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The Week

Rest up this weekend. The next few weeks could test your nerves Add to ...

These are stories Report on Business followed this week.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

What would a U.S. government shutdown mean?
God knows what a weekend of wrangling in Washington will mean for markets Monday morning as the U.S. fiscal year winds down and the government faces the threat of a shutdown.

Wait. There's more. Markets are actually looking at about three weeks of tension over fiscal issues in the United States and key economic readings that will play into speculation over when the Federal Reserve will finally begin to "taper," or pull back from its huge bond-buying stimulus program.

Next week alone will have its highs and lows, beginning with a budget deadline Monday, which marks the end of the fiscal period. Then, the trading week closes out Friday with the release of the key U.S. jobs report, which will be watched closely for what it could signal on tapering.

On Friday, the Senate passed legislation that would allow short-term funding, but the Republicans, fighting on the issue of health care, have warned they won't follow suit, which suggests a government shutdown, and the curtailing of non-essential services, beginning Tuesday.

Senior economist Sal Guatieri of BMO Nesbitt Burns cites one estimate that suggests a shutdown would eat into fourth-quarter gross domestic product to the tune of 0.3 of a percentage point, annualized, if it were to last two weeks. A month would mean 0.7 per cent of a point.

The last shutdown, in 1995-96, was believed to have trimmed economic growth by 0.5 per cent in the fourth quarter, but real GDP expanded by almost 3 per cent because of stronger spending by consumers and businesses, Mr. Guatieri noted.

"However, it's no stretch to say the economy rests on softer ground today," he said.

"Higher rates of foreclosure and unemployment than in late 1995 (2.4 and 1.7 percentage points higher, respectively), combined with more household debt (one-fifth more relative to disposable income), suggest consumers are more vulnerable today," he added in a research report.

A two-week shutdown probably wouldn't "derail" the U.S. recovery, Mr. Guatieri said, but "a prolonged closure  certainly could."

Monday is just the first deadline. Treasury Secretary Jack Lew said this week that the U.S. government will be effectively tapped out by Oct. 17 if the debt ceiling isn't raised, with just $30-billion in cash.

"In this case, the Treasury would have to prioritize payments, likely putting bondholders at the front of the list, but this will make for some very ugly choices," said senior economist James Marple of Toronto-Dominion Bank.

"We don't believe things will get this far, but the lesson from the previous showdown over the debt ceiling in the summer of 2011 is that the debate weighs on business and consumer confidence and tightens financial conditions. Gridlock has real economic consequences."

The bigger issue for the markets, said Mr. Guatieri's colleague at BMO, chief economist Douglas Porter, is what happens by mid-October.

"We have a real world example of just how dangerous this situation can become," Mr. Porter said.

"A little more than two years ago, Washington played chicken with the debt ceiling before ultimately coming to a last-minute deal in early August," he said in a report Friday.

"But even with a deal to cut the deficit, the damage was well and truly done. The 2011 showdown prompted S&P to strip the U.S. of its triple-A credit rating for the first time on record (quite appropriately, in the circumstances - the surprise is that other ratings agencies didn't follow).

Mr. Porter recalled the turmoil in the summer of 2011, when the S&P 500 tumbled more than 16 per cent over the course of two weeks in July and August, and the yield on the 10-year Treasury sank by 100 basis points in less than three weeks.

"Notably, the stock selloff in the summer of 2011 marked the third biggest two-week decline for equities in more than six decades, behind only the 1987 crash and the 2008 meltdown," he said.

"Yet, the market mostly ignored the issue so far this year."

BlackBerry in turmoil
These have been a gut-wrenching eight days for BlackBerry Ltd., its employees and shareholders, and the Canadian community it calls home.

A week ago Friday, the smartphone maker shocked the markets by warning it expected to post a second quarter loss of almost $1-billion (U.S.) on sharply lower revenue, sparking a rout in its shares. It also announced a pullback from the consumer market, to focus on the business market where BlackBerry first made its name, and plans to cut 4,500 jobs, or 40 per cent of its work force.

Just three days later, Prem Watsa rode to the company's rescue, proposing that his Fairfax Financial Holdings Ltd. lead a consortium to take the company private for $4.7-billion.

Then on Friday, it confirmed a quarterly loss of $965-million, or $1.84 a share, compared with a loss a year earlier of $84-million or 16 cents. Revenue slipped to $1.6-billion from $2.9-billion as BlackBerry recognized hardware sales on just 3.7 million smartphones in the quarter.

Those were mostly older BlackBerry models. Some 5.9 million devices were actually sold, including those shipped prior to the second quarter.

What did BlackBerry in was a $934-million hit from unsold inventory, largely on its touchscreen Z10 device that had been its hope for the consumer market amid a battle with the Apple Inc. iPhone, the Samsung Galaxy, and devices running Google Inc.'s Android system.

As The Globe and Mail's Omar El Akkad reports, the number of unsold devices was high partly because BlackBerry is not recognizing sales of certain of the newer BB 10 models until they're actually sold to consumers, rather than the shipments to partners and retailers.

"We understand how some of the activities we are going through create uncertainty, but we remain a financially strong company with $2.6-billion in cash and no debt,” chief executive Thorsten Heins said in the company's earnings statement.

The tentative deal with Fairfax - a letter of intent - proposes a price of $9 a share. But BlackBerry's stock price is now almost $1 below that on Nasdaq, closing up 1 per cent Friday at $8.03. That suggests the market has many questions and concerns that the Fairfax deal won't be done.

Mr. Watsa, however, stressed more than once this week that his proposal is solid, and that he's confident the deal will go through after due diligence is done by early November. He has not named his potential partners, though analysts have speculated on private-equity groups and pension funds.

“Once the company is taken private, we think it will become successful again,” Mr. Watsa told The Globe and Mail's Tara Perkins. “Not in three months or six months, over the years.”

The week in Business Briefing

The week in Streetwise (for subscribers)

The week in Economy Lab

The week in ROB Insight (for subscribers)

Required reading
Our European correspondent Eric Reguly looks at German Chancellor Angela Merkel's election victory, and why it means she won't change her tune on disclipline and austerity in the euro zone.

Canada’s failure to entice a large foreign wireless company to bid in an upcoming spectrum auction threatens the government’s effort to create a stable fourth player in Ontario, Alberta and B.C., Rita Trichur writes.

China has bought a chunk of one of the world’s largest potash producers, giving the Asian country more control over what price it should pay for the fertilizer. Carrie Tait looks at implications for Canada.

Two of Bay Street’s best-known money managers are selling off large portions of Gluskin Sheff + Associates Inc., the wealth management firm they founded. Jacqueline Nelson reports.

Newfoundland and Labrador is touting a major offshore discovery as the start of a new chapter in its oil industry, and a reason for international energy companies to consider investing, Jeffrey Jones writes.

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