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Economy a 'picture of mediocrity' that won't help jobless rate Add to ...

These are stories Report on Business is following Tuesday, July 31, 2012.

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Growth slows
Canada's economy is just chugging along. And while that may be a good sign compared to other parts of the world, it won't do anything to bring down the country's high jobless rate.

As The Globe and Mail's Ora Morison reports today, the economy neared stall speed in May, growing just 0.1 per cent.

Today's reading of gross domestic product by Statistics Canada was below what economists had expected, and down from 0.3 per cent in April.

The retail, finance and insurance sectors led the gains, while transportation services and arts and entertainment held output back.

Production of goods was flat. There was an expected boost in oil and gas and mining, but manufacturing and construction slipped, the agency said.

Economists now believe the economy expanded at an annual pace of less than 2 per cent in the second quarter, which we won't know until Statistics Canada's next report next month.

But if this keeps up, it will be difficult to cut the jobless rate from 7.2 per cent.

"A 1.5 per cent to 2 per cent range for growth isn’t terrible, all things considered, but it’s a pace that is consistent with no progress in bringing the unemployment rate down," warned chief economist Avery Shenfeld of CIBC World Markets.

Here's what some economists said today:

"Extremes make headlines, but Canada’s economy is a picture of mediocrity ... We had been looking for a much stronger contribution to the quarter from May, and there were also some fractions of a decimal place lost in revisions to prior month’s growth rates. As a result, our call for growth in the 2.3 per cent now looks much too high. Although these monthly reports by industry don’t always line up precisely with the quarterly data (which are derived by adding up sources of spending), we’re revising our Q2 forecast by a half point, to 1.8 per cent. That pace matches the Bank of Canada’s recently downward- revised projection. Unlike the Bank, we do not expect a material acceleration in 2013, as the same global forces that are holding Canada back, and a leveling off in the growth contribution from home building, extend the run of mediocrity through next year." Mr. Shenfeld

"The main downside surprise was a 0.5-per-cent setback in manufacturing output, which ran counter to an earlier report of a small gain in factory sales volumes. As well, the arts, entertainment and recreation sector sagged a hefty 1.7 per cent - perhaps reflecting the fact that not one of Canada’s seven NHL teams was still in action by the second round of the playoffs (and prospects don’t look much better for one certain team in 2012/13, but I digress) … Much like its U.S. counterpart, the Canadian economy seems unable to break out of its sub-par growth trajectory." Douglas Porter, BMO Nesbitt Burns

"While some of the unexpected weakness in the May GDP report should reverse in June the data imply that annualized Q2 GDP growth is likely to remain little changed from the modest 1.9-per-cent gain recorded in Q1. The persistence of modest growth is likely in large part a reflection of sluggish U.S. growth, declining activity in Europe and slowing growth in a number of emerging economies. The risk that this external weakness could deepen will likely keep the Bank of Canada holding monetary conditions highly accommodative through the end of this year." Paul Ferley, Royal Bank of Canada

"Strapped down by high household debt and weak global demand, the Canadian economy has clearly transitioned into a period of slow economic growth … This subdued pace of economic growth is likely to continue as we head into the second half of the year. For one, the slowdown experienced among Canada’s international peers, in particular the U.S. where real GDP growth clocked in at just 1.5 per cent in the second quarter and other G7 economies which appear to be mired in recession, is likely to continue to weigh on the all important export sector. In addition, the Department of Finance’s move to tighten mortgage insurance rules earlier this month is likely to weigh on activity in sectors tied to housing and household lending." Diana Petramala, Toronto-Dominion Bank

"The weakness in the manufacturing sector is at odds with other economic indicators: Strong export volumes for manufacturing goods, strong manufacturing sales volumes and a rise in manufacturing inventories. All these point to an increase in production, not a decline. Nevertheless, the report shows that growth in Q2 is likely to be weaker than expected at around 2 per cent quarter-over-quarter at an annual rate. This suggests to us the BoC is likely to continue to be on hold for some time, but it is not weak enough for it to justify a change to its forward guidance that the next policy move will be a hike." Chalres St-Arnaud, Nomura Securities

Lowe's stalks Rona
Lowe's Inc. appears poised to launch an all-out hostile bid for rival Rona Inc., and this one promises to take some interesting twists.

Already, the Quebec government is pledging to intervene to keep Rona out of the hands of its competitor.

As The Globe and Mail's Marina Strauss reports, Rona today disclosed that Lowe's is proposing a $14.50-a-share offer, or about $1.8-billion. It hasn't launched a formal bid yet, but that's clearly coming.

Rona today rejected the bid as not in the best interests of its shareholders. Lowe's confirmed it, saying it already has the support of institutional shareholders that account for 15 per cent of the stock.

That sparked an immediate response from Quebec Finance Minister Raymond Bachand, who said his government has promised its support to Rona and has asked Investment Quebec to assess the options for when Lowe's makes it official.

The Finance Minister and his colleague, Economics Development Minister Sam Hamad have mandated Investment Quebec to look at all steps it could take to counter this bid, including creating a fund to protect Quebec's interests," the government said.

It's not clear exactly how a fund would "protect Quebec's interests," but the comments are certain to raise eyebrows among foreign investors.

The Caisse de dépôt et placement du Québec, in turn, the giant pension manager that owns a chunk of Rona stock, said it is watching developments to take its own interests into account.

It wants "value creation," among other things, which include what happens to Rona's head office in the province, development of the supplier network, and the rights of franchisees.

Aside from that, there have also been some interesting movements in Rona stock.

Indeed, the hardware and home renovation retailer's shares climbed almost 12 per cent since Friday, July 6, and yesterday. Compare that to the S&P/TSX retailing index, which inched up 0.5 per cent in the same period.

Friday, July 6, is important because, according to Rona today, it received an unsolicited takeover proposal from rival Lowe's Inc. two days later, on a Sunday.

Investors, however, didn't learn about that until today.

There has certainly been speculation about Lowe's going after Rona, which pushed up its stock price earlier. Its chief financial officer was even asked about it a few months and said he was open to "all options." And, keep in mind that Lowe's hasn't launched a formal bid. As well, the stock closed yesterday at $11.87, well below the proposed offer.

According to Rona, Lowe's made its proposal July 8, prompting the board, a special committee of independent directors, helped along by bank and legal advisers, to study the bid.

Lowe's wanted a deal that was supported by the board, and Rona asked its competitor to pledge that it would not go forward with any offer that wasn't.

On July 26, Rona told Lowe's to take a hike.

Then, on July 28, Lowe's said it still wanted a deal supported by the board but, according to Rona, it "also indicated that it remained very interested in pursuing a transaction with Rona and was going to consider all of its options." That presumably meant its suitor could go hostile.

Today, Rona said it was disclosing what went down because shareholders should know: "With a view to ensuring market transparency, Rona believes that it is important for its shareholders and other stakeholders to be made aware of these developments."

Well, yeah, particularly when the stock rises 12 per cent.

U.S. government moves on Enbridge
The U.S. government is blocking Enbridge Inc. from restarting a pipeline after a mishap in rural Wisconsin until a plan for doing so is submitted and approved.

“Pipelines operate safely across the country every single day," said U.S. Transportation Secretary Ray LaHood as he announced the decision by the department's Pipeline and Hazardous Materials Safety Administration.

"That’s why accidents, like the one in Wisconsin, are absolutely unacceptable. I will soon meet with Enbridge’s leadership team and they will need to demonstrate why they should be allowed to continue to operate this Wisconsin pipeline without either a significant overhaul or a complete replacement."

Enbridge's Line 14 carries 318,000 barrels a day. The spill was not deemed to be big, but, noted the PHMSA in its document, the pipeline crosses several rivers and the site of the problem is less than three miles from a source of drinking water, which has shown no signs of being affected.

"This Order finds that continued operation of the pipeline without corrective action would be hazardous to life, property, or the environment and requires Respondent to take immediate corrective action to ensure the safe operation of the pipeline," the PHMSA said.

"The history of failures on respondent's Lakehead Pipeline system, of which the affected pipeline is a part, the defects originally discovered during construction, and the 2007 failure indicate that respondent's integrity management program may be inadequate," it added.

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