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Canada’s recovery stalled, housing still a risk, OECD says
business briefing
Michael Babad
Michael Babad

This article was published more than 10 years ago. Some information may no longer be current.

These are stories Report on Business is following Tuesday, Nov. 19, 2013.

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OECD on Canada
The OECD, the international body that ranked Canada's housing market as among the world's frothiest, warned today of the threat of a "disorderly correction" in prices given the record debt burden among Canadian families.

In its semi-annual economic outlook, the 34-country group said the market will probably weaken "since the housing stock seems greater than underlying demand," but that the federal government may be forced to intervene again should price pressures emerge.

The government has already moved four times to head off a bubble, most recently in the summer of 2012, with new mortgage insurance restrictions.

"There is also a risk of a disorderly correction in the housing market, in the context of a high level of household debt," the OECD said in today's report.

"Such a correction would depress consumption and residential construction and in an extreme case could threaten financial stability."

Several months ago, the OECD said Canada held the dubious distinction of ranking third, behind Belgium and Norway, in terms of most overvalued markets based on a combination of two measures.

Just to be clear here, most economists do not believe there will be a meltdown, despite the rebound in the market since the latest restrictions.

Over all, the OECD study painted a bleak short-term economic picture for Canada – and longer term where unemployment is concerned – but suggests a pick-up over the next two years.

"The pause in the economic recovery since early 2012 has continued this year," the Organization for Economic Co-operation and Development said today in a new look at global economic conditions.

"Exports have been weaker than expected, possibly reflecting shifts in trade linkages and ongoing competitive challenges," the group said in its semi-annual economic outlook.

"This, together with declining corporate profits, has depressed business investment … Private consumption expenditure, on the other hand, has remained buoyant, supported by gains in labour income."

The OECD said, though that economic growth should gather speed in 2014 and 2015, driven by growing exports and business investment, the two areas that have held the country back, meaning the Bank of Canada may need to raise interest rates.

"Improving exports result from the recovery in foreign markets and steps firms are taking to expand into the fastest-growing markets and enhance competitiveness, while business investment should be supported by declining spare capacity and cheap and readily available credit," the group added.

Among the findings in the report on Canada:

  • The economy is projected to expand by 2.2 per cent this year, 2.4 per cent next and 2.7 per cent in 2015.
  • Unemployment is forecast to average 7.1 per cent this  year, 7 per cent in 2014 and 6.9 per cent a year later.
  • Annual inflation should run at just 1 per cent this year, 1.6 per cent in 2014 and 1.9 per cent in 2015.
  • Exports are forecast to rise by 1.9 per cent this year, 4.6 per cent next year and 5.7 per cent in 2015, outpacing import growth in each year.
  • Canada’s household saving ratio, measured as a percentage of disposable income, should change little, at 5 per cent this year and 4.9 per cent in each of the next two years.

The Bank of Canada is in no rush to hike its benchmark interest rate – and economists don't see that happening for some time yet – while the OECD said today it may need to act by late next year to head off inflation.

The OECD expects the Bank of Canada to begin raising its key rate, now at 1 per cent, in the fourth quarter of next year, gradually bumping it to 2.25 per cent by the end of 2015.

Over all, the OECD report warns of the potential for "turbulence" in the global economy, pointing specifically to the United States.

"There is a risk of another bout of brinkmanship in the U.S. and there is also a risk that tapering of asset purchases by the U.S. Federal Reserve could bring a renewed bout of instability," said the group's secretary-general, Angel Gurria.

He was referring to the expected pullback – timing is uncertain here – of the U.S. central bank's quantitative easing program of monthly asset purchases of $85-billion (U.S.) a month.

"The exit from non-conventional monetary policy will be challenging, but so will action to prevent another flare-up in the euro zrea and to ensure that Japan's growth prospects and fiscal targets are achieved."

The OECD forecasts that economic growth across its 34 member countries will rise from 1.2 per cent this year to 2.3 per cent next and 2.7 per cent in 2015.

Bombardier in new deal
Bombardier Inc. has a tentative deal with Iraqi Airways for the purchase of five of its new C Series commercial aircraft, The Globe and Mail's Bertrand Marotte reports.

Montreal-based Bombardier also announced today at the Dubai Airshow another agreement for the sale of turboprops from its Q400 NexGen program.

Iraqi Airways' letter of intent for five of the larger CS300 C Series jets also includes options on 11 more planes in that category.

A firm order for five C Series jets would be valued at about $387-million (U.S.). If all of the options are exercised, the transaction's value rises to $1.26-billion. However, it is common practice in the industry for aerospace manufacturers to provide discounts to buyers.

Sears to pay special dividend
Sears Canada Inc. saw revenue and profit fall in the third quarter as the struggling company tries to find its footing in an increasingly tough retail landscape, Mr. Marotte reports.

The retailer also said today it's paying out a special dividend of $5 a share as a result of the $315-million sale of its joint venture interest in eight Quebec properties.

Sears posted a net loss of $48.8-million or 48 cents a share for the third quarter, compared with $21.9-million or 22 cents in the year-earlier period. Revenue slipped 6.4 per cent to $982.3-million from $1-billion.

Sales at stores open for at least a year increased by 1.2 per cent during the 13-week period, the company said.

"This is the first quarterly same-store sales increase for the company since 2008," Sears Canada president and chief executive officer Doug Campbell said in a news release.

Oliver warns on Keystone
Canada's Natural Resources Minister warns that a move by the European Union to target the oil sands could have an indirect impact on the fate of the Keystone XL pipeline project because it will stigmatize Canadian oil.

Canada has spent months fighting the European Union's proposed fuel quality directive which is designed to reduce greenhouse gas emissions. Under the proposal, oil from the oil sands would be labelled particularly dirty, creating a disincentive for European refiners to import Canadian crude. Canada has said the methodology used to create the EU's classification system is flawed and unscientific.

Today, The Globe and Mail's Paul Waldie reports from London, Joe Oliver said the EU's directive would damage the reputation of Canadian oil, something that could weigh on the decision in the United States on whether to approve the Keystone pipeline project, which is supposed to bring bitumen from Alberta to refineries along the U.S. Gulf Coast.

"One of our concerns about the fuel quality directive, because it's discriminatory and targets the oil sands in an unfair and scientifically inaccurate way, is that it could stigmatize the oil from Canada and impact on our access to some markets," Mr. Oliver said after delivering a speech to an energy conference in London.

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