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Key consumer debt-to-income level swells to almost 165% Add to ...

These are stories Report on Business is following Thursday, Dec. 13, 2012.

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Household debt burden climbs
A key measure of consumer debt continues to swell in Canada.

The level of household credit market debt to disposable income reached a record 164.6 per cent in the third quarter of the year, Statistics Canada said today, up from 163.3 per cent in the second quarter.

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Today’s numbers underscore the efforts of the country’s policy makers to cool down consumer borrowing.

Bank of Canada Governor Mark Carney has oft warned of the swelling debt burden, while Finance Minister Jim Flaherty has moved several times to tame the mortgage market, leading to a cooling in the housing market.

Mr. Carney has noted that credit growth is slowing, and, indeed, Statistics Canada said today the third-quarter rise was slower than that of the previous three months.

New borrowing by households amounted to $27.3-billion in the third quarter as mortgages rose by $18.4-billion to $1.1-trillion. Consumer credit levels climbed to $474-billion from $467-billion.

National net worth grew at the same time, by more than $9-billion to $6.8-trillion, or, on a per capita basis, $194,100.

Household net worth jumped 1 per cent on gains in share prices and pension plan holdings.

On a per capita basis, household net worth rose to $197,900 from $196,400.

In its latest financial system review, the Bank of Canada warned again that the biggest domestic threat to Canada “continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market.”

The central bank said the pace of growth eased over the past six months but the rate still outpaced that of disposable income, posing obvious troubles should unemployment spike and when interest rates inevitably rise.

“The bank’s stress-test simulations continue to suggest that households are vulnerable to adverse economic shocks,” the central bank said.

“Canadian households are vulnerable to two interrelated shocks: A significant decline in house prices and a sharp deterioration in labour market conditions,” it added.

“The vulnerabilities will increase the longer imbalances persist (or grow) in the housing market and the more household indebtedness rises.”

Economist Diana Petramala of Toronto-Dominion Bank cited the risks of higher debt burdens, though, like the Bank of Canada, noted that credit growth has “ebbed significantly” this year.

“This in part reflects the fact that households have constrained borrowing growth to about 6 per cent on an annual basis, which is the slowest pace since 2002 and about half the pace recorded during the 2004-2008 period,” Ms. Petramala said.

“Nonetheless, household debt remains excessive and is a notable risk to future Canadian economic growth,” she added in a research note.

“For now, thanks to the record low cost of borrowing, debt remains manageable for the majority of Canadians. However, the high level of debt leaves household more vulnerable to a rise in interest rates than they have been in the past. Given the prospects that interest rates will eventually rise, households must cool their spending and borrowing further.”

The Globe is wondering whether Canadians have been listening to such warnings. Has your debt lowered - or increased - this year? Share your successes and failures here.

Encana, PetroChina in deal
Just days after the Canadian government unveiled new takeover rules for foreign players, PetroChina has struck a $2.2-billion joint-venture deal with Encana Corp. to develop a liquids rich natural gas play, The Globe and Mail's Carrie Tait reports.

Today's deal comes after Ottawa essentially nixed takeovers in the oil sands by foreign state-owned companies, though this one relates to natural gas in Encana's Duvernay play in Alberta.

A subsidiary of PetroChina will hold 49.9 per cent of the holdings.

Western Canada’s new natural gas plays need an influx of capital if they are to be developed and transformed into liquefied natural gas export industry. Vast NGL fields are also expected to need money from abroad. Asian companies have widely been touted as participants, both as buyers and as owners.

‘When oil turns against you’
Canada is losing some $2.5-billion a month from the divergence in global oil prices, a new study calculates, highlighting the debate over the pipeline network.

While projects are now being eyed to correct the gap, they won’t be done before 2015, meaning this divergence will be a factor for “some years,” the recent report by Charles St-Arnaud of Nomura Securities warns.

Mr. St-Arnaud studied the differences in global prices, notably the gap between Western Canada Select and Brent crude that now stands at a near-record level of about $50 (U.S.) a barrel.

“Despite being an important crude oil producer, Canada still has to import more than 40 per cent of the oil it consumes,” said Mr. St-Arnaud, citing a pipeline network that moves crude from the West to the U.S. Midwest, but not to eastern Canada.

“Most of the imported oil comes from OPEC countries or the North Sea, which is priced using the Brent benchmark,” the analyst said in his report, titled “When oil turns against you.”

“Hence, each time the spread between WCS and Brent increases, it means that the difference between Canada's export prices and import prices also widen, leading to a deterioration in the terms of trade.”

He based his findings on oil import and export levels since the start of 2012, noting the traditional spread of about $10 to $15 and estimating that the current divergence means lost revenue to Canadian companies of $2.5-billion more than the norm.

“This means that if it were not for the excessive spread, Canada’s trade balance would currently show a surplus of about $2.3-billion (Canadian) instead of the current $200-million,” he noted.

“Moreover, this implies to a revenue loss of about $30-billion a year, or about 1.6 per cent of GDP.”

The result, he said, can be slimmer profits and thus lower government tax revenues, as well as poorer returns for investors and a “headwind on investment” in the energy sector.

“All this will be a drag on growth as long as the situation persists and, because it may last for some years, the Canadian economy may grow at a slower pace than otherwise expected.”

Supreme Court backs cable, satellite companies
Free television is going to remain free, after the Supreme Court of Canada sided with cable companies in a long battle with the local TV channels that provide them with signals, The Globe and Mail's Steve Ladurantaye reports.

Local television stations in Canada – owned by companies such as BCE Inc. and Shaw Communications Inc. – send their signals out over the airwaves. Cable and satellite providers capture those signals, and then add them to the packages of channels they offer to their paying subscribers.

Had these stations been allowed to charge the companies, the cable and satellite companies that deliver television into Canadian homes said they would increase their prices by as much as $1 a month to compensate. The Canadian Radio-television and Telecommunications Commission agreed that these local stations should be able to charge the companies to use their signals, something the Supreme Court outright rejected in its ruling today.

Greece to get funds
European finance ministers moved forward on two fronts today, approving another lifeline for Greece and agreeing on the details of a euro zone banking union under the European Central Bank.

Athens is now in line for about €34-billion in the latest tranche of its bailout money, which had been delayed.

On the banking front, finance ministers agreed on the details that will see the ECB become the leading bank supervisor.

“This is a crucial and very substantive step towards completion of the banking union and a timely step forward in the integration of financial supervision for the euro area and for the other member states which the commission hopes will also participate,” said European Commission chief Jose Barroso.

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