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House prices, credit revisit recessionary trends: CIBC

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Revisiting trends of the slump Canadian house prices and consumer credit are "revisiting recessionary trends," which will dampen consumer spending that is so key to the economic recovery, CIBC World Markets warns in a new report. "It's no secret that house prices have been falling recently, but less noted is that the performance of the housing market is already approaching levels seen during the recession," economists Benjamin Tal and Krishen Rangasamy said. "... Even a modest 5-per-cent additional drop in average price in 2011, on top of the 6 per cent it already shed from its peak, will lead to a negative wealth effect of $10-billion, stripping growth in consumer spending by more than a full percentage point."

Their outlook is equally bleak for consumer credit, which has driven spending and is also "mimicking recessionary trends" on a month-to-month basis. Growth in consumer credit will dip to 3.5 per in the next 12 months, on an annualized basis, compared to 6 per cent, also annualized, in the first half of the year.

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"Not surprisingly, the Canadian recovery didn't play out as advertised," they wrote. "While we did see a spike late last year and early 2010, the momentum has faded lately, largely as a result of a strong [Canadian dollar]and a softening U.S. economy."

CIBC World Markets economists believe that fears of a double-dip recession "look overdone." But in an overall global forecast, Avery Shenfeld noted that "the Great Recession that shattered global growth in 2008-09 is now water under the bridge, but the Great Disappointment of a subpar global recovery will be with us for a good while longer." Among other highlights of the report:

  • Global GDP growth will run "well below" the 5-per-cent pace of the prior expansion.
  • Emerging Asian economies still have room to grow but will feel some of the chill.
  • Canada's trade sector will underperform the domestic economy this year and next.
  • The recent improvement in business investment in Canada won't last.


Potash fight heats up The takeover battle for Potash Corp. of Saskatchewan is escalating, moving into the courts as the company tries to fend off BHP Billiton Ltd.'s $38.6-billion (U.S.) hostile bid. Potash has now launched a lawsuit against BHP, alleging it made "false and misleading statements and omissions" in its offer and regarding its plans to acquire the business. The lawsuit, filed in a U.S. District Court in Illinois, doesn't seek monetary damages, but asks for complete and accurate disclosure.

None of the allegations have been proven in court. BHP responded in a statement that it believes the lawsuit has no merit and it will fight it "vigorously."

The skinny on RIM's tablet The tech world is abuzz today on reports that Research In Motion Ltd. could take the wraps off a new tablet computer as early as next week, The Wall Street Journal reports. The tablet, which would rival the popular iPad from Apple Inc. and has been a subject of much speculation recently, could be introduced at a developers' conference in San Francisco, the news organization said. Some at RIM have dubbed the device the BlackPad, and, the Journal reports, it is scheduled to be released in the fourth quarter. With a seven-inch touch screen, it will have one or two built-in cameras, Bluetooth and broadband connections.

But, the report said, it will only be able to connect to wireless networks through a BlackBerry. And, in what the Journal called a significant development, the BlackPad would have a new operating system built by QNX Software Systems, which was acquired by RIM this year.

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Streetwise columnist Boyd Erman adds that RIM could introduce two sizes of the new tablet.

BlackPad tweets

This is a key time for RIM as it battles Apple's iPhone and the Android operating system from Google Inc. Analysts had been down on the company's stock, though its earnings last week buoyed investors. The Journal noted that a new RIM tablet will face what's shaping up to be a crowded field. Samsung Electronics Co., Acer Inc. and others are also rushing for a tablet.

U.S. dollar takes it on chin The outlook for the U.S. dollar appears grim today in the wake of yesterday's policy decision by the Federal Reserve. The Federal Open Market Committee painted a grim picture of the U.S. recovery as it held rates steady yesterday, and signalled it is troubled by low inflation readings. It also said it stood ready to take new measures, should developments warrant that. Markets had speculated over whether the U.S. central bank could unveil some new measures - dubbed QE II by economists, meaning another round of quantitative easing - but it came up short.

"The Fed did push the door further ajar to the prospect of further stimulus for the economy by drawing attention to concerns about the benign level of inflation, and indicated that they stood ready to act as necessary, in the event that inflation continued to remain benign and economic conditions failed to improve," said CMC Markets analyst Michael Hewson. "It would appear that it is now the dollar's turn to become the whipping boy of the currency markets again."

Here's what Scotia Capital currency strategist Sacha Tihanyi had to say today:

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"The FOMC decision to bring inflation into the discussion as justifying the potential for further policy action weighs heavily in the [foreign exchange]market today. Now that policymakers consider underlying inflation (core trends) to be currently at levels 'somewhat below' those judged most consistent with their dual mandate of price stability and maximum employment, a new dynamic for the [U.S. dollar]has entered the picture. This reflects the general concern that disinflationary pressures may gain traction, risking the chance that a very undesirable deflation dynamic takes hold. Indeed, the statement emphasized that the Fed is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation to levels consistent with its mandate.

"This certainly provides justification for [U.S. dollar]weakness as a further dovish tilt in rhetoric has absolutely crushed the 2-year U.S. government bond yield, sending it to a new record low near 0.4075 per cent in trading today ... Where recently it was a loss in growth momentum, it now becomes the fear that policy will ease further and not be normalized for some time, along with the recognition that the FOMC is certainly worried about the prospects for deflation."

Deflation risks? How big a threat is deflation? The Fed is on guard and some economists are sounding warning bells. As the chart from BMO Nesbitt Burns shows, it's a risk not only in the United States. "The conventional wisdom is that the U.S. faces a much more serious risk of deflation than Canada, since the domestic economy is so much firmer here, there's less slack, and the credit channels are open," BMO's deputy chief economist Douglas Porter said in a research note. "And it's low inflation that has the Fed seemingly on the brink of QE II, while the Bank of Canada has been busily boosting rates. But, why then does Canada have lower inflation than the U.S. (after taking the HST into account) on both headline and [readings that exclude food and energy prices]"

On core readings, or those that strip out volatile items and guide central banks, Mr. Porter noted that the Bank of Canada's favoured core measure has inched up just 0.3 per cent, at an annual rate, compared to 1.1 per cent in the U.S. core index.

Mr. Porter added in an interview that deflation is a risk, though the threat is low in both Canada and the U.S. "I think if the U.S. would slip into outright deflation it would be difficult for Canada to avoid that," he said.

Obama has chance to overhaul team The resignation of Lawrence Summers from the Obama team gives the U.S. president an opportunity to overhaul his economic policy group. And, given what the electorate thinks, it's a good time to do it. The Obama administration took over at a time of extreme turmoil and, arguably, kept the United States from what could have been something far worse. But unemployment shows no signs of easing, poverty levels are up and Americans are still losing their homes to foreclosure in record numbers. Dismay is running high heading into the U.S. midterm elections.

Mr. Summers, the president's key economics man, announced yesterday he plans to leave after the midterms, and that he'd been planning such a move for some time. He'll be the third person on the economics team to leave and, according to reports today, could be replaced by a senior executive from the corporate world. The Wall Street Journal suggests Anne Mulcahy, the former CEO of Xerox Corp., as a leading candidate. Other possibles include Diana Farrell, now the Deputy National Economic Council Director, and economist Laura Tyson of the University of California.

Cotton prices up, Gildan raises prices Analysts believe Gildan Activewear Inc. , the T-shirt king, will weather surging cotton prices, partly through price increases. Cotton prices have jumped 25 per cent in the past seven week, topping $1 (U.S.) a pound, and sit at 15-year highs, National Bank Financial analyst Hugues Bourgeois said in a research note today. "Decreasing global inventories, damaged crops in Pakistan, and constant increase in demand seem to contribute to this issue," he said, noting that cotton accounts for 30 per cent of Gildan's costs.

"In response to higher cotton price levels, Gildan has announced a 3.5-per-cent price increase effective at the beginning of October ... Gildan had already increased prices 3 per cent in early July. These recent price increases are expected to more than offset higher cotton prices during the next two quarters ... Basic cotton T's are selling for less than they were a decade ago and we understand that the industry also anticipates further selling price increases if cotton prices remain high."

His price target on Gildan stock is $34 (U.S.).

What will third-quarter earnings look like? With second-quarter earnings now largely out of the way, analysts are looking ahead to the next round. Here's a look today from BMO Nesbitt Burns economist Robert Kavcic: "The Q3 earnings season is a few weeks away, and expectations are for 24.4-per-cent year-over-year growth in S&P 500 profits, down from 38.6-per-cent year-over-year growth in Q2. Financials are expected to lead the pack with 74-per-cent growth, but strong 20-per-cent-plus gains are also expected in consumer discretionary, energy, industrials, materials and technology. If the consensus is right, Q3 profits will still be about 15 per cent below the peak level seen in [the second quarter of 2007] For comparison sake, the S&P 500 is 24 per cent below the closing level seen that quarter. In other words, the decline in stock prices since late-2007 has been driven by both a decline in profits and a substantial contraction in valuations."

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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