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A warning for Canadian consumers A visiting scholar at MIT's Sloan School of Management says Canada's finance ministry should develop a code of conduct on lending, which would force the banks to recommend "suitable borrowing and repayment plans." High debt levels, he warns, could have dire economic consequences.

Derek Dunfield, a neuroscientist and visiting scholar in behavioural economics and marketing at MIT, warned today in a paper that Canadian consumers "may soon be overwhelmed" given the inevitable rise in interest rates.

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Mr. Dunfield, of course, isn't the first to admonish Canadians on their borrowing habits. Bank of Canada Governor Mark Carney has warned several times that debt levels are bloated, and Finance Minister Jim Flaherty has brought in new mortgage rules to help Canadians diet.

Total household debt in Canada now tops $1.5-trillion, or three times the national debt, MIT said in a statement outlining the paper by Mr. Dunfield and his colleagues in the Action Canada fellowship. That means that while Mr. Flaherty is being fiscally responsible, many of us may not be following suit.

"The historically high levels of household debt present two possible problems for the Canadian economy," Mr. Dunfield said.

"One scenario is that interest rates rise, house prices drop, and more people begin defaulting on their credit card debt and mortgage obligations. An equally worrying - and perhaps more likely scenario - is that interest rates go up a little, and more of people's disposable income goes to repaying their debt, leading to a significant reduction in consumer spending. Since personal spending on consumer goods and services accounts for 58 per cent of the Canadian gross domestic product, this decrease would provoke a 'made in Canada' recession."

Such a recession is not inevitable, though, he says, urging Mr. Flaherty to develop the code of conduct, along with bringing in new measures to change "the culture of borrowing" in Canada. That would include a public awareness campaign. Banks, he said, should offer self-monitoring measures, such as budgeting calculators or "self-control" credit cards.

"The policies of Canada's banks have inadvertently encouraged the loading up of personal debt," Mr. Dunfield said.

Here's one example cited by MIT: "A couple could walk into their bank today and ask for a $10,000 loan to pay for their wedding. In this case, the bank might take a look at their finances and credit score and may tell them they actually qualify for a much larger loan, say $100,000. Since taking a $100,000 line of credit doesn't incur any extra fees, most people will sign on."

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That, of course, makes the newlyweds that much more likely to spend that higher amount.

Others have also warned on the potential hit to consumer spending, with a debt-to-disposable income ratio now at more than 145 per cent.

Having banks accept some responsibility for smarter borrowing is the main thrust of a report being issued today by the Action Canada Task Force on Household Debt, where Mr. Dunfield is the head of research, Globe and Mail personal finance columnist Rob Carrick reports.

Canadian, U.S. housing markets on different paths The difference between the Canadian and U.S. housing markets "couldn't be more stark," Moody's Analytics said today, projecting prices in Canada to climb a further 2 per cent by the third quarter while U.S. house prices slip another 4 per cent to hit bottom.

"The relatively stronger Canadian housing market may not be an engine of rapid growoth, but at least it won't be a drag," said economist Adam Goldin.

Mr. Goldin compared the 32 per cent plunge in U.S. property prices since the pre-crisis peak to the "more modest" 9 per cent peak-to-trough drop in Canada, followed by a climb of 15 per cent from levels of almost two years ago. He was comparing the reading of the S&P/Case-Shiller index to the Teranet-National Bank measure in Canada.

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"Canada has also avoided the wide regional performance differences seen in the U.S., where states such as Nevada, California and Florida suffered significantly larger declines than the nation overall," Mr. Goldin added. "In Canada, house prices in Calgary and Vancouver fell further than those across the nation, but the variance was relatively minor by comparison."

Ottawa's deficit narrows Ottawa's budget deficit narrowed in December to $1.4-billion as revenue climbed $8.4 per cent and expenses dipped 2.5 per cent, largely because of lower transfer payments.

The deficit compared to $3.1-billion a year earlier, the finance department said today.

So far this fiscal year, from April to December, the deficit is running at $27.4-billion, compared to $39.4-billion a year earlier. Some $12-billion of the current year's deficit is accounted for by stimulus measures, the department said.

In those first nine months, revenue was up by 7.7 per cent and program expenses down 0.6 per cent.

For December, the department noted, revenue from personal and corporate income taxes rose, though those from excise taxes and duties dipped.

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Based on the first nine months, Ottawa is on track to meet its projections, said Toronto-Dominion Bank economist Sonya Gulati, but Ottawa will have to stick to restraint to make ends meet down the road.

"Relatively strong economic growth has allowed the federal government to rein in its deficit numbers in the near-term," Ms. Gulati said. "But, with only moderate growth anticipated in 2012 and onwards, the government's planned return to budgetary balance will become increasingly dependent on its expenditure restraint efforts.

She noted that the plan limits annual spending increases to 2.5 per cent, which will be a "difficult task to achieve if the past is any indication."

Canadian dollar stronger, markets firm The Canadian dollar closed today more than 2 cents above parity with its U.S. counterpart, up by just shy of half a penny, driven by high oil prices and speculation of what the Bank of Canada will signal at its policy-setting meeting next week. The U.S. benchmark closed higher, but below $98 (U.S.) a barrel.

The Bank of Canada and the European Central Bank meet amid growing concerns over inflation, and, said Scotia Capital currency strategist Camilla Sutton, markets are speculating both may sound a "hawkish" tone. Markets are looking for signals from Bank of Canada Governor Mark Carney on the next hike in interest rates, she added in an interview.

"February has been an awkward month.," Ms. Sutton said later in a report.

"[The Canadian dollar]has been strong, even reaching multi year highs, however the correlations between the currency and its traditional drivers have generally been fairly weak. As we enter the end of the month most of these correlations are rising once again, suggesting that March might prove to be a more typical month. Brent oil currently holds the strongest positive correlation with [the Canadian dollar]"

Economists are divided on the timing of the next rate hike, though one is coming soon. There have been suggestions from economists that that could be as early as May, though others believe July.

"On inflation the bank will likely characterize it as evolving in line with its expectations, as there haven't been any significant surprises over the last few weeks," said Jacqui Douglas, senior macro and foreign exchange strategist at TD Securities.

"However, the bank will have to mention the downside risk coming from geopolitical issues in the Middle East and North Africa. That will help the bank to temper the tone of the statement and keep markets from getting too far ahead of themselves in pricing in rate hikes. While we do indeed think that we will see a lengthy stretch of rate hikes begin in the second half of the year, the bank will want to keep all options open and avoid as much forward-looking language as possible."

Global stock markets were also firmer today as Saudi Arabia moves to make up for the loss of oil production from embattled Libya.

Saudis boost crude output Saudi Arabia has reportedly made good on its pledge to boost oil production in the wake of the disruption in Libya.

"We have started producing over 9 million barrels per day," the Reuters news agency quoted one Saudi source as saying. "We have a lot of production capacity."

The troubles in Libya, which represents about 2 per cent of global output, have taken out of production between 500,000 and more than 1 million barrels a day, according to various estimates.

Safe at $100 oil, but what if? The spike in oil prices is a threat to the tentative global recovery, but some economists say the world is safe at this point, though they're not ruling anything out. Here are three views today:

"Dominoes are clearly falling, but Libya could still end up being the first and last significant oil producer to tumble. If so, the Saudis and ample inventories could almost certainly fill in the gap. In that case, we might spend a couple of quarters with elevated but not fatal oil prices.

"As long as the world's central banks don't add to the downdraft with inappropriate rate hikes in response to a temporary jump in the CPI, recession risks will remain minimal.

"... That said, a darker outcome can't be ruled out. There is still unrest in Yemen and Bahrain. In terms of significant oil producers, violent protests are back on the streets in Iraq, although that's a country where true political stability would be the (pleasant) surprise to markets. Algeria, a roughly equivalent oil producer to Libya, has lifted a long-time state of emergency in an effort to take down the level of tension with its opposition, but the next chapter on that story remains to be written. Two other oil players aren't entirely out of the woods. A March 11 protest is set for Saudi Arabia, and there is a suppressed but still simmering opposition in Iran." Avery Shenfeld, chief economist, CIBC World Markets

"The struggle for political freedom in the Middle East and North Africa has been an ongoing process, beginning in Tunisia and then spreading to Egypt, but it has thus far had a minimal impact on asset prices or the global economic recovery. However, with conflict spreading to oil producing Libya, and protests heating up in Bahrain, a small, but strategically important country between Saudi Arabia and Iran, the risk of a major disruption in oil supply led prices to jump by close to $10 this week from last. However, just to show how much of this run-up is fear-related, oil prices retreated at close of week as tensions appeared to lessen.

"... Apart from the recent flare-up in geopolitical risk, the fundamentals for oil prices should lead oil prices to stabilize around $90 a barrel over the next year. As such, we continue to be comfortable with our base case view that the [U.S.]economy will grow at a pace of around 3.5 per cent through 2011. In fact, while global geopolitics stole the show this week, there were continued signs that the recovery is taking place in line with our expectations." James Marple, senior economist, Toronto-Dominion Bank

"Substantially higher prices arising from a supply shock would significantly heighten the risk of renewed [U.S.]recession. The impact on households and business would exacerbate the drag imposed by the planned end of [the additional round of quantitative easing known as]QE2, rising interest rates, and fiscal restraint by the federal government, states, and municipalities. For instance, if [West Texas Intermediate]were to rise to an average of $150 this year, the direct result would be to reduce U.S. economic growth by a further 1 percentage point in 2012 - i.e., resulting in growth of 2 per cent.

"However, this direct hit underestimates the full impact. Given high debt levels and the weak housing market, households would not be able to compensate for the impact of higher fuel prices on their discretionary income by borrowing or extracting home equity. Businesses, still very cautious but on the cusp of accelerated hiring, would quickly pull back. A resumed downturn in consumer and business confidence and weaker employment would send the wobbly housing market into retreat, not to mention equities, with substantially adverse implications for home prices, net worth, and consumer spending. Earl Sweet, senior economist, BMO Nesbitt Burns

Suncor staffers leave Libya says all its expatriate staff members have now left Libya, the last group fleeing via sea to Malta today.

Operations were shut down this week, and most foreign employees and contractors were out before today, the Canadian energy producer said in a statement.

"After that time, a small number remained in-country - those that needed to be moved from field operations to evacuation points, and the leadership and safety professionals who were managing the evacuation," the Calgary-based company said.

"... At this time, our response centres in Calgary and Malta are continuing to work with industry partners, service providers and the Canadian government to support plans to evacuate workers, including in non-Suncor operated oilfields in Libya.

"We are also working to provide appropriate support to employees who are Libyan nationals, and to provide support to individuals and families of employees and contractors who have been evacuated, some of whom are still in transit to their home destinations."

How to beat high costs? Drive slower Spain has an answer for higher oil and gas pump costs: Drive slower.

The country's deputy prime minister, Alfredo Perez Rubalcaba, told reporters today in Madrid that Spain is lowering the speed limits on highways while at the same time cutting the price of train tickets, according to The Associated Press.

The new plan is expected to become effective, though temporarily, on March 7.

U.S. warns banks on Libya The U.S. Treasury Department is asking U.S. banks to "take reasonable risk-based steps" and monitor transactions related to the turmoil in Libya.

The Treasury Department's Financial Crimes Enforcement Network issued an advisory to financial institutions in the United States reminding them of requirements for "enhanced scrutiny" of private accounts held by foreign politicians, and be on the lookout for possible misappropriated or diverted state assets or other illegal payments.

"Financial institutions should be aware of the possible impact the events in Libya may have on patterns of financial activity when assessing risks related to particular customers and transactions," the agency said.

As the turmoil in the Middle East and North Africa escalates, there has been an heightened focus on potential misuse and misappropriation of state funds.

Yesterday, Switzerland froze the Swiss assets of Libyan leader Moammar Gadhafi, and a week earlier the assets of the Mubarak family and former officials of the Egyptian regime.

U.S. growth slower than believed The U.S. economy expanded at the end of last year at a slower pace than estimated earlier. Gross domestic product grew at an annual rate of 2.8 per cent in the fourth quarter of 2010, down from the U.S. Commerce Department's earlier reading of 3.2 per cent and below what economists had expected.

Among the main culprits were weaker-than-expected consumer spending in the holiday shopping season, thought it was still healthy, and reduced government spending.

"Over all, a bit disappointing, but largely old news at this point that will take a back seat to fears about growth beyond [the first quarter]in the wake of both oil price hikes and a budget impasse that could cut into government spending," said Avery Shenfeld, chief economist at CIBC World Markets.

Canada to see auto gains Canada's auto industry is on track to lead North American growth in auto production early this year, helping to boost the broader economy, Bank of Nova Scotia says.

Analyst Carlos Gomes said in a report today that the retolling at Chrysler's Brampton, Ont., assembly plant, coupled with higher output from General Motors Co. in Oshawa, Ont., will help ramp up production.

The increase in overall assembly in the first quarter will be the best showing since the economy was beginning to recovery in mid-2009, Mr. Gomes said.

"We estimate that rising vehicle output will add roughly 1.5 percentage points to economic growth in Canada, significantly higher than the 1 percentage point contribution expected from the auto sector in both the United States and Mexico."

Britain's growth worse than believed Britain's economy is in slightly worse shape than initially believed. The country's Office for National Statistics said today the economy contracted by 0.6 per cent in the fourth quarter of last year, a bit more than its previous reading of 0.5 per cent.

Japan struggles with deflation Deflation continues to grip Japan, stalling the country's efforts to bolster its rebound. Consumer prices in Japan fell again in January - that's almost two years of consecutive monthly declines - though the rate of decrease slowed to 0.2 per cent.

Analysts boost CIBC Analysts are boosting their price targets on Canadian Imperial Bank of Commerce after the bank's strong first-quarter earnings report yesterday.

National Bank Financial analyst Peter Routledge, increasing his estimates on earnings per share, raised his target on CIBC shares to $91 from $86, though he pushed out his call for a dividend hike by one quarter, to the fourth quarter of the current fiscal year.

"Over all, CIBC starts [fiscal]2011 on a strong note, largely attributable to its wholesale banking segment," Mr. Routledge said. "Performance in the retail markets segment was solid overall, but loan growth lagged our modest expectations."

Desjardins Securities analyst Michael Goldberg also boosted his price target, to $88 from $80, though he held his "hold" rating.

"Earnings, loan quality and capital are progressing at CIBC, contributing to a rising stock price," Mr. Goldberg said. "Risk has also been reduced significantly. Our concern about future relative performance boils down to where growth is going to come from. It is on this criterion that CIBC's prospects appear to be less positive than its peers."

RBC downbeat on Magna RBC Dominion Securities shaved its outlook for Magna International Inc. shares, to $67 (U.S.) after a fourth-quarter earnings report two evenings ago that drove down its stock price yesterday.

The auto parts giant's revenue was strong, said analyst Steve Arthur, but profits and margins were below expectations.

"Not unlike others in the auto sector, Magna has delivered a strong [fourth-quarter]revenue result but fell short of expectations on the bottom line," Mr. Arthur said.

"However, we note that new program launch costs are a key component of the higher-than-expected cost structure in the near-term - a situation that provides longer-term benefits as these new programs come online in 2012-13 and begin to contribute revenue and margin."

UBS upgrades Goldcorp UBS Securities Canada Inc. today nudged up its 12-month price target on stock of Goldcorp Inc. after the gold company beat expectations on fourth-quarter earnings and boosted its dividend yesterday.

"Goldcorp offers the highest five-year growth profile in our senior gold coverage universe, is unhedged, has relatively low political risk and exploration upside," said analyst Brian MacArthur, raising his target to $64 (U.S.) from $63.

Boyd Erman's Morning Meeting Onex Corp. is watching for opportunities to sell stakes a few of its private-equity portfolio companies as the markets become more receptive, Streetwise columnist Boyd Erman reports today.

In Personal Finance today

The time to withdraw from your registered retirement savings plan may be sooner than you think, writes Ted Rechtshaffen. But before you do, consider how taxes, Old Age Security and TFSAs come into play.

Sonali Verma looks at five common excuses for not making an RRSP contribution, and how you can overcome them.

Those who lost big and left the stock market in 2008 can rebuild their retirement funds, even if they are in their 50s and 60s.

From today's Report on Business

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