A run down of what's going on in the market and the company.

Monday, March 26, 2012

Ontario's Budget Pain Will Affect Entire Country

Rest of Canada will feel pinch if biggest province can't get its house in order

It's hard to believe that a single provincial budget could be more important to the Canadian economy than Thursday's long-awaited federal budget.

But Ontario is in a bind. Growth is stuck in low gear as the province struggles with high unemployment, and challenges in its key manufacturing sector. Meanwhile, just when the province's economy could use a helping hand from government, business-friendly moves are set to be scaled back as part of an austerity drive aimed at protecting its credit rating from a possible downgrade.

With the resources boom driving the economy in the West, Ontario isn't the economic engine it used to be. But at around 40 per cent of Canada's economy, Ontario still matters, and if the province can't figure a way out of its current bind the rest of the country will feel the pinch.

"[This] Ontario budget will be more closely watched than the federal one, largely because there are so many questions about how Ontario returns to fiscal balance," says former federal finance minister John Manley, who now heads the Canadian Council of Chief Executives.

Like other provinces, Ontario cranked up the deficits starting in the 2008-09 fiscal year amid the onset of global economic turmoil. What has put the Dalton McGuinty government in the crosshairs of fiscal critics, however, is the extent of its indebtedness - an estimated $238-billion, up from $157-billion four years ago. Ontario's deficit, at 2.3 per cent of GDP last year, was the highest among the provinces, and debt service costs of $10-billion this year will represent its third-largest expenditure after health and education.

Further, Ontario plans to take three to four years more than any other province to balance its books. Its most recent target for balance is 2017-18, and some are skeptical even that is achievable.

Economists are concerned about the province's output heading into a period of rising global economic uncertainty, fearing Ontario may not hit already anemic targets of growth in the 2-per-cent range for this year and next. "The amount of budgetary space they have to [boost] economic growth is quite limited," said Colin Busby, senior policy
analyst with the C.D. Howe Institute.

For Ontario Finance Minister Dwight Duncan, delivering a budget Tuesday that fosters economic growth while putting the province on a track to balance its books is a huge challenge.

Corporate Canada is eager for Ontario to get serious about putting its fiscal house in order while remaining competitive for business. One fear is that if deficits aren't reined in investors may push interest rates higher, adding debt-service costs that could eventually be funded through higher taxes. But for business there's a cost to balancing the books.

Ontario is backing away from plans to cut its corporate tax rate to 10 per cent from 11.5 per cent until the deficit is erased. At the same time, the government has promised to cancel or delay major capital spending projects and hem in business support programs. This depressed spending will reduce economic output, but is part of what is needed to keep Ontario an attractive place to invest in the longer term.

And Ontario may have much more work ahead to fix its fiscal mess. Federal Finance Minister Jim Flaherty - a former Ontario cabinet minister who is often at odds with Mr. McGuinty - is already predicting excuses from the province. "I'm concerned about Ontario," he said last week. "What we've basically seen in Ontario is eight, almost nine, years of spending mismanagement. They need to focus ... for the good of the country."
The federal government, which tables its budget on Thursday, is facing pressure in the opposite direction.

Some economists say Ottawa can afford to ease up on cuts and still balance the books around 2015.

While Ottawa says its budget cuts will be "modest," Prime Minister Stephen Harper's first budget written with a majority is expected to stir controversy with major changes to research and innovation programs, immigration policy and environmental regulation. But the most explosive debate will likely focus on Ottawa's plans to raise the eligibility age
for Old Age Security.

Mr. Duncan, meanwhile, must balance carefully, placating rating agencies with deep cuts while containing the political damage to his minority government - all without further damaging the economy. Mr. Duncan can't promise gushier royalties as resource-rich provinces have done; his prospects for increasing revenues are scattershot, ranging from
drivers' licence fee increases to approving construction of a casino in Toronto. Tax hikes and privatizing Ontario's booze distribution business are non-starters.

The government already has a blueprint for fiscal shock therapy, courtesy of economist Don Drummond, who has warned deficits could balloon if the government strays from his list of 362 recommendations. Mr. Drummond is a hero to fiscal hawks but his prescription for cutbacks is stirring some resistance: last Wednesday, he was temporarily chased from a lecture at Carleton University in Ottawa after some students began shouting at him.
But while Mr. Duncan has said his budget "will lay out the path to balance with some difficult choices in it," he and Mr. McGuinty have indicated they won't heed several of Mr. Drummond's big cost-saving ideas, such as cutting full-day daycare and electricity bill rebates.

Mr. McGuinty is, however, expected to take on teachers, demanding wage freezes and a rollback of sick-day benefits - which has faced a hostile response from unions.

Overall, Mr. Duncan must limit spending growth in health, education and debt service - which account for a combined 71 per cent of the his estimated $124-billion budget - while cutting 2.4 per cent per year in other areas.

If not, a credit downgrade could boost Ontario's borrowing costs and make matters worse.

"No finance minister wants to be downgraded," Mr. Manley said. "When the federal government was downgraded by Moody's in 1994 ... that was a pretty critical factor in forcing some fairly drastic action in the next budget."

March 25, 2012
Ontario's budget pain will affect entire country
From Monday's Globe and Mail
Article link: http://www.theglobeandmail.com/report-on-business/economy/ontarios-budget-pain-will-affect-entire-country/article2380816/

Wednesday, March 7, 2012

Home Ownership Becoming More Affordable

Prices soften in fourth quarter of 2011, while low interest rates through this year should continue to keep costs at bay: report Housing affordability is improving in Canada as home prices soften, while low interest rates through this year should continue to keep costs at bay.

A national measure shows housing became more affordable in the fourth quarter of last year, the second improvement in a row, Royal Bank of Canada's quarterly release showed Wednesday. It found all housing categories became more affordable, led by the two-storey home category.

The measure comes amid a debate over whether some Canadians are overextending themselves by taking out mortgages they can't afford - particularly in hot markets like Toronto and Vancouver. Canadian household debt burdens, meantime, remain a key concern to economists.

The quarterly improvement in affordability was modest, but still enough to "dial back the deterioration that impacted the market in spring last year," said Craig Wright, RBC's chief economist, in the report.
"Continued low interest rates in 2012 will help keep housing costs at bay in the near term."

The erosion of affordability levels in the first half of last year stemmed mostly from dramatic increases in a single market - Vancouver. In the second half of the year, though, this market became more aligned with the rest of Canada.

Vancouver remains - by far - the least affordable large city in Canada to own a detached bungalow. Toronto is next, followed by Montreal.

At this point, housing in Canada is as affordable as it was a year ago,
and "only slightly" less affordable on average than it has been over the long term, Mr. Wright noted.

The bank's affordability measure tracks the proportion of pre-tax household income that would be needed to service the costs of owning a home at current market values.

It comes on the same week the Canadian Real Estate Association predicted average home prices will fall 1.1 per cent this year, to an average of $359,100, before rebounding 0.9 per cent in 2013.

Article Link: http://www.theglobeandmail.com/report-on-business/economy/housing/home-ownership-becoming-more-affordable/article2361147/

Tavia Grant
Globe and Mail Update
Published Wednesday, Mar. 07, 2012 5:08AM EST
Last updated Wednesday, Mar. 07, 2012 12:58PM EST