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business briefing

Briefing highlights

  • Illusion of strong economy
  • Stocks, Canadian dollar, oil at a glance
  • Sun Life to acquire majority of U.K. firm
  • Fiat, PSA in binding deal
  • Inflation in Canada tops 2 per cent
  • GM winds down in Oshawa
  • What analysts are saying today
  • Required Reading


Here’s a holiday season thought for you: “No matter how you slice it, Canada has been entirely dependent on a debt binge to create the illusion of a strong economy.”

That comes from David Rosenberg, chief economist at Gluskin Sheff + Associates, who always has an interesting way of putting things.

(Mr. Rosenberg did not tie his comments to the holiday season, by the way. I did that because, well, it’s the holiday season and we’re talking about spending and debt.)

In this case, Mr. Rosenberg was commenting in a research report to clients about the latest consumer and corporate debt numbers from Statistics Canada.

As The Globe and Mail’s Matt Lundy reports, those numbers last week showed the household debt burden, or the ratio of credit market debt to disposable income, rising in the third quarter to 175.9 per cent from a revised 175.4 in the second quarter.

This, Mr. Rosenberg noted, came even as disposable income rose “at another solid rate,” that being an annual pace of 3.8 per cent.

He cited the fact that mortgage credit is up by more than 4 per cent from a year ago, and that “it is the proliferation of non-mortgage debt that is unprecedented.”

Credit market debt reached almost $2.3-trillion in the quarter. Of that, mortgages accounted for almost $1.5-trillion.

And according to Equifax Canada, defaults on non-mortgage debt, while still modest, are now at their sharpest for a third quarter since 2012.

“If households ever reduce their borrowing, this category will be the first to go, and their consumption spending will go with it,” Mr. Rosenberg said.

The Bank of Canada has been expressing concerns over the financial vulnerabilities posed by swollen household debt levels.

Note, too, that the debt-service ratio, or how much of disposable income goes to debt payments, is now at a record of about 15 per cent.

“Imagine that this is even higher than the financial obligations ratio two decades ago when interest rates were more than double today’s level,” Mr. Rosenberg said of that number.

“You still have to repay that principal, which represents a mountain of debt,” he said.

“This explains why the Canadian consumer will remain in slow-growth mode for years to come, with or without the Trudeau Liberals doling out more goodies to low- and middle-income households. There really is no fiscal solution for the ever-rising and unprecedented share of income devoted towards debt-service payments.”

We tend to focus on how consumers are faring in terms of debt, but Mr. Rosenberg noted that “the news isn’t any better” for corporate Canada, which brought him to his suggestion of an illusion of a strong economy.

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Markets at a glance

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Sun Life to acquire majority of U.K. firm

Sun Life Financial Inc. is set to purchase a majority stake in U.K.-based InfraRed Capital Partners, a global infrastructure and real estate investment manager, The Globe and Mail’s Clare O’Hara reports.

The Toronto-based insurer will acquire an 80-per-cent interest in InfraRed for £300-million.

As part of the transaction, Sun Life has committed to co-invest US$400-million to support the launch of new InfraRed investment products.

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Fiat, PSA in binding deal

From Reuters:

Fiat Chrysler and Peugeot maker PSA have reached a binding agreement for their roughly US$50-billion merger that will reshape the global car industry.

France’s PSA and Italian-American Fiat Chrysler, which are yet to decide on a name for their new company, will now start work on delivering their pledge to cut costs by US$4.1-billion a year without closing factories.

That will be all the harder with politicians and strong labour unions in both France and Italy worried about job losses at a combined business that will employ about 400,000 people.

French finance minister Bruno Le Maire welcomed the move to bring together Europe’s second and third biggest car makers, while adding the French government - a key shareholder in PSA - would remain vigilant on matters including where “decision centers” are located within the new group.

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Inflation tops 2 per cent

Canada’s annual inflation rate popped above 2 per cent in November, but economists expect it will cool again next year.

The latest reading from Statistics Canada marked an increase from 1.9 per cent in each of August, September and October.

This came as costs at the gas pump rose 0.9 per cent, having tumbled a month earlier.

“The acceleration to 2.2 per cent in annual inflation was largely the result of a soft comparison to a year earlier when gasoline prices were tumbling,” said CIBC World Markets senior economist Royce Mendes.

“Should gasoline prices remain stable, the headline inflation rate should also cool back down in the second quarter of next year, as the year-ago comparisons become a bit firmer,” he added.


China trims rate

From Reuters: China’s central bank lowered the interest rate on 14-day reverse repurchase agreements by five basis points, following a similar reduction in the short-term liquidity tool last month. The People’s Bank of China said on its website that it was lowering the 14-day reverse repo rate to 2.65 per cent, while keeping the seven-day rate unchanged at 2.5 per cent. The PBOC unexpectedly trimmed the seven-day lending rate in November for the first time in more than four years, a signal to markets that policymakers are ready to act to prop up slowing growth.

GM winds down in Oshawa

From The Canadian Press: General Motors Co. is winding down production at its Oshawa assembly plant as an era of vehicle production comes to a close for the Ontario city. Some of the roughly 2,600 direct employees at the plant are expected to produce the final vehicles today, though the company cautions that the exact timeline could still shift. GM announced in November of last year that it would effectively shut down the plant along with four others in the U.S. as part of a wider restructuring. In May, the company committed $170-million to convert the plant to a stamping and sub-assembly operation and keep about 300 jobs, as well as convert part of the complex into an advanced technology test track.

Volvo to sell UD Trucks

From Reuters: Sweden’s Volvo AB will sell its Japan-based UD Trucks business to Isuzu Motors in a deal worth around US$2.3-billion, exiting a low-margin business and boosting its cash pile as competition for high-tech trucking heats up. The deal, announced by the companies on Wednesday, is part of a broader alliance that will see them share advanced technology for electric and self-driving trucks and use their combined heft to cut development costs.

U.K. inflation steady

From The Associated Press: Inflation in Britain held steady at 1.5 per cent in the year to November, official figures showed Wednesday, reinforcing expectations that the Bank of England will not cut its main interest rate on Thursday. The Office for National Statistics said the largest downward push on the consumer price index came from accommodation services and tobacco, while the largest upward contributions came from food, and recreation and culture.

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What analysts are saying today

“Volvo shares are in the spotlight on Wednesday after Japan’s Isuzu announced a collaboration between the two rival truck makers. They will collaborate on electronification and autonomous driving. It looks like a similar arrangement to that of BMW and Jaguar Landover. These partnerships are a useful short-term alternative to mergers and acquisitions. We think this particular partnership probably has less scope to develop over time into a merger, but the chances are now clearly improved.” Jasper Lawler, head of research, London Capital Group

“In the U.K., yesterday afternoon [Prime Minister Boris] Johnson confirmed he will put the withdrawal agreement to a Commons vote on Friday. The plan to tie his hands on negotiations suggests further downside for [the pound] into 2020. As noted yesterday, it removes any [pound] benefit from the very large Tory majority, effectively putting us back in the position we would have been in with a narrow majority bound by hardliners. That makes the bullish [pound] consensus for 2020 look increasingly questionable.” Elsa Lignos, global head of foreign exchange strategy, Royal Bank of Canada

“The pound has lost the entirety of its election gains over the five days since the exit poll high. The FTSE 100 outperformance seen in the wake of the election has been partly driven by the underperformance seen in the pound, with fears over the self-imposed Brexit deadline holding back sterling gains this week.” Joshua Mahony, senior market analyst, IG

Required Reading

TD bets on malls

Toronto-Dominion Bank’s real estate funds are making a bigger bet on shopping malls by acquiring a 50-per-cent stake in one of Cadillac Fairview’s Quebec malls along with the option to buy part of Sherway Gardens in Toronto. Rachelle Younglai reports.

Takeover plot twist

Cineplex Inc. is taking unprecedented steps to entice a Canadian buyer into topping a $2.2-billion takeover bid for the country’s dominant movie chain from Britain’s Cineworld Group Inc., Andrew Willis writes.

Cash not always king

Minority shareholders show cash isn’t always king in buyout bids, Jeffrey Jones writes.

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