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Fat personal debts: Irrational exuberance, Canadian-style Add to ...

These are stories Report on Business is following Tuesday, Jan. 17, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Bank of Canada warns on debt Canadian borrowers still appear to be biting off more than they can chew, though by all accounts they have some time to get their debts in order.

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The Bank of Canada and other policy makers have warned repeatedly that households are gorging on debt at current low interest rates, which inevitably will rise. Today, it warned it's still expecting consumers to borrow at a faster pace than that at which their incomes are growing.

"Very favourable financing conditions are expected to buttress consumer spending and housing activity," the central bank said as it held its key rate steady at 1 per cent, the main reason behind those favourable financing conditions.

"Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further."

That's a worry for consumers, who are borrowing so heavily at rock-bottom rates, in the event the economy turns sour. Already, the jobless rate is at a high 7.5 per cent, and more people could find themselves in trouble.

"It makes Canadian households much more vulnerable to any shock to the global economy," said economist Leslie Preston of Toronto-Dominion Bank.

On the other hand, the central bank clearly sees no collapse in the housing market, which is slowing but is not believed to be headed for a meltdown.

"What they probably mean there is ... at a minimum it will keep the housing market from cooling more quickly than people fear, and maintain household spending," Ms. Preston said.

The ratio of debt to personal disposable income, a key measure of where a consumer stands, climbed in the third quarter of last year to a record 152.98 per cent from 150.57 in the second quarter, according to Statistics Canada. That measure includes not just debt but also outstanding liabilities like phone bills and taxes. A different measure of credit market debt alone also rose in the quarter, to 150.8 per cent.

That has some observers worried because that second number is so close to a comparable measure in the United States, which hit 160 per cent just before America's housing meltdown. It also plays into speculation of rate changes.

"A very interesting point in the communiqué is that the BoC does not expect any deleveraging from the household sector, saying that the 'ratio of household debt to income is projected to rise further,'" said Charles St-Arnaud of Nomura in New York.

"This tells us that the BoC is willing to let imbalances increase to cushion growth. It also indicates that if the uncertainty were to disappear, the BoC could revert quickly to a tightening bias."

Senior economist Michael Gregory put it another way, saying that "given escalating domestic debt concerns, external headwinds are going to have to blow much harder to elicit local rate cuts."

Finance Minister Jim Flaherty said in Ottawa today that he does have his eye on the housing market, and will intervene if he feels the need, as he did before in tightening mortgage rules.

"There’s some indication of some softening in the housing market in Canada recently," Mr. Flaherty told reporters. "We watch the housing market carefully and we are prepared to intervene if necessary. Having said that, we’re not about to intervene in the housing market now."

Carney warns on Europe Over all today, Bank of Canada Governor Mark Carney and his colleagues pointed to heightened global risks since last fall, though noting a stronger-than-expected economic performance in the second half of last year.

The central bank also unveiled fresh estimates that indicated Canada's economy expanded by 2.4 per cent last year, and will grow by 2 per cent this year and 2.8 per cent in 2013, The Globe and Mail's Jeremy Torobin reports.

"While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment," the central bank said in its statement.

It's the forecast for other countries that has eroded.

"The outlook for the global economy has deteriorated and uncertainty has increased since the bank released its October Monetary Policy Report (MPR)," the Bank of Canada said.

"The sovereign debt crisis in Europe has intensified, conditions in international financial markets have tightened and risk aversion has risen. The recession in Europe is now expected to be deeper and longer than the bank had anticipated in October. The bank continues to assume that European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks. In the United States, while the rebound in real GDP during the second half of 2011 was stronger than anticipated, the bank expects the U.S. recovery will proceed at a more modest pace going forward, owing to ongoing household deleveraging, fiscal consolidation and the spillovers from Europe. Chinese growth is decelerating as expected towards a more sustainable pace. Commodity prices – with the exception of oil – are expected to be below the levels anticipated in the October MPR through 2013."

The central bank also gave no signs of moving from their cautious approach, noting there is still "considerable monetary policy stimulus" in the economy, which suggests no rate cut in the pipeline.

"There is no indication that the bank is seriously thinking about shifting away from the current 'wait and see' stance anytime soon," said Peter Buchanan of CIBC World Markets. "Although we expect the next move in rates to be up rather than down, we continue to look for the bank to remain on the sidelines until at least early 2014."

Inflation eases in Europe Europe's monetary chiefs are getting a bit of help on the inflation front.

December's annual inflation rate in the euro zone was revised down to 2.7 per cent today, a tiny move from the original estimate by the Eurostat agency, but welcome nonetheless. The revision added to speculation that the European Central Bank could cut interest rates again soon, possibly in February.

The central bank has already cut rates twice, but the group is headed toward another recession, and the easing in inflation at least gives the ECB some more flexibility.

Inflation also eased in Britain, to 4.2 per cent in December, from 4.8 per cent a month earlier, according to the Office for National Statistics.

Yang quits Yahoo board Co-founder Jerry Yang has quit the boards of Yahoo Inc. and those of related companies, two weeks after the appointment of a new CEO.

“My time at Yahoo!, from its founding to the present, has encompassed some of the most exciting and rewarding experiences of my life," he said in a statement today.

"However, the time has come for me to pursue other interests outside of Yahoo! As I leave the company I co-founded nearly 17 years ago, I am enthusiastic about the appointment of Scott Thompson as chief executive officer and his ability, along with the entire Yahoo! leadership team, to guide Yahoo! into an exciting and successful future."

Mr. Yang co-founded Yahoo in 1995, and has been on the board since then. He was also CEO between mid-2007 and early 2009.

China's growth slows Economic growth in China is slowing, but it's still the big engine that could.

Numbers from Beijing this morning further eased fears of a hard landing in the midst of heightened uncertainty elsewhere in the world, notably Europe, which is believed headed for a recession.

China's economy expanded in the fourth quarter by 8.9 per cent, year over year, a slower pace that the 9.1 per cent registered in the third quarter but still better than expected. Over the course of 2011 as a whole, the economy grew by 9.2 per cent. Other data also buoyed markets, including industrial production, which increased at a year-over-year pace of 12.8 per cent in December, and retail sales, which climbed 18.1 per cent.

Beijing has already turned its attention to growth, having made huge inroads in its fight against inflation, and observers believe the People's Bank of China will ease policy further by again cutting the reserve requirements for the country's banks.

"Over all, the Chinese data are very encouraging, and should help boost expectations of a soft landing," said Benjamin Reitzes of BMO Nesbitt Burns. "Indeed, the mostly firm monthly figures suggest growth isn’t decelerating sharply. Even so, the slowing profile for growth points to further policy easing from officials. More reserve requirement rate cuts are just a matter of time."

There was a warning sign, however, in the real estate sector, as holdings of unsold properties increased.

"Last year, investment in real estate accounted for 25 per cent of total investment," said Mark Williams and Qinwei Wang of Capital Economics in London.

"The sector’s overall importance to the economy is much greater if we consider how much other industries such as steel and cement rely on real estate demand," they said in a research report today.

"But sales have stalled. Today’s figures show that residential sales increased only 3.9 per cent in 2011. Property sales in the east of the country were flat. In the meantime, developers have continued to build. The result is that developers’ inventories of unsold property at the end of 2011 were 26 per cent larger than a year before and equivalent to 30 per cent of total property completions in 2011 ... Much weaker construction activity is likely in 2012."

Kraft to slash jobs Kraft Foods Inc. plans to slash 1,600 jobs in the United States and Canada over the next year as the company prepares to break into two. About 20 per cent of those jobs aren't filled.

"Making these tough choices is never easy, and we recognize the impact these changes will have on many of our people and their families," said Tony Vernon, the chief of Kraft Foods North America. "But our plan for a more nimble company, combined with the current economic and competitive pressures, led us to this point. Taking the necessary steps now will enable us to continue investing in our beloved brands to drive growth."

The cuts announced today are among other moves in advance of its split into a global snacks company and a North American grocery business.

Kraft also today projected an increase in revenue of 10 per cent for 2011, and diluted earnings per share of at least $1.95 (U.S.).

We expect our 2011 results will place us solidly among the top-tier of our peer group, and we remain on track to launch two industry-leading companies in 2012," said chief executive officer Irene Rosenfeld.

TD said to stalk BankUnited Reports today suggest Canada's Toronto-Dominion Bank is among a handful of bidders for Florida's BankUnited Inc. .

BB&T Corp. and, possibly, PNC Financial Services may also be stalking the lender, Bloomberg News said.

TD bid once before for BankUnited, when it was in trouble and was acquired by private equity companies.

Citigroup profit slips The chief executive officer of Citigroup Inc. pledged today to "right-size our businesses" after the bank posted a drop in fourth-quarter profit, hurt by bond and equities trading.

Citigroup earned $1.2-billion (U.S.) or 38 cents a share in the quarter down from $1.3-billion or 43 cents a year earlier. Revenue slipped to $17.2-billion from $18.4-billion.

"Overall, we made solid progress in 2011," said CEO Vikram Pandit.

"We increased our net income to $11.3-billion, up 6 per cent from the previous year, and reached key benchmarks in our consumer businesses, showing our strategy is achieving results," he said in a statement.

"Clearly, the macro environment has impacted the capital markets and we will continue to right-size our businesses to match the environment."

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