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BMO cuts view of Ontario economy ‘effectively running at stall speed’

These are stories Report on Business is following Monday, July 15, 2013.

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BMO cuts Ontario outlook
Bank of Montreal has trimmed its projection for economic growth in Ontario, warning Canada's most populous province has been "effectively running at stall speed" for 18 months.

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Given that last year's economic expansion was revised slightly higher, and this year started with a fizzle, BMO Nesbitt Burns cuts its forecast for growth in gross domestic product to 1.4 per cent this year from an earlier projection of 1.6 per cent.

"Ontario's economy grew a tepid 1-per-cent annual rate in 2013Q1, and has now been effectively running at stall speed for a year-and-a-half (sub-1.1 per cent growth in five of the latest six quarters)," said senior economist Robert Kavcic.

"Unlike for Canada overall, net exports failed to add much to growth in Q1, while business investment fell sharply on declines in both [machinery and equipment] and nonresidential investment," he added in a research note.

"Growth in the province has underperformed the national average, but because of cooler activity out West, the gap has all but vanished."

Loblaw strikes Shoppers deal
Observers today lauded the proposed marriage of Loblaw Cos. Ltd. and Shoppers Drug Mart Corp. as one that would create unique opportunities for both companies.

Investors appeared to think likewise, driving up the shares of both companies.

As The Globe and Mail's Bertrand Marotte reports, Canada's biggest grocer struck a $12.4-billion deal for the country's biggest drugstore chain.

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Today's deal – $33.18 in cash and 0.5965 of a Loblaw share – comes amid fierce competition in Canada's retail sector, with the lines increasingly blurring and U.S. heavyweights such as Target Corp. and Wal-Mart Stores Inc. making their mark.

Based on where Loblaw shares closed on Friday, the deal is worth $61.54 a share, the companies said.

"This combination creates a compelling new blueprint for the future, positioning us to capitalize on important trends in society, from the emphasis on health, wellness and nutrition, to the imperatives of value and convenience," Loblaw executive chairman Galen Weston said in a statement.

Tony Chapman, chief executive officer of Capital C Partners, described it as the "perfect move" for Loblaw, which can bolster its pharmacy operations while giving Shoppers a "viable" food opportunity.

"The real opportunity is to launch hybrid stores – focused on the consumer's relentless pursuit of the fountain of youth," Mr. Chapman said.

"Leverage technology to capture key data points on health – blood, sugar levels, calories in and out, nutrition – and then index it against a custom plan involving food, supplements, exercise," he added.

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"Loblaw becomes an enabler to life, versus a provider of goods and services."

One natural question is whether those who shop weekly at both might drop one for the other, but observers see that as unikely.

While there may be some "cannibalization," noted Mr. Chapman, the benefits of the merged company far outweigh that slim possibility.

Michael Jaczko, a partner and portfolio manager at Toronto's K.J. Harrison & Partners, who is also a pharmacist, agreed, noting that Loblaw and Shoppers cater to different groups of shoppers.

"They're very different value propositions in terms of the segment of the market they're after," Mr. Jaczko said.

Shoppers, he said, attracts those who aren't necessarily price conscious, preferring it instead for the convenience it offers and the fact that you can easily get in and out.

"I don't think you're going to be seeing Loblaw people abandon one to go to the other," he said.

Observers such as Mr. Jaczko and Mr. Chapman had high praise for the deal.

"This is one of the smartest and well thought out acquisitions I have seen in years," said George Minakakis, a veteran of the retail industry, chief executive officer of Inception Retail Group and author of Last Retailer Standing.

"The synergies that will be gained over time and the benefits in creating access to a convenience market is a substantial benefit to Loblaw and Shoppers Drug Mart," he added.

"In addition, to the loyal customer base that Shoppers has this will further raise credibility to Loblaw pharmacy and make it more challenging for new entrants to acquire customers. When you consider all the other potential moves Shoppers or Loblaw could have made this makes the most strategic sense."

Pump prices spike
Gasoline prices have been spiking across Canada just in time for … summer vacation.

Economists say that may not be such a bad thing at this point. But watch out if they surge much higher.

The price of gas at many Toronto stations today stood at $1.349, though was much lower in Alberta and Saskatchewan and much higher in Quebec and British Columbia.

Prices had slipped over the past few months, so, noted Bank of Montreal's chief economist, they're not much higher than they were over the course of the second quarter.

"Plus, for Canada's economy, the fact that WTI prices have shot back up to nearly rival Brent prices again is a huge plus for producers in Western Canada," Douglas Porter said, referring to the benchmark West Texas Intermediate oil price versus that of the overseas benchmark.

"Over all, I would say the recent rise in oil prices is a solid net positive for the overall economy, even if it does ding consumers moderately," Mr. Porter said today.

"The concern would be if prices have another big leg up from here and do more serious damage to Canadian and U.S. consumers."

Deputy chief economist Derek Burleton of Toronto-Dominion Bank agreed on both fronts, though he noted the regional disparities.

"Canada's economy benefits from higher oil prices, which is the underlying driver of the gas price increases," Mr. Burleton said. "The benefits of higher oil prices tend to be concentrated in the oil-producing regions, however."

Where consumers are concerned, it's not just the impact in Canada but in the United States, as well, which could ripple across the border should high prices be with us for some time.

"If large pump price hikes are sustained, they would weaken the outlook for the U.S. economy, which in turn would weigh on central Canadian economic growth prospects the most through the manufacturing channel," Mr. Burleton said.

"If recent trends intensify, the higher pump costs will not be helpful to near-term spending prospects for Canadian consumers, who have been showing an increased hesitancy to spend amid soft wage growth and high debt levels," he added.

"In particular, given that gasoline is a necessity for many consumers, higher prices tend to crowd out spending in discretionary areas."

While higher pump prices generally weigh on economic growth because of how they can squeeze consumer budgets, it's not the same this time around, noted chief economist Avery Shenfeld of CIBC World Markets.

"This time, it's a bit circular to make that case, since some of the climb in oil prices has been related to data showing declining inventories associated with stronger U.S. demand – a positive signal for both the American and Canadian economies," Mr. Shenfeld said.

He was referring to the fact last week, prices in the United States jumped above $3 a gallon for the first time since the spring, partly on a report from the U.S. Energy Information Administration that gasoline inventories had dropped.

"As well, the higher crude prices will generate some offsetting momentum for capital spending in the oil patch across North America, with that impact now a larger factor given the declining U.S. reliance on Middle East oil," Mr. Shenfeld said.

"Some of the recent climb is related to concerns of Middle East politics, and that could fade if the Egypt situation settles down in the months ahead," he added. "So over all, this isn't yet a big worry for Canada's economy."

China's growth slows
China's pace of economic growth slowed in the second quarter to 7.5 per cent, from 7.7 per cent in the first three months of the year, but investors are breathing a sigh of relief that the pullback wasn't sharper.

"Combined with a disappearance of euro zone tensions and diminishing fears about U.S. tapering, we could be in for a week of quiet, steady gains for stock markets," said market analyst Chris Beauchamp of IG in London, referring to the fact markets are less concerned now about the timeline for the Federal Reserve beginning to pull back on stimulus measures.

Mark Williams and Qinwei Wang of Capital Economics have an interesting take on China's gross domestic product today, citing both the positive and the troubling aspects of the official numbers.

"The good news is that the labour market remains healthy, with real migrant wages rising at a double-digit rate," they said.

"The bad news is that China's economy shows no signs yet of weaning itself off its reliance on investment," they said in a report.

"Today's figures were arguably something of a relief, despite being in line with consensus," the economists added, referring to the fact that the 7.5 per cent was what many economists had projected.

"But we would be more confident if we could see that China's slowdown was being accompanied by a shift in the drivers of growth from investment to consumption. As long as investment remains the key driver, China's economic imbalances continue to worsen."

Citigroup profit climbs
Citigroup Inc. followed in the footsteps of JPMorgan Chase & Co. and Wells Fargo & Co. last week in reporting a sharp jump in second-quarter profit day.

Citigroup profit climbed 42 per cent in the quarter to $4.2-billion (U.S.)  or $1.34 a share, beating analysts' estimates. That compared to $2.9-billion or 95 cents a share earlier.

Adjusted profit rose to $1.25 a share, topping the $1.17 projected by analysts.

Credit losses declined by 25 per cent to $2.6-billion.

"Our businesses performed well during the quarter and these results are well-balanced through our products and geographies, especially in the emerging markets, where growth is being challenged," said chief executive officer Michael Corbat.

"We also continued to make progress in several critical areas. We reduced the earnings drag caused by Citi Holdings, where we saw the largest percentage reduction of assets since 2010."

Home sales solid
Canada's housing market continues to show signs of stabilizing, sales rising 3.3 per cent in June from May and slipping just slightly from a year earlier.

The number of homes sold over the Multiple Listing Service last month was 0.6 per cent lower than in June 2012, The Globe and Mail's Tara Perkins reports.

The number of newly listed homes dipped 0.5 per cent in June from May, while national prices rose.

The average sale price climbed 4.8 per cent from a year earlier, while the MLS home price index rose 2.3 per cent.

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