These are stories Report on Business is following Monday, Oct. 15, 2012.
As the song goes, another day older and deeper in debt
The debt burden among Canadian consumers is growing ever fatter, prompting some observers to question whether the Bank of Canada should move to quench the thirst for borrowed money.
The ratio of household credit market debt to disposable income climbed in the second quarter of the year to 163.4 per cent. Household income and the value of assets also rose, but at a slower pace.
Economist Diana Petramala of Toronto-Dominion Bank believes that key measure will probably “stabilize” over the next while as the housing market slows and consumers cut back, among other things.
“As we’ve argued, however, a gradual increase in interest rates by the Bank of Canada over the medium term will ultimately be required to ensure a more sustainable picture for household balance sheets,” she said, but not any faster than the central bank is planning at this point.
“With the cost of borrowing at record low levels, there is still a large incentive for borrowing to reaccelerate.”
Along with today’s numbers also came revisions to last year’s data, showing Canadians were a bit richer than they thought, but also further deeper in debt.
By taking into account new measures of valuing unlisted shares, and other items, the net worth of Canadian households got a 2011 boost, rising to $6.6-trillion from $6.3-trillion.
On a per capita basis, net worth among families rose to $190,000 from $182,900.
Debt burdens, a huge issue in Canada, were also revised up, meaning the latest second-quarter number compares to 161.7 per cent for 2011, rather than the previously reported 150.6
“Today’s report indicates that Canadian households are more financially vulnerable than had previously been thought,” Ms. Petrmala said.
“However, the vulnerability associated with a higher debt burden is partially mitigated by an improved asset base,” she said.
- Barrie McKenna's Economy Lab: Household debt surpasses levels foreshadowing U.S. housing bust
- Read the report
Home sales plunge
Home sales in Canada plunged more than 15 per cent in September from a year earlier, but edged up 2.5 per cent from August, The Globe and Mail's Tara Perkins reports.
More than half of all local markets posted sales levels that were at least 10 per cent lower than last September, according to data released by the Canadian Real Estate Association.
The national average price for homes sold in September was $355,777, up 1.1 per cent from a year ago. Excluding Vancouver the average price of a house sold rose 3.4 per cent.
“The Canadian housing market has clearly lost some of its lustre,” said Toronto-Dominion Bank economist Francis Fong.
“Sales have fallen from their peaks in most markets across the country with today’s gain only partially offsetting August’s substantial decline,” he said in a research note.
“That being said, with interest rates remaining sufficiently accommodative, we do not anticipate any precipitous decline in housing activity in the near term. Rather, we expect a gradual unwinding of the imbalance in both sales and prices over the next few years.”
Companies pull back
Canadian companies are retrenching, dramatically cutting back on investment plans as sales opportunities evaporate amidst weaker global economic growth, The Globe and Mail's Kevin Carmichael reports.
The Bank of Canada’s latest quarterly survey of business intentions shows that only 37 per cent of respondents plan to increase investment over the next 12 months, compared with 43 per cent at the time of the previous survey in July.
EU leaders to meet
They may have won the Nobel Peace Prize, but can European Union leaders settle their differences and get themselves out of their economic mess?
EU leaders meet again later this week, when they will discuss, among other things, various bailouts and the move toward their proposed economic union.
EU President Herman Van Rompuy is scheduled to give the summit his interim report. But there are questions about how united this group, which has been divided throughout the three-year-old debt crisis, will be.
“The roadmap will include steps for a banking union and single supervisory mechanism, which of course are the prerequisites for direct recapitalization of banks by the [rescue fund],” said senior currency strategist Elsa Lignos of RBC Europe.
“That can be expected to generate much debate – since the idea was first agreed on in principle at the June summit, the German, Dutch and Finnish [finance ministers] have met and released a statement indicating that legacy debts would be excluded from this process, presenting it as a ‘clarification’ of what was agreed in June,” she said in a research note.
“That was questioned by subsequent comments from anonymous EU officials, and markets should be looking for further guidance in the post-summit statement.”
As the Financial Times reports today, Germany and some others want the supervisory nature of the European Central Bank to be narrower than proposed. And Britain is also worried about how much clout the ECB would have.
Then there are questions surrounding the weaker nations, such as Greece and Spain, and questions surrounding when the latter will finally seek a full-scale bailout.
“Speculation regarding the Spanish bailout continues to churn, with ‘next month’ being the current aiming point,” said market analyst Chris Beauchamp of IG in London.
“Like ‘tomorrow,’ ‘next month’ never comes, and in reality Madrid is still looking to put off the dreadful day for as long as it can.”
Citigroup takes hit
Citigroup Inc.’s third-quarter profit tumbled as it took a massive writedown, but it still beat analysts’ estimates.
The giant U.S. bank today posted a profit of $468-million (U.S.) or 15 cents a share, down from $3.8-billion or $1.23 a year earlier, but the results included a $4.7-billion hit from a writedown on a brokerage stake.
Like other major banks that have reported so far – JPMorgan Chase and Co. and Wells Fargo Corp., Citigroup also a better showing where mortgage lending is concerned in the United States.
“We are managing risk very carefully given global economic conditions so we can continue to grow our businesses safely and soundly,” said chief executive officer Vikram Pandit.
China sees improvement
The latest economic readings from China are buoying investors’ hopes today.
Not only were both exports and imports up in September, according to weekend data, but inflation eased to 1.9 per cent, today’s reading shows.
As Carolynne Wheeler reports from Beijing, policy makers now have more leeway amid hopes that China, whose economy is key to the global recovery, is showing signs of better times ahead.
“We expect inflation to rise in [the fourth quarter] but it will not be a constraint on policy loosening in the enxt couple of months,” said Mark Williams and Qinwei Wang of Capital Economics in London.
Softbank strikes deal
Japan’s Softbank Corp. today struck a deal worth more than $20-billion (U.S.) for a majority stake in Sprint Nextel Corp., jumping into the United States in a big way.
It’s a two-tier deal for 70 per cent of the U.S. carrier, involving $12.1-billion for shareholders and $8-billion in fresh capital, the two companies said.
“This transaction provides an excellent opportunity for Softbank to leverage its expertise in smartphones and next-generation high speed networks, including LTE, to drive the mobile internet revolution in one of the world’s largest markets,” Softbank chief executive officer Masayoshi Son said in a statement.
“As we have proven in Japan, we have achieved a v-shaped earnings recovery in the acquired mobile business and grown dramatically by introducing differentiated products to an incumbent-led market.”
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