Current and future shocks
Several embattled Canadian governments may be in for even more of a crude awakening.
Warren Lovely of National Bank Financial has taken a fresh look at the fiscal hit to Ottawa and some of the provinces in his latest study of government finances, warning that some assumptions are probably still too optimistic.
“A fundamentally weaker outlook for commodity prices means nominal growth has likewise received quite a haircut,” said Mr. Lovely, the bank’s chief of public sector research and strategy.
“Clearly, nominal growth isn’t nearly as ugly in non-oil-levered jurisdictions,” he added, referring to those provinces not shocked by the collapse in crude prices.
“But don’t kid yourself, nominal GDP – the best proxy for own-source revenue – hasn’t lived up to expectations pretty much everywhere one looks. Moreover, we’d generally characterize future year growth assumptions for nominal GDP as too bullish, reliant on a significant improvement in real growth and notable reflation in oil.”
By own-source revenue, he meant tax revenue earned in the provinces before federal transfers.
Mr. Lovely questioned the outlook for Ottawa, whose revenue outlook is already shaky and, thus, “creating a growing fiscal headache for the newly minted Liberal government.”
He cited not only the trouble since last April’s budget, but also Finance Minister Bill Morneau’s latest admission that the cost of the Liberal tax changes will come to $1.2-billion a year. Add to that, the infrastructure spending the government has pledged.
“All this means further significant downside fiscal adjustments in the first Liberal budget,” Mr. Lovely said.
Among the provinces, of course, troubles largely relate to Alberta, Saskatchewan, and Newfoundland and Labrador, whose finances together will amount to $8-billion in deficits in the 2015-16 fiscal year.
“Should oil prices fail to deliver the hoped-for recovery, we estimate that a further $3-billion-plus of annual provincial oil royalties risk going [missing in action], all else equal,” Mr. Lovely added, noting that the three oil regions will, for the first time in at least 25 years, have a collective budget balance worse than the remaining provinces.
As for the overall economy, he said, “one might fairly characterize 2015 as landing somewhere between ‘challenging’ and ‘disastrous,’ depending where you happen to reside.”
Oil stable
Oil prices are stable so far this morning, while major stock markets are largely down.
Tokyo’s Nikkei lost 1 per cent, and Hong Kong’s Hang Seng 0.5 per cent, though the Shanghai composite gained almost 0.1 per cent.
In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were down by between 0.1 and 0.2 per cent by about 4:15 a.m. ET.
This morning’s latest oil inventory reading from the Energy Information Administration could move oil prices, though.
“It is slowly becoming apparent that the slide in commodity prices could well turn into a more prolonged slump, and while in some respects that has a net benefit for consumers at one end it has a rather chilling effect at the other end in the context of highly leveraged basic resource stocks, as well as banks that have large lending exposures to the sector,” said CMC Markets chief analyst Michael Hewson.
“With no sign that OPEC is even towards an agreement and the next meeting scheduled for mid-2016, it’s become a bar room brawl with Saudi Arabia and Iran the main protagonists with the rest of the cartel caught in the crossfire, while non-OPEC members look on.”
Lululemon slips
Lululemon Athletica Inc. cut its profit forecast for the year as it posted a drop in third-quarter results today, sending its shares tumbling 8 per cent in premarket action.
Chief executive officer Laurent Potdevin called today’s results a “solid quarter” as he unveiled a quarter profit of $53.1-million (U.S.), or 38 cents a share, down from $60.5-million or 42 cents a year earlier.
Revenue climbed to $489.7-million from $419.4-million, while same-store sales, a key measure in retailing, rose 9 per cent.
Lululemon projected fourth-quarter earnings per share of 75 cents to 78 cents, and revenue of $670-million to $685-million.
For the full year, it forecast earnings per share of $1.81 to $1.85. That’s down from its earlier projection of $1.87 to $1.92, the latest with fewer shares outstanding and a lower tax rate.