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The sad state of the Canadian family budget

These are stories Report on Business followed this week.

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The sad state of the family budget
Be thankful for small mercies: Home sales are sinking and we're deeper in debt than we thought, but we're also a bit richer.

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Fresh readings and calculations from Statistics Canada, however, paint a troubling picture of the family budget, one that leaves households even more vulnerable than believed.

The federal agency this week updated the debt burden of Canadian consumers in the second quarter, and at the same time revised last year's measures.

Given repeated warnings from Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty, it's no surprise that the needle is in the red.

First, the key measure of household credit market debt to disposable income now stands at 163.4 per cent, compared to 2011's 161.7 per cent. But that latter number is a revision, up from 150.6.

This puts Canadians in the same area – about 160 per cent – that got the Americans and British into trouble.

"Revised data released today show that Canada's household debt problem is even worse than previously thought," said David Madani of Capital Economics in Toronto.

"Debt growth dynamics over the last decade look eerily similar to the U.S. experience, just before their dramatic housing bust."

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Household net worth did rise in the second quarter, by 0.9 per cent, largely on rising house prices. But, at 1.8 per cent, debt outpaced that growth.

It's important to note that debt growth is slowing, but it's still growth. And the softening housing market should go some way to cooling it even more, while economists still expect a soft landing, not a crash.

But the report from Statistics Canada, coupled with a real estate industry report the same day showing home sales in Canada slumping more than 15 per cent in September, means consumers need to exercise extreme caution.

The revisions from Statistics Canada also show the net worth of Canadian households higher than thought last year, at $6.6-trillion compared to the original $6.3-trillion. Of course, the people who had that wealth knew they had it, and the change doesn't really affect the average consumer.

"Today's report indicates that Canadian households are more financially vulnerable than had previously been thought," said economist Diana Petramala of Toronto-Dominion Bank.

"However, the vulnerability associated with a higher debt burden is partially mitigated by an improved asset base," she said in a research note.

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"The upward trek in the household debt-to-income ratio has slowed since 2010, as borrowing has moderated to almost half the pace experienced over the 2004-2009 period. We still believe that the household debt ratio is likely to stabilize in the coming quarters, as housing activity comes off the boil, consumer spending slows and renovation activity cools."

What's also worrisome is what this all means to consumers helping to pump up the economy at a crucial stage in the recovery.

"While Canada's consumer debt burdens are still not as high as some countries, the new estimates are, likely, if anything to add to the already intense focus on consumer debt levels and the potential limitations this places on the consumers' ability to support growth going forward," said Peter Buchanan of CIBC World Markets.

CRTC kills deal
Canada's broadcast and telecom regulator turned the industry on its head with a decision to kill a $3.4-billion merger.

Thursday's ruling left giant BCE Inc. and its target, Astral Media Inc. both scrambling to determine their next steps, though BCE appealed to the federal government to intervene and overturn the decision by the newly activist Canadian Radio-television and Telecommunications Commission.

The regulator thought the deal would put too much power in the hands of one company, though BCE, the one company in question, said the ruling would hurt consumers.

"BCE failed to persuade us that the deal would benefit Canadians," said CRTC chairman Jean-Pierre Blais.

"It would have placed significant market power in the hands of one of the country's largest media companies. We could not have ensured a robust Canadian broadcasting system without imposing extensive and intrusive safeguards, which would have been to the detriment of the entire industry."

BCE responded harshly, its chief executive George Cope saying that "Canadian consumers were told today by the CRTC that they don't deserve more - more choice, more competition, more Canadian content funding - all of which Bell and Astral committed to with this transaction."

BCE asked the federal cabinet to overturn the decision, but the government said it can't do that legally.

Analysts said the ruling should also serve as a warning to the major phone companies, not just BCE's Bell Canada.

"We commend carriers like Telus for eliminating hidden wireless fees and activation charges and Shaw and Telus for offering generous bandwidth caps," said Dvai Ghose of CanaccordGenuity.

"Our concern for BCE has been Bell Canada's relatively aggressive stance on hot issues such as bandwidth caps and hidden wireless fees. This should be a wakeup call to all carriers. In our view, the regulatory environment has changed under the current Conservative government and consumer sentiment has become far more significant than in the past."

China shows signs of stability
While analysts may question the credibility of the latest economic readings from Beijing, they do believe that China's economy is stabilizing.

That's a good sign for other economies counting on China to help the global recovery.

Economic growth in China slowed in the third quarter to 7.4 per cent, according to official numbers and reported by Carolynne Wheeler in Beijing, marking the slowest pace since early 2009.

"Thursday's release of GDP data for Q3, together with spending and activity figures for September, gave a strong sign that China's economy stabilized in Q3," said Mark Williams and Qinwei Wang of Capital Economics in London.

"We are skeptical that the economy has rebounded quite so strongly in quarter-over-quarter terms over the last six months," they added.

"Nonetheless, our estimates derived from our China Activity Proxy, also suggest that the rate of growth has bottomed out."

Nine things
1. Just sayin': Bloomberg News noted this week that a push by Montreal's Gildan Activewear Inc. to grab business from Fruit of the Loom and Hanesbrands Inc. "has made it the best performing North American underwear stock this year." No. 2 is Under Armour Inc. Gildan has surged since last December, with a 52-week low of $16.32 (U.S.) and a high of almost $35, while Under Armour has climbed of late, with a low of $34.62 and a high of $60.96. I want to know why women's underwear doesn't count. Limited Brands, home to Victoria's Secret and La Senza, has rebounded from a mid-summer slump, with a low of $37.57 and a high of $52.20. Okay, I realize that Limited isn't a pure underwear play.

2. Picking up where M left off when she called 007 a blunt instrument, OECD head Angel Gurria warned a conference in India this week of the combined mix of high unemployment and slow economic growth, according to Agence France-Presse: "Like the James Bond cocktail – when you shake together and do not stir – you have a very, very dangerous combination."

3. Marie Antoinette's slippers were to be auctioned this week by Paris Druout, among items to mark the anniversary of her date with the guillotine. Really, it's the white hat that you want, right?

4. "Despite a trickle of scandals involving talkative ex-butlers, demand is soaring," The Economist notes, citing a rising need among "plutocrats" in China, Russia and the Middle East.

5. Chief economist David Rosenberg of Gluskin, Sheff + Associates on pizza, potato chips and pretzels being hurt by the NHL lockout and what that means for other goods: "That in turn means more pocket change to spend on other things. And we do have the other two prolonged lockouts - 1994-95 and 2004-05 - to draw inferences from. Retail sales actually fared quite well ... guys seemed to have dealt with their depression by going to the auto dealerships (13 per cent average growth in vehicle sales) and spending their new spare time by fixing up the house because home improvement and related purchases jumped at over a 17-per-cent average annual rate. Instead of watching hockey, it looks as though video games became the new fix on Saturday nights because electronics sales rose at a decent annualized pace of 7.5 per cent on average."

6. Is it possible this could be the answer to Canada's lagging productivity? A Japanese study suggests that looking at photos of things like cute kittens and puppies can make folks more productive, Weird Asia News reports.

7. Tweet of the week, from @amaeryllis: "Used to hate those people furiously typing with their heads down as they walk but now I'm so one of them."

8. Runner-up tweet of the week, from @justinwolfers the morning after the presidential debate: "Thinking of picking my daughter up from school and cooking my family dinner, despite being a man"

9. From Harvard Business Review's Daily Stat: "When people feel psychologically close to someone who behaves selfishly, they're more likely to consider the behaviour to be less shame-worthy and less unethical," Francesca Gino of Harvard Business School and Adam Galinsky of the Kellogg School at Northwestern University found.

Required reading this week
Leaders of some of America's biggest companies are mobilizing behind an effort to reach a compromise on the U.S. deficit predicament, Joanna Slater reports from New York. Some are even saying they would pay higher personal income taxes as part of the bargain.

Cineplex Inc. is rolling out more theatres aimed at adults-only audiences, as it seeks to draw free-spending grown-ups with a movie-going experience that is heavy on the amenities, Simon Houpt and Steve Ladurantaye report.

Vikram Pandit's rise to the top job at Citigroup Inc. was dizzyingly quick, Joanna Slater writes. His fall was even faster.

It wasn't scared off by sexual assault charges, a dog-fighting scandal, or a formerly squeaky-clean celebrity cheating on his wife, but Nike Inc. is drawing the line at cheating in sport, Susan Krashinsky reports.

Newsweek will no longer exist as a paper magazine, John Barber and Omar El Akkad report. The final print edition will be dated Dec. 31. The new, digital-only version, called Newsweek Global, will run on a paid-subscription model.

What to watch for next week
The Bank of Canada and its U.S. counterpart take centre stage next week, with questions surrounding the message the Canadian central bank wants to send.

Governor Mark Carney and his colleagues announce their policy decision Tuesday. And while they won't change their benchmark overnight rate from its current 1 per cent, analysts wonder whether they will change a key line in their statement. That key line has, for now, been a signal that the next move in rates will be up. But given that Mr. Carney omitted that statement in a speech earlier this week, economists expect he could change it on Tuesday.

"There remains some chance the bias is left intact, though this says more about its conditional nature rather than confidence in the medium-term outlook," said Mark Chandler and Ian Pollick of RBC Dominion Securities.

"Instead, the BoC may choose a 'third way,' outlining various economic scenarios in an uncertain forecasting environment and the associated policy responses that might be expected."

For those reasons, there's heightened speculation surrounding Tuesday's decision.

"Many took the Governor's remarks this past week as a sign that the bank was about to drop its very soft-pedaled warning of rate hikes to come," said chief economist Avery Shenfeld of CIBC World Markets, though he believes Mr. Carney won't change his message.

"In its most recent incarnation, there has been no sense of urgency in terms of the timing of when those hikes would take place, and very specific conditions under which they would happen at all. If the bank dropped that message in its entirety, it would leave investors guessing whether the next move was even a hike, would rally the short end a bit, and take some of the wind of the Canadian dollar's sails. So in this case, words do count."

A day after the rate decision, the Bank of Canada will release its widely watched Monetary Policy Report, and could well trim its outlook for economic growth.

"In the July edition of the MPR, the BoC expected growth to be 2.1 per cent in 2012 and 2.3 per cent in 2013," said Charles St-Arnaud of Nomura Securities in New York.

"Based on the level of uncertainty and the recent data, we believe that growth in 2012 could be revised to 2 per cent and for 2013 to 2.2 per cent for 2013. This should still see the output gap closing in the second half of 2013."

While Canada's central bank is unveiling that report, the U.S. Federal Reserve will be preparing to release its policy announcement that afternoon.

"After pressing harder on the monetary gas pedal in September, the Fed will likely stay in cruise control for a few months to monitor the effectiveness of recent policies," said Sal Guatieri of BMO Nesbitt Burns.

"With the unemployment rate trending lower and the expansion picking up some, there is little urgency for additional monetary fuel. ... The statement should also repeat that policy makers will take additional action 'if the outlook for the labour market does not improve substantially and retain a super-easy stance 'for a considerable time after the economic recovery strengthens.'"

For shareholders, several major companies are scheduled to report quarterly results, including Canada's two major railways, Apple Inc., Yahoo Inc., Potash Corp. of Saskatchewan, Cenovus Energy Inc., Nexen Inc., Precision Drilling Corp., Caterpillar Inc., Facebook Inc., Xerox Corp., AT&T Inc., Encana Corp., Rogers Communications Inc. and Teck Resources Ltd.

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