) from $11, and held his "buy" rating after its earnings: "Revenue guidance for Q1 and 2012 was weaker than we expected but more importantly, Celestica continues to expect a consistent operating model with operating margins of 3.5 per cent to 4 per cent, in line with our view."

Mario Mendonca of CanaccordGenuity trimmed his price target on shares of Bank of Nova Scotia to $57 (Canadian) from $58, and maintained his "hold" rating: "We are lowering our 2012E and 2013E EPS to $4.69 (from $4.73) and $5.05 (from $5.14), respectively."

RBC downgraded BCE Inc. to "sector perform from outperform," while holding its price target on the stock at $43. Analyst Drew McReynolds: "We continue to view BCE as a core holding that should continue to benefit from investor demand for yield and capital preservation. Nevertheless, we see rising valuation risk in the name should the improvement in leading economic indicators and associated increase in risk appetite be sustained."

RBC analyst Mike Abramsky boosted his price target on shares of Apple Inc. to $600 (U.S.) from $525, holding his rating at "outperform"after the tech giant's extraordinary earnings report: "Strong Q1 results offer an early vote of confidence for CEO Tim Cook and team, and the strong guidance shows continued momentum from product cycles and expanding markets."

CanaccordGenuity analyst Jeff Rath boosted his target on shares of Netflix Inc. after its earnings, to $66 (U.S.) from $57, and held his "sell" on the stock. He cited better domestic streaming but said he continues to believe Netflix "faces numerous challenges, including subscriber losses, rising content costs and an increasingly competitive landscape."

RBC analyst Stephen Walker cut his price target on shares of Barrick Gold Corp. , citing "potential headwinds" as three new mines near start-up. "We continue to believe Barrick has the potential to generate strong free cash flow and grow dividends by 25 per cent [a year]as its new mines come online," Mr. Walker said as he cut his target to $62 (U.S.) from $70. "However, we are downgrading Barrick shares to sector perform from outperform due to relative valuation and the potential for negative surprises at its three construction/start-up projects over the next 12 months."

Required reading this week North America’s major gas producers are shutting in production and cutting exploration drilling in an industry-wide effort to reduce a massive surplus that has depressed prices to 10-year lows, Shawn McCarthy reports.

The euro zone may be suffering from a severe debt crisis that threatens to unravel the currency union, but at least one outsider still wants to join the 17-country club. That would be tiny Iceland, Brian Milner writes.

Shareholders may cheer the massive premium California’s Semtech Corp. proposed in its friendly bid for semiconductor firm Gennum Corp. this week, but it's not the best news for Canada's semiconductor industry as a whole, which has been dealt a series of blows recently in the form of other significant foreign takeovers. Bertrand Marotte reports.

The president of Starbucks Canada has a grande challenge on his hands as he battles to match the financial performance of his bosses in Seattle, Marina Strauss writes.

The company that created Super Mario is struggling to find its place in an Angry Birds world. Omar El Akkad reports on Nintendo's dismal earnings projections.

Low interest rates and an entrenched culture of spending are changing the face of indebtedness in Canada, driving people who already are deeply in debt to borrow ever more, even as incomes stagnate, Tavia Grant writes.

What to watch for next week Key next week will be the January jobs reports in the United States in Canada, notably the former, where there's a crisis that shows no signs of easing markedly. That's not to say that Canada's high jobless rate is tolerable, only that America has a much deeper problem.

Economists believe Friday's report will show that the U.S. economy created about 150,000 jobs this month, and that the unemployment rate held steady at about 8.5 per cent.

"Recent encouraging news on the U.S. labour market should have continued into the start of 2012, although further improvement may well prove harder to achieve," said Andrew Grantham of CIBC World Markets.

"With growth settling to a more moderate pace, hiring would do well to average much in excess of 150,000 [a month]this year. This would not be enough to prevent the unemployment rate from edging up later in the year should previously discouraged workers return to the labour force."

In Canada, Friday's report is expected to show job creation in the area of 20,000, give or take, but an unemployment rate stubbornly stuck at 7.5 per cent.

"Canadian employment rose nearly 200,000 in 2011, but growth slowed sharply in the second half of the year," said Benjamin Reitzes of BMO Nesbitt Burns.

"The underlying deceleration is expected to persist in 2012. However, over the past two years, the first half of the year accounted for the bulk of employment gains, with January kicking things off with a strong report. We look for a similar pattern (though milder than last year), and are calling for an 18,000 headline increase for January."

In the markets, quarterly earnings season continues with reports from several major energy companies, including Imperial Oil Ltd. , Suncor Energy Inc. , Canadian Oil Sands Ltd. , and MEG Energy Corp. .

"We expect MEG registered very strong flush production in the months following its annual September turnaround," said analysts at UBS Securities Canada.

"Our estimate of 29,750 barrels a day would eclipse the Q2’11 record of 27,800 barrels a day, establishing good momentum into 2012 ... For [Suncor] we expect an update on operations at Firebag 3, where we have seen ramp-up contribute to strong oil sands production volumes in December. For [Canadian Oil Sands] we note Q4 production from Syncrude was the lowest since Q2’09. For [Imperial Oil] we await an update on Kearl which remains the key investor focus."

Follow on Twitter: @michaelbabad

 

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