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Wealth effect: How we’ll feel impact of lower commodity prices Add to ...

These are stories Report on Business is following Tuesday, July 17, 2012.

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Bank of Canada warns on wealth
The Bank of Canada is warning Canadians to expect a hit from lower commodity prices.

As it held its benchmark overnight rate steady at 1 per cent today, the central bank also noted that the turmoil playing out around the world will affect Canadian incomes and wealth as commodity prices soften.

Governor Mark Carney and his colleagues on the rate-setting panel didn't elaborate, but it's likely they were referring to oil, Canada's key commodity, whose price has slipped since the central bank last talked about crude a few months ago.

"While the economic expansion in the United States continues at a gradual but somewhat slower pace, developments in Europe point to a renewed contraction," the central bank said in its statement.

"In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand. This slowdown in global activity has led to a sizeable reduction in commodity prices, although they remain elevated."

That, in turn, will filter through to household budgets.

"Consumption and business investment are expected to be the primary drivers of growth, reflecting very stimulative domestic financial conditions," according to the Bank of Canada's statement. "However, their pace will be influenced by external headwinds, notably the effects of lower commodity prices on Canadian incomes and wealth, as well as by record-high household debt."

The central bank will expand on this in its monetary policy report tomorrow morning, but it's likely that policy makers are now looking at an oil price that's about $15-a-barrel lower than the April level above $100.

That, said Mark Chandler, chief of fixed income and currency research at RBC Dominion Securities, gets close to the range at which some oil projects could be held back. Wage gains have also been tied to oil patch activity, he said.

Lower prices could also bring down stock prices on the Toronto exchange, about one-third of which is tied to energy, Mr. Chandler added.

Over all today, the Bank of Canada held to its line of late, with a statement still suggesting that the next rate change will be up rather than down, though it trimmed its economic growth forecast for this year to 2.1 per cent from 2.4 per cent.

There's still no time-line attached to any rate hike, but economists don't expect a move at any point soon.

"We suspect the bank is going precisely nowhere with interest rates over the next year, as has been the case for almost the past two years," said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

"The maintenance of the tightening bias is likely a signal to one and all that the bank has absolutely no intention of following the easing lead of many other central banks, but at the same time they are highly unlikely to act on that bias any time soon. After all, in the current global economic climate, restraint is the better part of valour."

Factories suffer setback
Canada's manufacturers have suffered their fourth setback in five months.

Sales among the country's factories slipped 0.4 per cent in May, Statistics Canada said today, largely on a 9.6-per-cent decline in the oil and coal sectors given temporary shutdowns at some refineries. Strip those ut, and sales climbed 1.2 per cent.

The aerospace industry, on the other hand, gained.

Over all, sales slipped in 13 of the 21 industry groups measured, accounting for two-thirds of the entire sector, the federal agency said.

"The drop was largely due to a dive in petroleum and coal due to refinery maintenance, but other sectors were also lackluster," said chief economist Avery Shenfeld of CIBC World Markets.

"Inventories climbed sharply, suggesting that production wasn’t as weak in the month as the headline figures suggested. Still, the results bode poorly for May GDP, and suggest yet another nudge down in our growth forecast for that quarter, which should be closer to 2 per cent than the 2.5 per cent we initially forecast last month."

It's interesting to note, though, that lower sales haven't affected factory jobs.

"Despite four monthly declines in overall manufacturing sales in 2012, manufacturing employment has continued to increase," Statistics Canada said.

"Employment rose 2 per cent in May according to the labour force survey. Since January 2012, employment in the manufacturing sector has risen 4.5 per cent to 1.8 million workers."

Goldman profit dips
Goldman Sachs Group Inc. today posted a 12-per-cent drop in second-quarter profit as deal making slowed, but the Wall Street giant still topped the forecasts of analysts.

Goldman earned $927-million (U.S.) or $1.78 a share in the quarter, diluted, down from $1.1-billion or $1.85 a year earlier.

“During the second quarter, market conditions deteriorated and activity levels for both corporate and investing clients were lower given continued instability in Europe and concerns about global growth,” said chief executive officer Lloyd C. Blankfein. “Still, we remain focused on meeting our clients’ needs, while prudently managing our capital, liquidity and risk."

Investment banking revenue slipped 17 per cent to $1.2-billion, though that was up slightly from the first quarter of the year.

Diamond market softens
I'm not sure just whose best friend diamonds are at this point, as the market softens and prices slip.

In a report today on production at its Diavik mine, Harry Winston Diamond Corp. noted the "softened demand" in the rough diamond market since the beginning of 2012.

"The company held partial rough diamond sales in May and June, and the July sale has just commenced and the company expects higher than normal rough diamond inventory at July 31, 2012," Harry Winston said in a statement, noting production in the second quarter of the year of 1.79 million carats from 500,000 tonnes of ore processed.

"The company estimates that current market prices have declined by approximately 4 per cent from the beginning of the fiscal year and by approximately 8 per cent since the Company’s March/April 2012 sales," it added.

Héroux-Devtek sheds assets
Canada's Héroux-Devtek Inc. is selling its aerostructure and industrial products businesses to a U.S. company for $300-million, narrowing its operations to focus on landing gear in the aerospace industry.

That affects Héroux-Devtek operations in Quebec, Texas and Mexico, which together accounting for some $130-million in sales in its last fiscal year. The businesses are being sold to Precision Castparts Corp.

The Quebec-based company said it's now studying what to do with the money, including paying down debt and offering a "significant distribution" to shareholders.

“The sale of the aerostructure and industrial products operations represents an opportunity to crystallize substantial value for our shareholders and allows Héroux-Devtek to focus on its core landing gear operations," Claude Boivin, who headed the company's special committee on the deal, said in a statement.

"We have evaluated and continue to evaluate attractive opportunities for the corporation and will consider the most effective and efficient options for distribution and redeployment of proceeds from the transaction."

Next iPhone said to have thinner screen
Among the buzz making the rounds in the tech world today is what the next iPhone will look like.

According to The Wall Street Journal, it's going to use new technology for a thinner screen that puts touch sensors into the liquid crystal display, meaning there won't have to be a separate touch-screen layer.

That would shave the thickness of the screen and at the same time improve the display, the report said.

Sharp Corp., Japan Display Inc. and LG Display Co. are now making the parts of the next device.

According to the report, Apple could use the extra room to either have a thinner phone over all, or create more room for other parts.

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