Factory woes a bigger concern than housing and debt, BMO warns

The Globe and Mail

These are stories Report on Business is following Thursday, Dec. 12, 2013.

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BMO warns on manufacturing
Bank of Montreal is ringing alarm bells over the state of Ontario’s manufacturing sector, warning it’s of more concern than fears over the housing market and consumer debt.

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“Ontario manufacturing employment has dropped more than 4 per cent in the past year alone, even as North American auto sales have revived big time – not good,” said chief economist Douglas Porter of BMO Nesbitt Burns.

“And the headlines have been replete with more factory closures in recent weeks, with the venerable Kellogg’s plant in London, Ont., the latest casualty,” he added in a research note.

“It would seem to us that this is a much bigger issue for the medium-term Canadian outlook than the more hyped housing bubble/household debt concern.”

Indeed, as The Globe and Mail’s Tavia Grant reported this week, the decision by Kellogg Co. to close the cereal factory was the latest in a growing list of American companies shuttering plants.

“Note that even in Canada’s industrial heartland, there are now more people employed in health care and social assistance than in factories,” Mr. Porter said.

“As recently as 2000, the ratio was 2:1 in favour of manufacturing."

Senior economist Robert Kavcic, Mr. Porter’s colleague at BMO, said there could be some solace had from the recent weakening of the Canadian dollar, and the forecasts for faster economic growth in the United States.

“But, keep in mind that a weaker currency won’t help overnight – the impact tends to filter through over the course of at least two years,” he said.

“Of course, there are other challenges in the sector, such as labour and electricity costs, that will continue to pose headwinds.”

Poloz warns of risks
The Canadian economy faces the risk of deflation and won’t reach full capacity for two years, with imbalances in household debt and the housing market gradually diminishing in that time, Bank of Canada Governor Stephen Poloz said today.

He still expects a soft landing in the housing market, which will be offset by a pickup in exports and business investments, The Globe and Mail's Tavia Grant reports.

His comments come one week after the central bank governor kept Canada’s key interest rate on hold for the foreseeable future, saying non-commodity exports have been disappointing, while business investment is recovering “more slowly than anticipated.”

“Right now, it looks to us like it will take around two years to get inflation back up to 2 per cent,” he said in a speech to the Canadian Club of Montreal.

Lululemon sinks
Shares of Lululemon Athletica Inc. plunged today after the yoga wear maker cut its outlook for the year.

The stock was down 9 per cent within about 15 minutes of the Nasdaq open.

As The Globe and Mail’s Marina Strauss reports, Lululemon posted a gain in third-profit, to $66.1-million (U.S.), or 45 cents a share, from $57.3-million or 39 cents a year earlier.

Sales jumped 20 per cent to $379.9-million.

Today, Lululemon also cut its sales forecast for the year to between $1.605-billion and $1.61-billion, and its earnings-per-share estimate to between $1.94 and $1.96, down from its earlier range of $1.94 and $1.97. It also cut its forecast last quarter.

“While our outlook for the fourth quarter is being impacted by both macro and execution issues, I believe that the investments we are making in the business combined with the team in place create a strong platform for growth in the years ahead,” said chief executive officer Christine Day, who’s leaving the company.

Cenovus to focus on existing projects
Cenovus Energy Inc. plans to reduce investment in emerging oil sands projects next year, and focus on the development of its existing projects and refining operations, The Globe and Mail’s Bertrand Marotte reports.

The Calgary-based energy giant said today its total 2014 investment in projects will be between $2.8-billion and $3.1-billion, a 13-per-cent decrease compared with the previous year. Oil production is anticipated to grow 10 per cent.

The strategy is to use cash flow from oil, natural gas and refining operations to finance further growth of oil sands projects, it said.

Overall cash flow in 2014 is projected to be between $3-billion and $3.7-billion.

Bombardier in new deal
Bombardier Inc. has won a firm order from American Airlines Group Inc. for 30 of its CRJ900 regional jets valued at about $1.42-billion (U.S.), Mr. Marotte also reports.

The order’s value could rise to about $3.38-billion if American converts options on an additional 40 of the planes.

The much-anticipated deal is a big win for Montreal-based Bombardier, which is looking to boost its regional-jet order backlog, and comes just after the closing of the merger between American’s parent AMR Corp. with US Airways Group Inc. and American’s emergence from bankruptcy protection.

Why we’re special
With our housing market and, now, our post office, Canada is getting quite the rep.

Which got me thinking about how we’re unique. And drawing up a list. Which is a lot easier in the morning than gathering information on why the euro zone is a basket case or when the Fed will taper or other market themes.

So, here are 13 things:

1. We’re a hardy folk who won’t mind trudging in the cold and the snow to a community mailbox, unlike the rest of the developed world.

2. The OECD said Canada could boast just the third most overvalued housing market in the world. But then Deutsche Bank made everything right again this week by naming us No. 1.

3. The oil sands. Or, as opponents like to call them, the tar sands. Or, as Neil Young likes to call them, Hiroshima.

4. The mayor. (This one’s so obvious I don’t even have to say which mayor.) Seriously, Google “worst mayor in the world.”

5. The Toronto International Film Festival draws a lot of international celebrities. So does the seal hunt.

6. Santa Claus is Canadian. At least, that’s what the government plans to tell the UN Commission on the Limits of the Continental Shelf.

7. Our banks like to buck global trends. Like being owned by the government during the financial crisis.

8. You can borrow from the bank or, better still, the prime minister’s chief of staff.

9. We have our own Target stores. And it doesn’t really matter that they’re not even real Target stores.

10. If you visit Quebec, you get to learn how to say “pasta” in French. (It’s pâtes, by the way.)

11. We were so excited about giving the world mobile e-mail that we let everyone in on the act.

12. Our currency is so special that Goldman Sachs is telling its clients to short it.

13. Only in Canada might you find a cemetery that gives you both “peace of mind and up to 48 months to pay, interest free.” (Think about that. And note that it was a “limited time offer” at Toronto’s Mount Hope, and for all I know the deal has now expired. Like its customers. I saw the sign a few months ago.)

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