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The Week

TD: Is another economic storm brewing in Canada? Add to ...

These are some of the major stories Report on Business followed this week. Get the top business stories on weekdays on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Whither Canada's economy Francis Fong poses a troubling question: Is another economic storm brewing in Canada?

"Unfortunately, the economic momentum in Canada appears unlikely to last as some cracks have begun to form under the surface," the Toronto-Dominion Bank economist said in a report Friday.

"First, the headwinds being faced by households are clearly growing. The pace of consumer spending remains decisively moderate, growing by just 1.2 per cent in the third quarter. This is down from 2.1 per cent the previous quarter and a far cry from the 3.5 per cent average pace recorded in the latter half of 2009 and throughout 2010. High levels of household debt, falling real wages, and the first decline in disposable income in over a year during the third quarter are all layered on top of this morning’s grim employment news."

Mr. Fong's commentary followed a Statistics Canada report that showed some 19,000 jobs were lost November as the unemployment rate edged up to 7.4 per cent. That followed a loss of 54,000 jobs in October.

"This was the first time the labour market has recorded two consecutive monthly declines since the end of the recession, reflecting the coming slowdown in economic momentum," Mr. Fong noted.

"Of particular note was that the participation rate, the share of the working-age population who are either working or looking for work, fell to a fresh low of 66.6 per cent, the lowest level since April, 2002. This dichotomy between the positive economic growth and poor labour market data points to weakening business and consumer confidence."

Just two days earlier, Statistics Canada's reading of the economy showed gross domestic product expanded by an annualized 3.5 per cent in the third quarter, a rebound from a second-quarter slump and a better showing than expected.

But, as Mr. Fong noted, the report showed consumer spending slowing. And many economists believe the third-quarter number may have been the high point, and that growth will inevitably slow from here, though not back into recession territory.

Mr. Fong believes Europe will ultimately act to tackle its crisis. But it's probably going to get worse first, he said, and "already weakened global demand, depressed financial markets, and building domestic headwinds all point to modest growth for the Canadian economy going forward."

RIM's bad week The week just went from bad to worse for Research In Motion Ltd. and its shareholders. And a couple of employees.

It began Monday when two of its employees, both in their middle years, got into something of an alcohol-induced incident on an Air Canada flight from Toronto to Beijing, forcing the plane to land in Vancouver. They pleaded guilty to mischief a day later and got off the hook with suspended sentences and probations, and orders to pay the airline almost $72,000 for the cost of diverting the flight. (One hopes their money isn't tied up in RIM shares.)

It's of course not RIM's fault that a couple of its employees acted like boors on a plane, but the company did suspend them and was forced to discuss the incident publicly.

Then later in the week, The Globe and Mail's Iain Marlow reports, hackers said they'd done a "jailbreak" on RIM's PlayBook tablet, getting access to operating system files and raising issues about security.

And on Friday, the week became a writeoff. Literally.

RIM announced it would miss its financial projections for the year, and would take a $485-million (U.S.) pre-tax hit on the PlayBook given the "high level" of the tablet's inventory.

“The company now believes that an increase in promotional activity is required to drive sell-through to end customers," RIM said in a statement, adding the news about its financial forecast.

"RIM's soft Q4 outlook sustains concerns re further franchise erosion, and raises the bar for turnaround," said RBC Dominion Securities analyst Mike Abramsky.

RIM said it now expects adjusted earnings per share in the quarter to be “at the low to mid point” of its previous forecast of $1.20 to $1.40. That excludes the hit from the PlayBook and the costs associated with the BlackBerry blackout earlier this year. As well, it said it doesn’t expect to meet its full-year forecast of $5.25 to $6.

"The lower expected shipments in the fourth quarter are due to several factors including lower than expected sell-through in the third quarter and RIM’s current view of fourth quarter demand," RIM said of its BlackBerry outlook.

Co-CEO Mike Lazaridis said in a statement the company remains committed to the PlayBook, describing the tablet market as "still in its infancy."

"Although a number of factors have led to the need for an inventory provision in the third quarter, we believe the PlayBook, which will be further enhanced with the upcoming PlayBook OS 2.0 software, is a compelling tablet for consumers that also offers unique security and manageability features for the enterprise," he said.

Lululemon sinks, bounces back It was an odd week for Lululemon Athletica Inc. .

First, investors decided Thursday that they didn't like the yoga wear retailer's third-quarter results - that was a bummer - but then its stock bounced back the very next day.

Lululemon posted a hefty increase in both profit and revenue, earning $38.7-million (U.S.), or 27 cents a share, in the quarter, up from $25.7-million, or 18 cents, a year earlier, The Globe and Mail's Marina Strauss reports.

Revenue climbed 31 per cent to $230.2-million, and same-store sales, a key measure in retailing, rose 16 per cent, while the company also projected fourth-quarter revenue of $327-million to $332-million, and diluted earnings per share of 40 cents to 42 cents.

But Lululemon also warned of a potential squeeze on margins in the post-holiday season, when it could be forced into clearance sales, something it hasn't done often because it sells out.

The thing about Lululemon, too, is that it usually over-delivers on its results, and investors have become used to that.

Chief executive officer Christine Day declared it "another very healthy quarter of financial results," and said the popular retailer is set to close out the year with "a stronger brand, a stronger organization."

Ms. Day said inventory levels, which have not been able to keep up with high demand in the past, will be at normal levels in the fourth quarter, potentially leading to a higher level of price discounting at the end of the season to clear excess merchandise. Ultimately, more markdowns could pinch profit margins, company executives warned on a conference call.

"The quarter was solid, with upside across the board," said Howard Tubin of RBC Dominion Securities. "This remains one of our favourite stories as Lulu remains in the early stages of its growth story and the company continues to outperform in a difficult consumer environment."

End of the road for Suncor's George One of the kings of the oil patch announced this week he's stepping down from the helm of Suncor Energy Inc. after more than two decades as a CEO who transformed the Canadian energy giant.

As Gordon Pitts reports, Rick George not only rescued Suncor early in the 1990s, he also made a huge bet on the oil sands later that decade, and then, during the recession, engineered the takeover of Petro-Canada.

Regrets? Of course.

“The fact [Suncor]has not got recognition in the stock market is not something I feel great about,” Mr. George, 61, said Thursday as he announced he plans to retire at the company's annual meeting next May.

As Mr. Pitts, Carrie Tait and Dawn Walton report, the new chief, Steve Williams, will face two big challenges when he ascends to the position.

He will have to contain the mounting cost pressures of operating in the the oil sands and increase profit and production. He'll also be in the hot seat of defending the industry from criticism by environmental groups.

“Suncor’s growth opportunities are largely locked in and it is largely a question of execution right now,” said Andrew Leach, a professor of natural resources, energy, and environment at the Alberta School of Business at the University of Alberta. “The key challenge to their value is going to be cost inflation in the oil sands.”

All eyes on Europe, again As is so often the case, hopes for saving the embattled euro zone are tied to the next summit.

There have been several, and next up is a gathering of EU chiefs in Brussels beginning next Friday. Some in the 17-member monetary union - notably Germany's Angela Merkel and France's Nicolas Sarkozy are again heading in with a plan.

Ms. Merkel and Mr. Sarkozy, among others, want the euro zone to work toward greater fiscal bonds, but divisions remain, largely related to the German chancellor's repeated opposition to eurobonds and a much greater role for the European Central Bank.

"Once again markets seem to have positioned themselves for a seminal event," said senior currency strategist Stewart Hall of RBC Dominion Securities.

"There is a substantial precedent for expecting disappointment here given that the very nature of the crisis does not lend itself to a quick fix. The focus for next week will fall on how a 're-founded' Europe will look in terms of deeper integration and the push for fiscal union. The details of which may very well be lost on a market that continues to clamour for a quick fix."

Indeed, the central banks of the United States, Canada and others joined the ECB in buying Europe's leaders some time and easing the pressures on euro banks and the financial system in a co-ordinated move earlier in the week. That sparked a rally in global markets.

Olli Rehn, the economic chief of the EU, warned this week of a critical 10 days leading up to the summit. Yet again, officials have raised the hope of the markets that something concrete will result. But many observers don't see that, and warn of disappointment.

"Expect progress toward announcing measures that strive toward greater fiscal oversight, but as we’ve noted before, we attach low odds to a meaningful framework including penalty structures for deviating from fiscal guidelines as much of Europe will be reticent to take policy direction from the imperfect northern states," said Karen Cordes Woods and Derek Holt of Scotia Capital.

Still, there is badly-needed momentum for measures to deal with the debt crisis that began two years ago.

There's also the possibility that the ECB under its new chief, Mario Draghi, will cut interest rates again next week, having done so once after the blunder that was raising rates twice in the midst of the crisis.

"The ECB meets next week and we anticipate another 25-basis-point rate cut, bringing the refinancing rate back to the Great Recession lows of 1 per cent, though recent polls put the odds at about 60 per cent," said Benjamin Reitzes of BMO Nesbitt Burns.

"European economic data have worsened over the past month and Draghi showed in November that expectations of slowing inflation are sufficient to prompt a rate cut, suggesting another easing in December."

The ECB announces its decision Thursday.

Watchdog raises flag at TMX Having repelled the British, the group that wants to take over Canada's TMX Group Inc. now faces the country's competition watchdog.

Competition Commissioner Melanie Aitken said this week she has serious concerns about the plan by Canadian banks and other financial institutions to acquire TMX, which operates the Toronto Stock Exchange.

Some in the consortium known as Maple Group believe they can still address her concerns, Tim Kiladze, Boyd Erman and Tara Perkins report, but there are also fears that what she wants could scuttle the $3.8-billion deal.

“You knew this was going to be challenging from the get-go – it’s the largest financial institutions trying to buy a key piece of financial infrastructure,” said analyst Jeff Fenwick of Cormark Securities. “It is likely to drag on for several more months.”

Maple Group also still must win approval from provincial regulators.

In the markets The S&P 500 had its best week since March of 2009, climbing almost 7.5 per cent, while Toronto's S&P/TSX composite rose 5.3 per cent, buoyed by the co-ordinated move by the world's central banks.

"The Canadian banks began rolling out their Q4 earnings this week, and results were better than expected across the board at CIBC, TD, Royal and Scotia," said Robert Kavcic of BMO Nesbitt Burns.

"The stock price response, however, was somewhat muted, with investors keying in more on the fact that profit growth is likely slowing (in part due to tighter interest margins) and capital markets results remain volatile. Still, the banks were up a firm 6.7 per cent on the week."

Required reading this week In the decade since the collapse of energy giant Enron Corp. ushered in major reforms in the boardroom, Canada’s corporate boards have undergone a tectonic shift in the way they operate.

Just over a year into his post, the chief of Greece's statistics agency is at the centre of a bizarre series of criminal investigations, Paul Waldie reports.

The mine that helped put Canada on the global diamond map could soon be for sale, put in play by the industry’s shifting economics and an inexorable drop in production, Brenda Bouw writes.

One makes movies. The other’s into oil.Two companies that couldn’t be much further apart in the business world are now finding at least one thing in common: A name. Omar El Akkad reports.

Nissan Motor Co. chief executive officer Carlos Ghosn delivered a sharp criticism of his company’s Canadian unit this week, declaring that the auto maker’s 5 per cent market share is “absolutely unacceptable” and needs to be doubled. Greg Keenan reports from Yokohama, Japan.

What to watch for next week Bank of Canada Governor Mark Carney returns to the stage next week, where he's certain to again stand pat on interest rates. The central bank's announcement is Tuesday.

"The U.S. data has looked a touch better of late but Canada’s job recovery and inflation have cooled and Europe’s problems if anything have worsened since the last time out," said Peter Buchanan of CIBC World Markets.

"The message, echoing recent statements from Carney, should once again be that Canadian rates remain on hold for the foreseeable future."

In the markets, Bank of Montreal and National Bank of Canada will close out the fourth-quarter earnings season for the country's major banks. Toronto-Dominion Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia all reported this week.

Five things 1. Tweet of the week, from @mollymcnearney: "To the guy who stole my credit card number to play World of Warcraft online, I hope you enjoy eternal virginity."

2. Subway commuters in Minsk have been hoarding tokens as fares increase, Bloomberg News reports. So much so that they've stashed more than half of the amount in circulation, holding on to some 700,000.

3. Britain's government intelligence service is looking for a higher-tech James Bond. The GCHQ is running ads asking hackers to try to crack a code in order to be interviewed, according to The Guardian. To see the site, click here.

4. Leaders of the so-called old media told a Reuters Global Media Summit that they're uncomfortable with sharing personal info, particularly on Twitter. (See number 1.)

5. Jeremy Clarkson, the star of Britain's Top Gear auto show, found himself in the centre of some controversy this week when he took on striking public sector workers. His suggestion? "I would take them outside and execute them in front of their families." Complaints to the BBC are running at more than 20,000.

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