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Ontario: From 'whipping boy' to impressive rebound

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Ontario sees 'impressive' recovery Ontario is in the midst of an "impressive" economic recovery driven by government stimulus, a pickup in auto manufacturing and a hot real estate market, BMO Nesbitt Burns says. "In fact, the recovery has been so potent that the province, which had been Canada's economic whipping boy throughout the recession, has now moved to the top of the pack on a number of indicators," economist Robert Kavcic said in a research note today. "While this renewed momentum should allow for some positive near-term fiscal revisions, the pace of the recovery will slow later in 2010, and the difficult long-term budget-balancing task will continue to weigh on growth in the years ahead."

Ontario's annualized growth in real GDP was 6.8 per cent in the last quarter of 2009 and 6.2 per cent in the first quarter of this year, marking the strongest pace since 1999. BMO's provincial economic momentum index, which is made up of 36 indicators, also suggests further growth ahead, he said. Employment has increased 3.1 per cent in the past year, the best showing in Canada, as the province regained almost all the job losses from the recession, Mr. Kavcic said.

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Most European banks pass stress tests All but a handful of Europe's banks have passed the widely-watched stress tests conducted by regulators amid mounting fears over the continent's debt crisis and health of the financial sector. According to the tests of 91 banks released after European markets closed, five of Spain's banks, one German bank and one Greek institution failed, meaning they would need to boost their capital strength. The banks that failed need to raise just €3.5-billion, according to the Committee of European Banking Supervisors. Among them is Hypo Real Estate Holding AG, which was taken over by the government. That had been largely expected.

European authorities hailed the results as proof of a strong financial sector. Many observers, though not all, were skeptical. Some comments:

  • "Arguably the failure here is not the banks concerned but the test itself. There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making this a wasted opportunity." Richard Cranfield, chairman of the global corporate group at Allen & Overy, to The FInancial Times
  • "The stress tests do not seem that stressful and it is looking more like a political whitewash rather than a genuine attempt to reassure financial markets that euro zone banks have balance sheets that could really withstand sovereign risk shocks. They are delaying the day of reckoning." Neil MacKinnon, global macro strategist at VTB Capital, to The Associated Press
  • "It's a huge non-event, it's like the Y2K of banking. The broad expectation was it wouldn't be transparent and it wouldn't be stringent and that's exactly what we had delivered." Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Conn., to Bloomberg News
  • "This outcome was pretty much in line with expectations and the Committee of European Banking Supervisors appears to have delivered reasonably rigorous methodology in an attempt to instill confidence. What can be said is that today's stress test release does not appear to have uncovered any skeletons in the closet'. Whether it goes far enough remains to be seen." Chris Turner, ING, to Agence France Presse
  • "Overall, the results were largely as expected, perhaps a couple of more banks were expected to fail the tests. "On the surface, only seven failing banks needing a mere €3.5-billion in capital is definitely good news. With such a small amount of capital necessary, according to these scenarios, worries were overblown. Europe's banking system is healthy barring an extreme negative shock. However, many market participants won't be satisfied with the difficulty of the stress scenarios. The lack of sovereign default and keeping bank books from sovereign losses are decisions which will be scrutinized (and rightly so), as they no doubt limit potential losses. The results bring some relief but won't be enough to eliminate worries about Europe's banking system." BMO Nesbitt Burns economist Benjamin Reitzes

Federal deficit down in first two months It's only two months into its fiscal year, but the federal government is on track, at this point, to beat its projected budget deficit of $49.2-billion. It's longer term where the pressure lies, analysts say. Revenues in April and May rose on a higher tax take while spending fell, largely on lower transfer payments, the Finance Department said today. Debt charges also declined. All in all, the deficit in the first two months came in at $4.4-billion, compared to $7.5-billion in the same period of last year.

"While early in fiscal 2010-11, the government appears on track to beat its budget projection for a deficit of $49.2-billion," said Toronto-Dominion Bank senior economist Pascal Gauthier. "If the last fiscal year and our own economic forecasts are any guide, the deficit should lie somewhere in the $42-45 billion range. "

Ottawa's medium-term targets seem well within reach, particularly given the economy's pickup and job growth, Mr. Gauthier said. It's the longer-term goal to move to no deficit that's likely to be more of a challenge.

"Over this longer-term time frame, a number of headwinds are expected to intensify," Mr. Gauthier said in a research note. "On balance, government budget plans - which are based on private-sector forecasts - have generally assumed lacklustre long-term economic and baseline revenue growth. Debt-service costs are projected to rise steadily - more than doubling over the next five years. These forces put the onus on longer-term budget plans to hold program spending growth at or below 2 per cent on average post-2011."

Still, international investors should continue to laud Canada's comparatively strong fiscal position, as they have been doing, he added.

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Can you handle the truth? The bear has a question for the bulls: Can you handle the truth? Chief economist David Rosenberg of Gluskin Sheff + Associates today runs through a long list of items that are making the bulls bulls, everything from a soft landing for China's property market to renewed stability in Europe's debt market to mortgage delinquencies falling in California to a three-year low.

"From our lens, this is still a meat-grinder of a market," Mr. Rosenberg said in a research note. "The bulls have the upper hand, but only until the next shoe drops in this modern-day depression and post-bubble credit collapse. The S&P 500 is still down 2 per cent for the year, the Dow by 1 per cent, the FTSE and Nikkei by 11 per cent, the Hang Seng by 5 per cent and China by over 20 per cent."

Mr. Rosenberg then asks whether the bulls can "handle the truth." On the U.S. economy, here's his view:

  • "The suggestion that somehow generating 3-per-cent real GDP growth a year after a bottom is bullish ignores the deep the hole we are still trying to climb out of. Normally, two years after a recession starts, nominal GDP is up 16 per cent and real GDP is up 7.5 per cent. Currently, nominal GDP is up 1.1 per cent while real GDP is down 1.5 per cent from pre-recession peaks."
  • "According to earlier White House projections, that $800-billion fiscal gorilla unveiled last year was supposed to pull down the unemployment rate to 7 per cent by now. Instead, we are at 9.5 per cent."
  • "What about jobless claims? They lead employment. Below 400,000 you can have a bullish stance. Above 500,000 - the opposite, and recession risks rise materially. Well, that rise in the past week to 464,000 from 427,000 was even worse than it appears because the non-idling of auto plants this summer has given a temporary downward skew to the claims data - the underlying number is now closer to 475,000."

There's more: Corporate earnings have been net positive, but "not a slam dunk," the U.S. housing market is still a mess, and the stock market still appears driven largely by technicals and momentum trading.

Germany in 'party mood' Business confidence in Germany has registered its biggest gain since reunification in 1990. The closely-watched Ifo index released today jumped to 106.2 from 101.8 in June in Europe's biggest economy.

"The German economy is in a party mood," the Ifo statement said. "In manufacturing the business climate has brightened strongly. The business situation of the manufacturing firms has clearly improved. Moreover, the survey participants are now more optimistic with regard to the six-month business outlook ... Also in wholesaling, retailing and construction the business climate has brightened. An increasing number of wholesalers and retailers have assessed the current business situation as good. The business expectations of the survey participants for the coming six months are now more positive in both distribution sectors. The survey participants in construction have appraised the business situation considerably more favourably than in the previous month."

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Germany has been rebounding from the global recession and its unemployment rate is falling. Chancellor Angela Merkel has heralded the recovery as "really robust."

Britain looks brighter Britain's economy is picking up steam, expanding in the second quarter at a pace of 1.1 per cent, almost double what economists had been expecting. Britain is the first in the G7 to unveil gross domestic product for the quarter. "The U.K. economy grew by almost twice as much as the consensus was forecasting for the second quarter, and it was the country's third straight quarter of recovery," said Carl Weinberg, chief economist at High Frequency Economics. "... Despite the growth spurt, the economy is still 4.6 per cent below its pre-downturn peak. We will continue to call that level activity 'depressed.' It will take a full year of growth at this rate to regain the level of activity before the economic crisis, and have no reason to think that will happen."

Inflation remains tame As BMO Nesbitt Burns senior economist Sal Guatieri put it today, inflation in Canada is "really going nowhere fast." Consumer prices slipped 0.1 per cent in June, bringing the overall annual inflation rate down to 1 per cent from 1.4 per cent, Statistics Canada reported, while the core rate, which strips out volatile items and guides the Bank of Canada, dipped to 1.7 per cent. This all means that Bank of Canada Governor Mark Carney, who raised lending rates Tuesday by one-quarter of a percentage point for the second month in a row, has his hands free to do as he wishes. Some economists expect another rate hike in September.

"Well anchored expectations and rising demand have countered the downward pull from economic slack and the high dollar to keep the core rate range-bound and close to the 2 per cent target," Mr. Guatieri said. "Deflation is much less a risk in Canada than in the U.S. because of the explicit target and lesser slack. The risks to the economic growth outlook will guide monetary policy going forward."


Magna shareholders approve deal Shareholders of Magna International Inc. today approved a controversial deal to buy out founder Frank Stronach. Shareholders who cast ballots at a special meeting in Toronto voted to go ahead with the arrangement. Under the deal, Magna will pay Mr. Stronach $300-million in cash and $563-million worth of class A shares to purchase his class B multiple-voting shares of the company. The buyout has been criticized by several large institutional shareholders as too generous. Former Ontario premier Mike Harris, a Magna board member who chaired the shareholder meeting, said the vote showed shareholders "think this is a good deal long term for this company."

Ford turns in strong quarter Ford Motor Co. , the only Detroit auto maker to come through the crisis without resorting to bankruptcy protection or government aid, today posted its fifth quarterly profit in a row and its best showing in six years. Beating analysts' estimates, Ford earned $2.6-billion (U.S.) or 61 cents a share, compared to $2.3-billion or 69 cents a year earlier. Ford said it expects even higher earnings next year. "We delivered a very strong second quarter and first half of 2010 and are ahead of where we thought we would be despite the still-challenging business conditions," said chief executive officer Alan Mulally.

Harry Winston buys Kinross Diavik stake Harry Winston Diamond Corp. is buying a 9-per-cent stake in the Diavik mining project northeast of Yellowknife held indirectly by Kinross Gold Corp. . The companies announced today that Kinross will sell its piece of the partnership that holds Harry Winston's 40-per-cent stake in the Diavik joint venture. Harry Winston will pay about $220-million (U.S.) for the stake, including $50-million in cash, some 7.1 million shares and a note. "The transaction represents an opportunity for Harry Winston to consolidate its interest in the Diavik mine, Canada's largest diamond producer and one of the most profitable diamond mines in the world," said Harry Winston chief executive officer Robert Gannicott.

Kinross is also selling an existing stake of about 15 million Harry Winston shares to a group of financial institutions. When all is said and done, Kinross will own 8.5 per cent, Harry Winston said.

Celestica swings to loss Celestica Inc. today posted a second-quarter loss of $6.1-million (U.S.) or 3 cents a share, compared to a profit a year earlier of $5.3-million or 2 cents. Revenue rose to $1.59-billion from $1.4-billion. Adjusted earnings came in at $48.3-million or 21 cents a share, compared to $31.1-million or 14 cents a year earlier.

"Celestica's year-over-year increase in revenue reflects the progress the company is making toward achieving its revenue growth objectives in its targeted end markets," chief executive officer Craig Muhlhauser said in a statement. "Recent wins in our consumer, computing, industrial segments, and the after-market services business, are expected to further contribute to our revenue growth in the fourth quarter."

India eyes cheap tablet India's government wants to build a $35 (U.S.) tablet computer for students and, once it finds a company that can build it, hopes to begin producing the device next year. Similar in look to an iPad, it uses the Linux operating system and would have several functions, including word processing and Web surfing. "This is our answer to MIT's $100 computer," Human Resource Development Minister Kapil Sibal told the Economic Times. The Associated Press, which reported the development today, noted that India already boasts the $2,100 Nano car, a $16 water purifier and open heart surgery for $2,000.

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