These are stories Report on Business is following Wednesday, Oct. 9, 2013.
OECD warns U.S.
The OECD is warning Washington’s squabbling politicians that failure to raise the government debt ceiling would plunge the developed world back into recession.
Today’s warning from the secretary-general of the Organization for Economic Co-Operation and Development came on Day 9 of the Washington showdown.
“The current political deadlock in the United States is needlessly putting at risk the stability and growth not only of the U.S. but also the world economy,” Angel Gurria said in a statement.
“This comes at a time when a fragile recovery in advanced economies was under way, and when a number of emerging economies were already facing new risks.”
The partial shutdown of the U.S. government is just one issue. Failure to raise the debt limit, and the potential for a default, is a far greater fear, one that is plaguing investors as the Oct. 17 deadline to do that draws nearer.
The Treasury Department warns the government will be tapped out by that date if the debt ceiling isn’t raised. Fears of a default have been rising as the drop-dead date approaches, though some observers believe the government has more leeway than it’s saying.
“We still see the probability of failing to raise the debt ceiling as low, but as the government shutdown drags on, the level of concern is ratcheting up,” said Mr. Gurria.
“If the debt ceiling is not raised – or, better still, abolished – our calculations suggest that the OECD region as a whole will be pushed back into recession next year, and emerging economies will experience a sharp slowdown.”
The OECD projects U.S. government consumption would contract immediately by the equivalent of at least four percentage points of gross domestic product, shaving that amount from economic growth next year.
A default, of course, would be even worse, he warned, and would hit other countries hard.
“Even if the likelihood of this is low, just the uncertainty about the government’s ability to avoid a default on part of its debt would result in disruptions in financial markets that would deepen the economic downturn, lowering tax revenues and forcing more cuts in public spending,” Mr. Gurria said.
He concluded his statement by saying that his group has “trust in the wisdom” of America’s political chiefs.
Others aren’t so sure.
“Confidence that the U.S. will get its act together is slowly turning into fear,” said market analyst Alastair McCaig of IG in London.
“The constant bickering by both the Republicans and the Democrats have seen almost 1,000 points wiped off the Dow in the last four weeks, and with no end in sight U.S. markets look set to tumble even further,” he added.
- The Doomsday scenario of a U.S. default
- Kevin Carmichael: U.S. budget showdown drives up borrowing costs
- Things you can't do amid U.S. shutdown (But spies laid off so 'sext' away)
Still, North America had a respite of sorts today as investors celebrated President Barack Obama’s nomination of Janet Yellen to succeed Ben Bernanke as chief of the Federal Reserve, and as he scheduled meetings with both parties for this week, hoping to break the logjam.
As Société Générale’s Kit Juckes put it, it’s was a “dovish interlude” in the market angst over the Washington stalemate.
“The news that Janet Yellen will be nominated to be the first Fed chairwoman today has triggered a rebound in risk sentiment,” said Mr. Juckes, the bank’s chief of foreign exchange.
“She may be the Queen of Doves in monetary policy circles but even if she were Superwoman, she wouldn’t be able to solve the U.S. fiscal/political crisis on her own.”
Obama taps Yellen
From ‘Queen of Doves’ to ‘ultra-dove,’ as another analyst dubbed her, Ms. Yellen is being seen today as a steady hand at the helm of the world’s most powerful central bank who will continue to push the Fed’s easy money policy.
The Fed’s current vice-chair is now on track to take over when Mr. Bernanke’s term expires Jan. 31.
“This choice of monetary policy dove makes it much more likely that the Fed will continue to remain accommodative into next year, though even sure won’t be able to apply a Band-Aid if Congress continues along its self-destructive path,” said senior analyst Michael Hewson of CMC Markets in London.
What he means is that, as a “dove,” Ms. Yellen’s leadership should see the Fed continue to keep the taps open in an ongoing effort to bolster the recovery and ease unemployment.
"Yellen, the current vice-chairmwoman of the Fed, is believed to be even more dovish than Ben Bernanke, whose term ends on 31 January," added market analyst Craig Erlam of Alpari in London.
"It's therefore no surprise to see investors respond positively to the news of President Barack Obama's nomination, especially given that he was previously believed to be more in favour of a much more hawkish Lawrence Summers."
Mr. Summers pulled out of the race amid a backlash from the Democrats.
CIBC World Markets economist Emanuella Enenajor doesn’t see Ms. Yellen as “more dovish,” though certainly part of the overall policy of the Federal Open Market Committee, the central bank’s deciding group.
“Yellen’s FOMC voting record has matched Bernanke’s and her speeches have largely echoed the themes of her predecessor,” Ms. Enenajor said.
“Bonds may see a temporary boost on the appointment of Yellen to the helm (pending Senate confirmation), given her support of the Fed’s overall dovish stance,” she added.
“However, assuming an amicable passing of the current debt ceiling and budgetary deadlock, we see longer-term risks of a sell-off as the drag from fiscal policy eases in 2014, giving even a Yellen-led Fed justification to scale back bond-buying by early next year.”
She was referring to the central bank’s anticipated pull-back from its massive asset-buying stimulus program known as quantitative easing, or QE.
The Fed had been expected to announce at its last meeting that it would start trimming those purchases, but surprised markets by holding the line.
Minutes of that meeting, released this afternoon, however, showed the Fed policy makers still see this so-called tapering of the program as probable this year.
Ms. Yellen still has to be confirmed. That’s expected to happen but there may be some turmoil along the way, particularly given the atmosphere in Washington.
“Yellen will be nominated today to be the chairman of the Fed and has the support of key Democrats for her Senate confirmation,” Sébastien Galy, a colleague of Mr. Juckes at Société Générale, said before the president’s announcement.
“While the Senate is the senior body, it doesn't necessarily mean the process will be smooth or fast,” he added in a research note.
“Being painted an ultra-dove is not going to go down well with the tea party. For now, this nomination is boosting expectations of money printing.”
- Kevin Carmichael in Economy Lab: Why Janet Yellen is the right person to lead the Fed
- Kevin Carmichael: Fed officials' decision to hold off on tapering a 'close call'
- Yellen nominated as new Fed chief in historic announcement
- Economists weigh risks after Yellen tapped to lead the Fed
- U.S. Senate's No. 2 Republican opposes Yellen as next Fed chair
Demarais dies at 86
Paul Desmarais, one of French Canada’s leading business figures, has died at the age of 86.
Mr. Desmarais, the controlling shareholder of Power Corp. of Canada, died last night, The Globe and Mail's Sophie Cousineau reports.
“Known for his vision, leadership and his innate sense of entrepreneurship and for his profound attachment to his country, Mr. Desmarais contributed greatly to turning Power Corporation into an international management and holding company with interests across North America , Europe and Asia,” the company said.
Mr. Desmarais, who was chairman and chief executive officer from 1968 through 1996, had already given over power to his sons, Paul Jr. and André, as co-CEOs.
- Sophie Cousineau: Canadian business icon Paul Desmarais dead at 86
- Eric Reguly: How the Desmarais family clinched its power play
Shuffling off to Buffalo
The loonie may have dipped somewhat, but the gap in consumer prices between Canada and the United States is still, well, gaping.
A new report today from BMO Nesbitt Burns shows the price gap on a basket of goods - it describes it as a “semi-random” sample – has narrowed somewhat to 10 per cent from 14 per cent in a May, 2012 study.
The loonie, as the dollar coin is known in Canada, remains “simply too strong for its own good,” said BMO’s chief economist, Douglas Porter.
“While the high-flying currency has lost some altitude in the past year – it’s down about 4 per cent this year – the slide has largely stalled in recent months at levels still above what we would consider fair value, let alone the OECD’s measure of purchasing power parity,” Mr. Porter said, adding he expects the Canadian dollar to weaken, averaging 95 cents U.S. next year, but to only a bit below where it currently stands.
“This is another small step in the ‘right’ direction, but not enough to alter the underlying fundamentals facing the economy,” said Mr. Porter, who has tracked the price gap for several years.
“One of those lingering fundamentals is that the Canada-U.S. price gap remains locked in place, still drawing a phalanx of cross-border shoppers southbound from Canada,” he added.
One of his interesting findings is that, while goods such as cars and books have seen some “notable narrowing” in the past six years, Target Corp.’s “much-ballyhooed” jump into Canada has had a limited effect on prices.
Mr. Porter found a gap of 34 per cent on baby items, 19 per cent on running shoes, 14 per cent on hardware, 13 per cent on housewares and 10 per cent on magazines.
Autos and digital cameras are 6 per cent higher in Canada, electronics 3 per cent, and sporting goods 1 per cent.
Good news for the tech crowd: Tablet computers are 2-per-cent less.
This, of course, affects how and where we shop, and the suggestion is that many of us are heading to malls such as those in Buffalo, N.Y., and Bellingham, Wa.
“With the price gap remaining substantial, the tourism deficit continues to groan,” said Mr. Porter.
“Over the past year, the travel deficit totalled nearly $18-billion, or roughly 1 per cent of GDP. In the decade before the currency first hit parity in 2007, the tourism shortfall averaged less than 0.3 per cent of GDP per year.”
Overnight trips to the United States, which can be a proxy for cross-border shopping and moves almost in line with the value of the loonie, has been on the rise. The number of Americans visiting Canada has been near record lows, he said.
“To put it in perspective, as recently as a decade ago, there were more Americans visiting Canada than Canadians visiting the U.S., where the ratio now is nearly 1:3,” Mr. Porter said.
(For Mr. Porter's research, see the accompanying infographic or click here.)
What happened at MTS Allstream?
Streetwise columnist Boyd Erman today looks at Monday's decision by the Canadian government to reject an Egyptian-led group for Manitoba Telecom Services Inc.'s Allstream unit, and offers three theories.
- Boyd Erman: Three theories on why the government rejected Allstream bid
- Rita Trichur, Steven Chase and Boyd Erman: MTS, Sawiris is search of answers after shock Allstream decision
Lunch with your co-workers may not be the best noon getaway, a new study suggests.
Indeed, the study published by the Rotman School of Management at the University of Toronto indicates eating while working at your desk may be the way to go.
As long as it’s your decision.
According to the paper by associate professor John Trugakos, PhD student Bonnie Cheng and Wilfrid Laurier professor Ivona Hideg, workers who pursue relaxing activities at lunch are the least tired, as long as it’s their choice.
Those working through the break can appear more fatigued, but it’s not as bad if it’s a personal choice.
Their paper for the Academy of Management Journal is long, and complex, but Rotman sums it up well in an accompanying news release: If you’re in the cafeteria or somewhere else with colleagues, and your boss, for that matter, you may be concerned about choosing your words wisely or how you come across to your co-workers.
“You’re hanging out with people who you can’t necessarily kick back and be yourself with,” said Prof. Trugakos.
The main message, he added, is that “freedom to choose” is crucial.
“The autonomy aspect helps to offset what we had traditionally thought was not a good way to spend break time.”
The study’s authors say their results could be meaningful for companies and their employees.
“Our results show that employees should be aware of what they do during their lunch breaks, as even seemingly inconsequential activity choices made during the lunch break can impact their fatigue at the end of the day,” they write.
“Autonomy over the lunch break can offset the negative effects of work and social activities as not engaging in relaxing activities during lunch,” they add.
“In light of increased pressure to continue working or skip lunch in today’s workplace, however, it seems possible that autonomy over the lunch break may be relatively low. Indeed, other authors have suggested that the modern capitalist workplace is characterized by particularly low levels of autonomy.”
Coutu unveils payout
Jean Coutu Group (PJC) Inc. says it plans to distribute up to $502-million to shareholders through a share buyback program as well as a one-time dividend of 50 cents, The Globe and Mail's Bertrand Marotte reports.
The drugstore giant said today it intends to buy back up to 22 million class A subordinate voting shares at $18.50 each in addition to the 50-cent per class A and B share dividend following the sale of its equity stake in U.S. pharmacy chain Rite Aid Corp. and given its strong cash flow from operations.
Coutu also posted a jump in second-quarter profit to $208.2- million or 99 cents a share, largely on gains related to Rite Aid, from $51.2-million or 23 cents a year earlier.
The Organization for Economic Co-operation and Development says Canada’s economic outlook is picking up.
The group released its composite leading indicators today, which suggests “a positive change in momentum” for Canada.
Over all, it said, the indicators “continue to signal improvements in growth in most major OECD countries with divergent patterns among large emerging economies.”
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