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Canadian Finance Minister Jim Flaherty to paint bleaker picture in update today

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

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Flaherty's update
Canadian Finance Minister Jim Flaherty is expected to paint a bleaker picture when he releases his fiscal update today, possibly projecting a deficit that's "slightly higher" than the original budget forecast.

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But the longer-term story will likely remain largely intact when he speaks in Fredericton.

"We're anticipating a status quo fiscal update with no new policy initiatives," said Sonya Gulati of Toronto-Dominion Bank.

"Instead, new economic assumptions will be presented and the resulting fiscal impacts discussed. In particular, I'm anticipating a slightly higher deficit than originally forecast in the 2012 budget. But, even with the revision, no change is expected for the medium-term fiscal plan and the deficit reduction timetable."

The deficit for the current fiscal year was initially projected at $21.1-billion, and Ms. Gulati now expects it "to come in slightly higher."

While there probably won't be any surprises from Mr. Flaherty today, added Derek Burleton, Ms. Gulati's colleague at TD, "some tinkering will be done to the annual budget balances to build in updated economic assumptions, but the medium-term story on the economy has not changed significantly enough to warrant a material change in the government's path towards a balance budget in 2015-16."

As The Globe and Mail's Bill Curry reports, commodity prices have eased and economic growth is slower than expected, eating into the Canadian government's revenues.

Whatever Mr. Flaherty does today, it won't knock him off track in any big way.

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Last year's deficit, at more than $26-billion, came in over target.

"Mr. Flaherty has already let it be known that the forecast for 2012 has been downgraded since the March budget (actually more due to lower-than-expected prices for our goods, not so much a misfire in terms of real GDP)," said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

"That may clip revenues a bit more than expected, and lead to a slight adjustment on the deficit forecast for this year and the next few fiscal years … I don't believe there will be a significant change in the fiscal outlook, but I suspect few will be talking about Ottawa hitting a surplus by 2014-15 any longer – 2015-16 is still a possibility, but the global economy will have to stay on the rails."

Canada is feeling the effects of global uncertainty, a strong currency and a cooling off of its hot housing market, and policy makers are "generally becoming more nervous" where fiscal and monetary policies are concerned, said Derek Holt of Bank of Nova Scotia.

"While the risks over recent years have been more geared toward external risks in the U.S., Europe and China, the big macros call to made here is that the shine is coming off the domestic economy through decelerating housing and consumer markets into next year and beyond," Mr. Holt said.

Any "adjustments" to the fiscal outlook should be modest, said Mark Chandler and Ian Pollick of RBC Dominion Securities, and they suggested possible new measures in the next budget that could spur business spending.

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"The government is expected to incorporate the slightly-weaker consensus expectations recently surveyed by the Department of Finance (which included a 0.4-percentage-point downgrade to real growth expectations for 2013)," the RBC strategists said.

"In and of itself, the adjustment will do little to alter the expected path for the budget balance (in part, because 10-year [government bond] yields are also expected to be lower as a result – some 60 basis points in 2013 from projections incorporated in budget 2012 – but also because the results for the first five months of the current fiscal year have been quite good)."

Chief economist Avery Shenfeld of CIBC World Markets put it well, noting that the Canadian government has the wiggle room to juggle austerity and growth, something Europe, for example, is ignoring.

"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."

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."

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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