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Ontario budget comes amid limping economy, ‘ugly external backdrop’

These are stories Report on Business is following Monday, July 14, 2014.

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Down and out in Ontario
Some food for thought as we await the first budget since Ontario Premier Kathleen Wynne and her Liberals were re-elected with a majority government:

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What to expect
We know generally what the document will contain given that the government of Canada's most populous province said it plans to re-introduce the proposed budget that sparked the election: As The Globe and Mail's Adrian Morrow reports today, Ontario Finance Minister Charles Sousa will table a $130.4-billion spending budget that includes new transit lines, a provincial pension plan and a $2.5-billion "jobs and prosperity fund."

Ontario's labour market has stalled, with employment barely above the level of a year ago and a jobless rate that tops the national average at 7.5 per cent. The median wage has increased by just 1.1 per cent over the past year, and the employment-to-population rate, or the number of people working as a percentage of the adult population, is a shade below 61 per cent.

Those numbers aren't something you want on your record as you unveil a fresh budget.

"After three months of solid job growth, Ontario gave most of it back in June," said senior economist Robert Kavcic of BMO Nesbitt Burns.

"Employment growth is now running at 0.1 per cent year-over-year, the slowest clip since the recession."

Mr. Kavcic was referring to Friday's report from Statistics Canada, which, among other things, contained this stunning fact: Factory jobs in the province now stand at the lowest on records dating to 1976, with manufacturing now accounting for about 10 per cent of jobs in Ontario, compared to 17 per cent 10 years ago.

Ontario lost almost 34,000 jobs in June, some 13,600 of them from the province's factories. That, said Mr. Kavcic's colleague, BMO chief economist Douglas Porter, puts the level of manufacturing employment at below 750,000.

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Economic growth
Ontario's economy expanded by just 1.3 per cent last year, though forecasts are brighter going forward.

Royal Bank of Canada, for example, forecasts economic growth this year at 2.3 per cent, down from its earlier projection of 2.5 per cent, and growth of 2.8 per cent in 2015.

The latest forecast from CIBC World Markets, in turn, sees something less stellar, with economic growth this year of 1.9 per cent and next year of 2.3 per cent. CIBC sees the jobless rate holding at 7 per cent or more for at least the next two years.

"While there is plenty of room for improvement in policy decisions – both at the provincial and federal level – the bulk of Ontario's economic woes can be put down to much more prosaic factors: The 50-per-cent appreciation in the Canadian dollar in little more than a decade; a still-struggling U.S. economy (Ontario's biggest customer); And, relentless manufacturing competition from China and Mexico (yes, the U.S. is enjoying a manufacturing renaissance … mostly in Mexico," Mr. Porter said in a recent report.

"For any manufacturing-dominated province, that's an ugly external backdrop, which even the best economic policies would struggle to deal with."

Ontario faces a projected 2014-15 deficit of $12.5-billion, or 1.7 per cent of gross domestic product, for the worst showing in the country. The ratio of net debt to GDP is at about 40 per cent, and projected to rise to 40.5 per cent before starting to ease in 2017-18.

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Here's what Moody's Investor Service said at the beginning of July: "The expected path to balance and stabilization of the debt burden, in our opinion, faces greater challenges than before."

Citigroup settles, profit sinks
Shares of Citigroup Inc. are rising this morning as the giant U.S. bank puts a major probe behind it while unveiling a plunge in profit that still beat estimates.

Citigroup announced today it would settle a Department of Justice investigation into mortgage-backed securities with a $7-billion (U.S.) payment that includes $4-billion to the government, $500-million to the Federal Deposit Insurance Corp. and various states, and $2.5-billion to "consumer relief" programs.

That hit the bank's second-quarter results, also released today, driving down profit to $181-million, or 3 cents a share, from $4.2-billion or $1.34 a year earlier.

The charge from the settlement amounted to $3.8-billion, Citigroup said.

"Our businesses showed resilience in the face of an uneven economic environment," said chief executive officer Michael Corbat.

Fitch warns on housing
Along with a new report today showing Canadian home prices still rising comes a warning from a credit rating agency that the government may have to intervene in the housing market yet again.

Fitch Ratings, which has believed for some time now that the residential real estate market is overvalued to the tune of about 20 per cent, warned that heavy consumer debt levels have "made the market more susceptible to market stresses like unemployment or interest rate increases."

The credit rating agency doesn't believe the jobless level is going to spike, but it doesn't see interest rates easing further, either.

"Both property sales and building permits for residential construction have picked up in recent months," Fitch said in today's report.

"Home prices also continue to be supported by historically low interest rates and a lack of supply in the major metropolitan areas; these factors have propped up affordability and drive demand."

Fitch noted the many steps Canadian policy makers have taken over the past few years to "mitigate some of the risks," including those from the government, the banking regulator and Canada Mortgage and Housing Corp.

"However, the long-term impacts remain unclear, and policy makers may be required to take additional steps over the short term to engineer a soft landing."

The Fitch report came just a new reading of Canada's housing market showed prices continued to rise in June, though lagged for what's generally expected in that month.

Prices rose 0.9 per cent from May, according to the Teranet-National Bank house price index released today, and climbed 4.4 per cent from a year earlier.

Last month's increase was "substantial," according to the statement, though was the second slowest for the month of June over the last decade.

Compared to last June, the rise of 4.4 per cent was the slowest in six months.

Calgary again led the country, with a jump of 8.1 per cent from a year earlier, while Toronto and Vancouver each recorded gains of 6.1 per cent.

National Bank economist Marc Pinsonneault expects prices to continue rising, though with "weakness east of Toronto being dwarfed by generally healthy market conditions elsewhere."

Over the course of the year, prices indeed fell in Halifax, Quebec City and the Ottawa area.

Canadian economists generally believe the market is heading toward the hoped-for soft landing.

"With the housing market having now shaken off the winter blues, prices are continuing to rise at a solid pace," said senior economist Randall Bartlett of Toronto-Dominion Bank.

"That said, the continued deceleration in price growth on a year-over-year basis may be an indication that the Canadian housing market is becoming more balanced," he said in a research note today.

"We expect to see the cooling trend continue through the end of 2015. This view is premised on rising prices encouraging strong growth in new listings while the number of newly-competed housing units remain elevated, both of which will boost supply and weigh on prices. At the same time, interest rates are likely to grind higher in Canada, resulting in reduced affordability."

Bombardier gets orders
Bombardier Inc. is kicking off the Farnborough International Airshow with a number of sales agreements for its new C Series aircraft, including letters of intent for up to 24 units from two airlines.

The Montreal-based plane and train maker said on today it has a letter of intent from Zhejiang Loong Airlines Co. , Ltd. for 20 CS100 airliners valued at about $1.28-billion (U.S.)., The Globe and Mail's Bertrand Marotte reports.

Meanwhile, Jordan-based Petra Airlines Ltd. has inked a letter of intent to buy up to two CS100 and two CS300 planes. If all four aircraft are bought, list prices put the deal at about $298.4-million.

The orders follow Saturday's announcement that Britain-based lessor Falko Regional Aircraft Ltd. has signed two letters of intent to buy up to 24 CS100 aircraft. Bombardier did not state the estimated value of that deal.

In a separate announcement today, Export Development Canada said it is teaming up with its British counterpart and Quebec's economic development agency to create a financing partnership for the C Series.

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