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TD Bank to Paul Krugman: You’re wrong about 'vulnerable' Canada Add to ...

These are stories Report on Business is following Friday, June 21, 2013.

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TD takes on Krugman
Toronto-Dominion Bank is taking Paul Krugman to task for suggesting Canada may be headed for trouble.

It would take a shock for that to happen, TD economist Diana Petramala says.

In his New York Times blog a week ago, Mr. Krugman noted that he’d been to Canada to get an honorary degree from the University of Toronto, which got him thinking about the Great White North, and how it could be a test case in the post-recession era.

The Nobel prize winner said many observers believed the financial crisis was a banking one, and felt the economy would rebound at a fast pace when the financial services sector was stable.

While the industry indeed calmed down, he said, the economy did not pick up, leading some economists, including Mr. Krugman, to think that other problems were at hand, notably depressed housing and consumer debt.

“Famously, Canada’s old-fashioned, boring banking system avoided getting caught up in the global financial crisis,” the economist wrote.

“And for a while Canadian housing prices lagged those south of the border.”

Of course, Canadian property values shot up, as did the key measure of consumer debt to disposable income.

“So if the new, non-bank-centred view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks,” Mr. Krugman said.

“Of course, people have been saying this for several years, and it hasn’t happened yet – but remember, the U.S. housing bubble took a long time to pop, too.”

Mr. Krugman is not alone. Others from outside the country have also warned they believe Canada is headed for trouble.

Canadians, of course, are all too familiar with warnings from the Bank of Canada to get their household finances under control, and Finance Minister Jim Flaherty’s four attempts to cool down the real estate market.

The latest numbers from Statistics Canada show the household debt burden continuing to ease from record levels, while home sales have fallen sharply though prices have held up.

That’s the background.

TD economist Diana Petramala agrees that there are risks associated with the housing market and consumer debt, but that there are “important counter-arguments” to Mr. Krugman’s worth noting.

In a research note, she pointed out the warning signs in the run-up to the U.S. crisis, which included rising mortgage interest costs and mortgage delinquencies that climbed along with consumer debt.

“The charts show that Canadian households are far less financially vulnerable than their U.S. counterparts were heading into the crisis,” Ms. Petramala said.

“Largely owing to a continued low interest rate environment, mortgage interest costs as a per cent of personal disposable income have fallen despite the sharp rise in the debt-to-income ratio,” she added in her report.

“Meanwhile, while mortgage delinquency rates in Canada and the U.S. were similar during the 1990s, the per cent of mortgages in arrears 90 days or more in Canada is about a third of what they were in the U.S. leading up to the 2008-2009 crisis.”

Ms. Petramala cited the “riskier lending practices” in the U.S. between 2002 and 2007, and the tighter restrictions now in place in Canada.

Add to that the fact that incomes have climbed at a faster pace in Canada since the recovery began, helping to ease “some of the recent overvaluation” in the property market.

That’s not what happened in the U.S.

“We would be concerned should we see a further increase in household indebtedness or an acceleration in home price growth – both of which are certainly a risk given a continued low interest rate environment,” Ms. Petramala said.

“However, absent of a negative economic shock, excesses are expected to continue to unwind in an orderly fashion.”

Inflation edges up
Canada’s annual inflation rate edged up to 0.7 per cent in May, still well shy of the Bank of Canada’s target.

Driving the increase, Statistics Canada said today, was a 15.4-per-cent surge in the price of natural gas, marking the fastest increase since 2008.

Prices for food and clothes also rose, while the cost of tobacco took a big jump.

Food prices 1.3 per cent. Notable was a 5.8-per-cent jump in the cost of fresh vegetables and a 3.9-per-cent increase in bakery goods.

On a month-to-month basis, seasonally adjusted, consumer prices inched up 0.1 per cent from April.

So-called core prices, which exclude volatile items and help guide the Bank of Canada, the annual reading held at 1.1 per cent.

Not that the new governor of the Bank of Canada, Stephen Poloz, was about to signal any change in policy, but today’s report showed just how tame inflation is these days.

“Over all a set of soft number giving new Governor Poloz little reason to veer away from the bank’s current accommodative policy stance,” said economist Emanuella Enenajor of CIBC World Markets.

RIM draws stronger forecasts
Research In Motion Ltd. continues to draw stronger projections for sales of new BB10 BlackBerry devices.

As The Globe and Mail’s Omar El Akkad reports, RIM appears to be in far better shape than it has been in quite some time, having released the BlackBerry Z10, Q10 and Q5.

This is in the run-up to fourth-quarter results next week from RIM, which has rebranded itself as BlackBerry but, for now, still carries the legal name Research In Motion.

Analysts are all over the place as to where RIM stands, and, today, Frederic Bastien of Raymond James added his voice to the mix, with a “market perform” rating.

“Near term, financial trends at BlackBerry are likely improving given substantial sell-in of A10, Q10 and Q5 devices globally creating potential for reported revenue and [earnings per share] to be better than some fear,” he said.

“However, we remain more cautious longer term given the uncertain level of decline in the services revenue stream, and the lack of positive sustained sell-through data on BB10 devices to date.”

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