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Moody's turns wary eye from euro basket cases to Ontario

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Moody's eyes Ontario Moody's Investors Services has turned its wary eye from the basket cases of Europe to Ontario, revising its outlook to "negative" from "stable" and issuing a stern warning on the province's hefty debt burden.

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The decision, Moody's said in a statement, reflects the risks surrounding the province's ability to meet its medium-term fiscal targets. It noted the recent slowing of economic growth.

"The negative outlook on the province reflects the softening economic outlook, Ontario's growing debt burden, and the extended time frame to achieving a balanced budget," Moody's analyst Jennifer Wong said.

In his November statement, Finance Minister Dwight Duncan revised his forecasts for economic growth for both this year and next, a significant downgrade to just 1.8 per cent in each year, compared to earlier projections of 2.4 per cent 2.7 per cent.

The government plans to eliminate the deficit by 2017-18, which will require it to rein in growth in program spending. The deficit is forecast to reach $16-billion this fiscal year.

Ontario's fortunes, of course, are tied to the United States, where growth is also projected to slow.

"The slowdown in provincial economic growth presents a challenge to the already lengthy planned consolidation path, particularly given the strong expense growth seen in recent years," Moody's said in the statement.

"Expense growth leading up to the recent downturn was relatively robust, highlighting the challenge ahead. Indeed, expense growth averaged 7 per cent annually in the five years to 2007-08, with health expenses having grown at an average of 8 per cent. The fiscal plan presented in the 2011-12 budget assumed expense growth of roughly 2 per cent annually for the duration of the plan."

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Moody's did add that Ontario's high investment grade rating reflects "the high degree of fiscal flexibility" in the way provinces operate.

Ms. Wong issued a stern warning, though.

"We believe that increased fiscal discipline will be required to sustain debt affordability," she said. "If a credible plan to address the fiscal imbalance and stabilize the debt burden is not implemented in the next provincial budget, expected in March 2012, downward pressure on the province's Aa1 rating would emerge."

In Toronto, The Globe and Mail's Karen Howlett reports, Mr. Duncan told reporters the Moody's decision means the Liberal government of Premier Dalton McGuinty must follow through on its plan to eliminate the deficit by fiscal 2017-18.

"We can't miss targets," he said.

In its latest forecast, the economics department of Royal Bank of Canada projected growth in Ontario of 2 per cent this year, and 2.3 per cent in each of 2012 and 2013. The jobless rate is forecast to remain elevated at 7.7 per cent next year and 7.5 per cent a year later.

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Still, the RBC outlook was not bleak, though, as elswhere, much depends on the fortunes of the United States and how the debt crisis in the euro zone plays out.

"Ontario's economy is showing signs that it is back on its feet after stumbling in the second quarter of this year when severe disruptions in global automotive supply chains hurt its manufacturing sector," RBC senior economist Robert Hogue said in the forecast.

"While fears of a protracted slowdown in activity are being alleviated, the provincial economy still faces stiff headwinds that will restrain its speed as we head into 2012 and beyond. We believe that, barring any major slippage in the European crisis, the Ontario economy is now engaged on a path of modest growth that will extend into 2013."

Downgrades have been coming fast and furious in the post-recession era as governments around the world scramble to slash the debts built up to fight the slump. The problem has been most serious in the embattled 17-member euro zone, where some countries have suffered downgrades and others are on watch from both Moody's and Standard & Poor's.

While Ontario's outlook is suddenly in the crosshairs, Canada as a whole still stands strong.

S&P reaffirmed Canada's triple-A rating in the summer. And just earlier this month, the Fitch ratings agency said Canada is leading the triple-A club despite the fact that growth is expected to slow.

"The Canadian government's demonstrated ability to put forth a credible long-term fiscal consolidation plan provides critical support for the country's triple-A rating," Fitch said. "The government's commitment to eliminate the federal budget deficit by the middle of this decade even in the context of weaker growth puts Canada ahead of other peers rated triple-A."

It also noted that Finance Minister Jim Flaherty has said he's ready to step in with more stimulus "in a pragmatic way" should conditions sour even more. Indeed, Mr. Flaherty said this again as recently as yesterday.

Canada has built-in buffers that will help defend the triple-A credit rating, the agency said.

"The growth outlook for Canada remains tightly connected with that of the U.S., which accounts for approximately three-quarters of Canada's exports," Fitch said.

"Nevertheless, the macro prudential policies in place, a strong banking system, and the haven status of the Canadian dollar are likely to provide shock-absorbing support for the rating in a scenario where the euro zone crisis worsens and undermines global growth prospects further."

RIM shares sink Shares of Research In Motion Ltd. sank in after-hours trading today, continuing a decline of more than 70 per cent this year, as the BlackBerry maker disappointed with its outlook and said its new QNX-based devices won't come until later than expected in 2012.

The BlackBerry maker posted third-quarter results, and guided markets to a soft fourth quarter, sending investors scurrying again, The Globe and Mail's Iain Marlow and Omar El Akkad report.

RIM earned $265-million (U.S.), or 51 cents a share, in the quarter, which includes hits to its bottom line that the Waterloo, Ont.-based company had disclosed earlier this month. What markets were waiting to see was the number for earnings per share excluding the rather exceptional items, largely a hit related to inventory of its PlayBook tablet. That came in above forecasts at $1.27. Revenue climbed 24 per cent to $5.2-billion. The number of subcribers rose to almost 75 million, and shipments topped 14 million.

The fourth quarter is looking weaker, however. RIM projected revenue in the final three months of its year at between $4.6-billion and $4.9-billion, BlackBerry shipments of 11 million to 12 million, and earnings per share of 80 cents to 95 cents.

"It's really not about the quarter, it's about the guidance," Sterne Agee analyst Shaw Wu told Reuters. "They're expecting a pretty steep decline into the holiday period, and that's not a good sign, obviously."

Many analysts have slashed their price targets for RIM's shares, and have warned that the company must act amid a declining market share and intense competition from the likes of the iPhone from Apple Inc. and the Android system from Google Inc. .

While they noted the "challenges" of the quarter, the two chiefs of the company, Jim Balsillie and Mike Lazaridis, were upbeat, particularly given the the pressure they're under.

"RIM continues to have strong technology, unique service capabilities and a large installed base of customers, and we are more determined than ever to capitalize on our strengths to overcome the recent execution challenges surrounding product launches and the resulting financial performance," they said in a statement.

Mr. Balsillie and Mr. Lazaridis stressed that the company continues to look for ways to boost its operations, and is committed to better meeting expactions of both shareholders and customers.

"It may take some time to realize the benefits of these efforts and the platform transition that we are undertaking, but we continue to believe that RIM has the right set of strengths and capabilities to maintain a leading role in the mobile communications industry."

The two men also said they are going to take a salary of just $1 a year.

TransCanada gets commitments TransCanada Corp. plans to boost the capacity of its Keystone XL pipeline after winning further commitments from producers for the project.

The pipeline has been controversial, though plans are back on track after the Canadian company agreed to reroute the pipe to skirt an environmentally sensitive area in Nebraska.

TransCanada said today it has received additional binding commitments, and will, subject to regulatory approval, push ahead with an 80-kilometre extension from Keystone XL to help facilitate movement to Houston.

"The Keystone Pipeline System has now secured long-term contracts in excess of 1.1 milion barrels per day," it said in a statement.

Canaccord strikes deal Canada's Canaccord Financial has struck a $400-million deal to acquire Collins Stewart Hawkpoint, a move that will boost its presence in both Britain and the United States, Streetwise columnist Boyd Erman reports.

Canaccord is Canada's biggest independent brokerage, and Collins Stewart one of the largest in Britain.

Canaccord has been expanding globally, with recent additions in China and Australia. The firm has been looking for an acquisition in the United Kingdom for months.

Canaccord is offering 96 pence a share in cash and stock.

MacKay's euro trip Canada's government says it has absolutely no plans to help bail out Europe's weak economies, but the Defence Minister appears to be doing his part.

According to the Canadian Taxpayers Federation, hotel bills show that Peter MacKay spent $1,452 a night for two nights at a top-end Munich hotel, and $770 a night for three nights in Istanbul, The Canadian Press reports. His staff reportedly had rooms at the same Munich hotel for $276 a night during February of 2010 after a NATO meeting in Turkey.

Mr. MacKay's lavish trip came just about a month before Finance Minister Jim Flaherty unveiled what he called a "tough budget," the "smallest ... in terms of new spending in about 10 years."

Indeed, that budget, which forecast a hefty deficit in the wake of the recession-era stimulus spending, prompted Mr. Flaherty to pledge a return to balanced books.

"I don't like running deficits," the Finance Minister said at the time.

Possible he'd just seen Mr. MacKay's hotel bills? More likely he was anticipating the bills to spruce up Tony Clement's riding in advance of the June summit.

Jobless claims fall A fresh reading today on claims for jobless benefits in the United States is a welcome sign - indeed, the best showing in years - though no one should imagine that the nation isn't still struggling under what Federal Reserve chairman Ben Bernanke calls the "national crisis" of unemployment.

Still, the numbers show what has been a brighter trend, and suggest that the U.S. jobs market is picking up.

Initial claims for jobless benefits fell last week to 366,000, according to the U.S. Labor Department, continuing a streak below the key 400,000 mark. More importantly, the four-week average also fell, to 387,750. The weekly reading is the lowest since the spring of 2008, and the four-weak average the best since the summer of that year.

Continuing claims were just about flat.

The U.S. jobs markets is struggling to rebound from the depths of the recession, and just this week the Fed projected that the unemployment will remain high. Having said that, today's reading is, as Andrew Grantham of CIBC World Markets put it, "below anything recorded since the downfall of Lehman Bros." in mid-September of 2008.

"The Labor Department stated that there were no special factors behind the drop, and so the decline will be viewed as further indication of improvement in labor market conditions," he said.

There were several numbers from the United States today, all of which paint a brighter picture. Industrial production, however, slipped in November.

"Judging by this morning's U.S. economic data, yes Virginia, there is a Santa Claus," said senior economist Jennifer Lee of BMO Nesbitt Burns.

"Very encouraging numbers from jobless claims (big drop), manufacturing activity (nice bounce in the Empire State survey), moderate rise in prices (at the producer level), and a narrower current account gap."

Numbers weak Fresh readings of the manufacturing sectors in Europe and China signal troubled times, particularly in the euro zone.

In China, a purchasing managers index for December increased to 49 from 47.7, but held below the 50 mark that separates contraction from expansion.

"The rebound in the headline index may ease concerns of an imminent hard-landing," said Mark Williams and Qinwei Wang of Capital Economics in London.

"Nonetheless, this sub-50 reading is still the second-worst since March 2009. Manufacturing remains weak."

In the euro zone, the numbers were actually better than expected, with manufacturing at 46.9 and the services sector at 48.3. But they remain "well into contractionary territory," warned Adam Cole, the global chief of foreign exchange strategy at RBC in London.

Note that it's the fifth month in a row that the manufacturing sector has contracted in the monetary union, which is expected to suffer another recession, if it's not already in one. For services, it's the fourth month of contraction.

Czechs wait on euro Crippled by recession, the Czech Republic isn't rushing into the arms of the euro zone.

Its central bank and finance ministry said today it's recommending against setting a date to adopt the currency now shared by 17 countries. The Czech Republic doesn't meet the criteria, and won't in 2012, they said. And, at any rate, the debt crisis has pushed up the potential costs of joining in.

"The situation in recent years has been strongly affected by the global financial and economic crisis," the Czech National Bank and ministry of finance said.

"The Czech economy has thus temporarily stopped catching up with the euro area economic level," they said in a statement.

"On the other hand, though, it is showing signs of increased alignment with the euro area over the business cycle. As a consequence of the global crisis, the economies of the the euro area and other EU countries, including the Czech Republic, have gone into recession and recorded a considerable deterioration in public finance followed by a phase of gradual economic recovery and consolidation of public budgets."

Finning sees strong demand Canada's Finning International Inc. says it's looking forward to strong demand, but its announcement today still disappointed investors.

Finning, the world's biggest Caterpillar equipment dealer, today projected revenue growth of about 5 per cent next year, and 10 per cent in each of 2013 and 2014. It also forecast "strong" growth in earnings per share next year.

The company, which is holding an annual briefing for investors in Toronto today, said conditions in its Canadian and South American businesses is expected to be "robust," and that the outlook in Britain and Ireland is "positive" despite the troubles in Europe.

The company's outlook also indicates strength in the mining sector, which took a hit yesterday and is so key to Canada's overall outlook.

"We are entering 2012 with a sizeable backlog and a clear growth strategy," chief executive officer Mike Waites said in a statement.

"The continued strong demand for our products and services gives us confidence in our top-line growth projections through 2014. Particularly in mining, we continue to see solid business opportunities driven by strong commodity prices."

Still, Desjardins analyst Benoit Poirier that he expects analysts to cut their outlook for the company in 2012, though "the longer term outlook remains bullish."

In particular, he noted that Caterpillar Inc. has forecast revenue growth of 10 per cent to 20 per cent next year, so Finning's guidance for 2012 appears "soft."

Business ticker

In Economy Lab Consumers in Quebec are less likely to shop online that those in any other province, Frances Woolley writes.

In International Business The last into the slump, the world's shipping industry could be the last out, The Financial Times reports.

In Globe Careers When Marci O'Connor was laid off from her job in mid-November, the first place she turned was Facebook. Within two days of telling her friends, she found a job, Dan Shawbel writes.

In today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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