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Jim Flaherty finds 'optimal balance' between austerity and growth Add to ...

These are stories Report on Business is following Tuesday, Nov. 13, 2012.

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Flaherty pushes back deficit timing
The Canadian government is pushing back its timeline for balancing the budget and projecting fatter-than-expected deficits for the next few years.

Finance Minister Jim Flaherty certainly has more wiggle room than many of his peers - we're not Greece, after all - and the revisions may not be surprising given the global economic climate.

For now, observers believe Mr. Flaherty has found the right mix, though Bank of Montreal warns that Ottawa should  watch out going forward lest its not inconsiderable reputation take a hit.

Mr. Flaherty unveiled his new projections in a fiscal update to a Fredericton business audience, The Globe and Mail's Bill Curry and Jane Taber report, delaying its planned return to a balanced budget by a year, depending on developments.

In his last budget, in March, the finance minister forecast he would eliminate the deficit by the 2015-16 fiscal year, with a $3.4-billion surplus. Today, though, he forecast a deficit of $1.8-billion for that year, and a return to a surplus, of $1.7-billion, in 2016-17.

Remember, the government builds in a risk cushion, so that could change.

"The delay of one year in the return to balance, based in part on global risks, does not represent a significant departure from earlier plans, although it highlights the fiscal  stance’s continuing vulnerability to global risks," said CIBC World Markets economist Peter Buchanan.

Mr. Flaherty also projected a deficit of $26-billion for the current fiscal year, heftier than the $21.1-billion forecast in the budget. Next year's deficit is now forecast at $16.5-billion, up from the earlier projection of $10.2-billion, while the 2014-15 shortfall is now pegged at $8.6-billion, wider than the original $1.3-billion.

 “While Canada’s economy is still growing, we are not immune to the economic uncertainty beyond our borders and the economic challenges faced by some of our largest trading partners," Mr. Flaherty said, citing lower-than-expected commodity prices that have eaten into revenues, and slower-than-forecast growth.

"Global weaknesses beyond our control today carry serious consequences for Canada that are affecting our economy and our fiscal projections.”

Senior economist Michael Gregory of BMO Nesbitt Burns noted that a return to a surplus position could actually come earlier, citing the fact that the deficit projected for 2015-16 is below the level of the $3-billion risk cushion.

"But this was also the case last year (for FY14/15). The fiscal slippage reflects the government’s judgment that it has found the optimal balance between austerity and growth, while maintaining its policy credibility," said Mr. Gregory. "We concur, but if there’s a third consecutive year of slippage without any offsetting policy response, the government’s credibility could be called into question."

I agree with Mr. Gregory's note on "the optimal balance." Just look at some of Europe's wounded nations, where policy makers have erred with an austerity crusade that is helping crush their economies.

Chief economist Avery Shenfeld of CIBC World Markets also put it well, noting that the Canadian government has the wiggle room to juggle austerity and growth.

“Prices are lower across a spectrum of resources, implying a weaker-than-planned take from corporate income taxes and royalties,” Mr. Shenfeld said.

“But do we really want a deeper fiscal crackdown to offset that if the cause is soft global growth?” he said.

“Fortunately, coming off a deficit of only 1.5 per cent of GDP last year, we’re not Greece or even the U.S., and have room to take a gradualist approach to deficit reduction at the federal level.”

The new projections are not likely to upset the credit rating agencies for whom Canada is triple-A. Nor is it likely to trouble investors.

“Even with the revised timetable, some comfort will be had that deficits and debts are a small share of the economy,” said senior economist Sonya Gulati of Toronto-Dominion Bank.

“This is something that most other countries are not in a position to state. Second, a multi-year plan to return to surplus appropriately balances the need to restore fiscal health while catering to the economic fragility present. Third, the date of the return to surplus is arguably less important than the profile and path.”

Greece in spotlight … again
Markets were closed by the time Europe’s finance ministers finished dickering yesterday, but the never-ending crisis is resonating today.

Meeting in Brussels, the finance ministers gave Greece two years of leeway on its fiscal targets, but put off a decision on the next tranche of bailout money until next week. Why decide something now when you can continue to kick it down the road?

The two-year extension on bringing its deficit into line means billions of euros more in financing that Athens will need, and also has sparked divisions among its lenders, the European Union, whose finance group is chaired by Luxembourg’s Jean-Claude Juncker, and the International Monetary Fund, under chief Christine Lagarde.

“Greece remains in focus after euro area finance ministers agreed yesterday to give the country an extra two years, until 2016, to hit the deficit target of 2 per cent of GDP,” said Robert Kavcic of BMO Nesbitt Burns.

“Of course, this means that Greece will require about €33-billion in extra funding, and the finance ministers said that they won’t decide where exactly that funding will come from until another meeting set for Nov. 20,” he added in a research note.

“In the meantime, the IMF didn’t sound pleased. The finance ministers also said Greece’s debt-to-GDP goal of 120 per cent could also wait two years, to 2022, but Christine Lagarde was clear in wanting the 2020 target to stick. And thus, some uncertainty has been cast over the market this morning, with the euro slipping to the lowest level since early September.”

Greece did raise enough money in a Treasury bill auction today to be able to meet a €5-billion payment on Friday, but there’s still no end in sight to the debt crisis in Europe, particularly Greece, whose economy is in recession and where social unrest mounts by the day given harsh austerity budgets and 25-per-cent unemployment.

“Even allowing for this apparent two-year extension there still remain significant differences as to how the question of where the €30-billion will come from to pay for this extra time, as well as the question of how the debt sustainability will be managed with eurogroup’s Juncker and IMF chief Lagarde disagreeing after Juncker stated that the 120-per-cent debt to GDP target had been moved to 2022,” said senior analyst Michael Hewson of CMC Markets in London.

“Lagarde’s comment was a terse ‘we clearly have a different view,’ which doesn’t really bode that well for future harmony.”

How retailers rank
Canada's Lululemon Athletic Inc. ranks among the most productive retail operations in the United States, according to a new ranking, running behind Apple Inc. and Tiffany & Co.

According to the ranking by U.S. research Retail Sails, Lululemon rakes in $1,936 (U.S.) per square foot, behind Tiffany's $3,017 and the chart-topping $6,050 generated by Apple.

Lululemon, which holds the No. 1 spot among apparel chains, and operates more than 100 shops in the U.S., has moved up one ranking from the last measure, swapping spots with Coach Inc. Rounding out the top five is Michael Kors Holdings.

"Apple Stores have captured shoppers’ imaginations and dominate the competition with sales per square foot nearly more than double its closest rival," the research firm said.

The rankings were compiled based on company documents and industry sources, and is meant to strip out sales not done in stores. It looks at everything from clothing and luxury retailers to department and drugstores.

Unlike Apple and Tiffany, Lululemon also ranks among the top 10 in the category of fastest-growing, which looks at the annual change in store sales. At almost 39 per cent, it holds the No. 8 spot there.

In early September, Lululemon posted a 33-per-cent jump in revenue to $282.6-million (U.S.) and an increase of 15 per cent in same-store sales, a key measure in the retail sector.

Profit rose to $57.2-million or 39 cents a share from $38.4-million or 26 cents.

Loblaw strikes pharmacy deal
Loblaw Cos. Ltd. appears to have scored an upset in the phamacy sector, with a deal to become the preferred provider of pharmacy services to a group managing Canadian employers’ drug plans, The Globe and Mail's Bertrand Marotte writes.

Towers Watson, a professional services and employee benefits management company whose Canadian Rx Coalition selected Loblaw as its preferred provider today, says the agreement will help employers see to their employees’ drug and wellness needs while also allowing companies to better manage increasingly costly benefits programs.

Loblaw has about 500 pharmacies in its supermarkets, operating under several different banners, including Loblaws, Real Canadian Superstore and Zehrs.

BHP sells diamond unit
BHP Billiton Ltd., the world’s largest diversified miner, has agreed to sell its diamonds business to Canadian diamond miner and retailer Harry Winston Diamonds Ltd. for $500-million (U.S.), The Globe and Mail's Pav Jordan reports.

The assets include BHPs interests in the EKATI Diamond Mine and its diamonds marketing operations.

“Completion of this acquisition will bring the opportunity to marry our Canadian diamond sorting and marketing skills with an experienced mine operating and development team, a world class operating asset, and future growth potential," said Harry Winston's chief executive officer, Robert Gannicott.

"Together with our existing mining business, these assets will serve as our platform for sustained, disciplined growth in the upstream diamond sector.”

Quebecor profit sinks
Sun Media Corp. – Quebecor Inc.’s newspaper chain – is slashing 500 jobs and shutting two production facilities in Ottawa and Kingston.

The measures are part of a plan to deal with shrinking newspaper revenues and cut costs by more than $45-million per year in the division, Quebecor said today after reporting third-quarter financial results, The Globe and Mail's Bertrand Marotte reports.

Quebecor also posted a hefty drop in third-quarter profit today, taking a goodwill hit from weak newspaper and music markets and other charges that were offset by an increase in operating income and one-time financial gains.

Profit fell to $18.6-million or 30 cents a share from $26.1-million or 41 cents a year earlier. Revenue climbed 4.4 per cent to $1.06-billion.

“The corporation continued its growth in the third quarter of 2012 despite a fiercely competitive business environment in most of its lines of business,” said chief executive officer Pierre Karl Peladeau.

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