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Carney warns on debts Bank of Canada Governor Mark Carney warned Canadians today to curb their enthusiasm for debt. Using particularly strong language, Mr. Carney said in a midday speech that the ratio of household debt to disposable income hit 146 per cent in the first quarter of the year, a record and a level that is closing in on that of the U.S.
"This cannot continue," the central bank chief warned, adding that while the net worth of Canadians is about six times the level of average disposable income, asset prices rise and fall but "debt endures." And despite the "buoyancy" of the real estate market, the debt-to-asset ratio among Canadian households is at its highest in more than two decades.
"With Canadians working, but not as much as they would like, they have been borrowing," Mr. Carney said. "Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."
Household balance sheets are growing "increasingly stretched," and it's possible Canadians are beginning to address the issue.
Carney warns of slowing growth Mr. Carney also told the audience in Windsor, Ont., that the economy will grow at a "modest pace" going forward given the headwinds from abroad and as Canadians try to tackle those personal debts.
While Canada's recovery has been the envy of the Group of 7, it has relied on levels of consumer spending and investment in housing that are proving unsustainable, Mr. Carney said. Both areas of the economy have slowed since the first quarter of this year as interest rates began climbing again and as worries mounted over the health of Canada's main export market.
Economy shrinks but mining shines Canada's economy contracted in July for the first time in 11 months, shrinking 0.1 per cent, Statistics Canada said today. Many sectors - such as manufacturing, construction and forestry - were hit hard but the mining industry in particular rebounded after hitting a soft spot in June.
"Metal ore production increased significantly as some producers in the copper, nickel, lead and zinc mines industry boosted their output following the end of labour disputes," Statistics Canada said, noting the sector expanded 1.1 per cent.
Home resales were also hit, falling markedly for the third month in a row, leading to an 8-per-cent drop for real estate agents and brokers. "The output of this industry atood at about two-thirds of its level recorded at the beginning of 2010," the federal statistics gathering agency said.
"The decline was likely temporary in nature," Toronto-Dominion Bank economist Diana Petramala said of the overall dip in the economy. "In particular, retail sales in July suffered a heavy blow from the introduction of the HST in Ontario and B.C., and once consumers shake off the initial shock, growth should continue."
Where home prices are most inflated Canadian homes are overvalued by almost 12 per cent, driven largely by inflated prices in British Columbia, Alberta and, to a lesser extent, Ontario, CIBC World Markets says in a new report today, warning the housing sector "looks vulnerable" in the West.
"Granted, no part of Canada looks to be immune to further housing market weakness, with significant momentum having been more recently lost," said economist Warren Lovely. "... But it's in B.C. and Alberta where housing prices have overshot fair market value by the largest margin ... with an ongoing correction expected to dull residential construction activity and blunt consumer enthusiam."
In B.C., CIBC said, house prices stand almost 17 per cent above fair value, and in Alberta 12.5 per cent and Ontario 11.6 per cent.
The real estate market has cooled considerably since its dramatic rebound from the depths of the recession, and is expected to cool further. Given the power of the sector in the overall recovery, that's troublesome.
Yesterday, National Bank said house prices in July were 6.4 per cent above their pre-recession peak, and most economists see costs slipping well into next year.
And today in Windsor, Ont., Bank of Canada Governor Mark Carney also noted that the sector is "declining markedly" from high levels.
"The slowing since the spring in resale, renovation, and new home construction activity has been driven by a number of factors, including the passing of pent-up and pulled-forward demand; the expiration of the federal Home Renovation Tax Credit in January; the tightening of standards for government-backed insured mortgages that came into effect in April; the introduction of the HST in Ontario and British Columbia in July; declining affordability; and subdued income growth," Mr. Carney said. "... Overall it appears unlikely that private consumption will be bolstered by substantial house price gains going forward."
Flaherty scales back EI plans The Harper government is scaling back plans to hike Employment Insurance premiums this year - and in the years to come. Rather than raising premiums by the maximum of 15 cents for workers on Jan. 1, the hike will be limited to five cents per $100 of insurable earnings. Finance Minister Jim Flaherty made the announcement today at an Ottawa fireplace dealer as a way of showing the Conservative government is responding to concerns of small business.
Mr. Flaherty also announced that premium hikes will be limited to 10 cents annually in subsequent years. This will have a multi-billion impact on the government's forecasts for balancing the budget over time.
Ireland unveils bank bailout Ireland moved today to calm market jitters over its banking sector, unveiling a costly bank bailout that includes taking control of Allied Irish Bank and put money into smaller institutions. Ireland said it will put up to €40-billion euros into the country's two biggest banks, Anglo Irish and Allied Irish. It already owns Anglo-Irish.
The cost to Ireland of bailing out the banking sector is dramatic, with the country's deficit this year now likely to top 30 per cent of GDP.
"We have to get bondholders from overseas to fund the Irish state, and to fund the substantial deficit," Finance Minister Brian Lenihan told a national broadcaster. "You can't go to your bank manager and say, 'I want to default,' and at the same time, 'I want more loans.' If that's the underlying message coming out of Ireland, we're not going to flourish as a country."
Mr. Lenihan said he's still committed to bringing down the deficit to 3 per cent of GDP within about four years, which will be "a very tough task" indeed, noted BMO Nesbitt Burns economist Benjamin Reitzes.
"While the figures are certainly astounding, markets welcomed the clarity provided by the announcement," Mr. Reitzes said. "Government bond yields tumbled across the curve, down 10-to-23 basis points, narrowing the gap vs. German Bunds. Even so, yields and spreads remain uncomfortably high. A period of calm with no more surprises is what Ireland needs now."
AIG reaches deal with government American International Group, the giant insurer that became a poster child for government bailouts, has reached a deal with U.S. officials that would see the Treasury Department no longer hold majority control.
Under the plan announced today, The Treasury Department would convert almost $50-billion (U.S.) of preferred shares into common stock next year, which would actually boost the government's interest in the company. But it would then sell those common shares over time.
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