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We're living on borrowed money and borrowed time

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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Something borrowed, something blue Canadians are living on borrowed money and borrowed time.

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While it has warned repeatedly that consumer debts are out of hand, the Bank of Canada said this week it expects the burden on households to continue rising in this era of ultra-low interest rates.

"Very favourable financing conditions are expected to buttress consumer spending and housing activity," the central bank said Tuesday, at the same time holding its key rate steady at 1 per cent.

"Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further."

Already, debt burdens in Canada are tremendously high, leaving families vulnerable to economic shocks.

The ratio of debt to personal disposable income, a key measure of where a consumer stands, climbed in the third quarter of last year to a record 152.98 per cent from 150.57 in the second quarter, according to Statistics Canada. That measure includes not just debt but also outstanding liabilities like phone bills and taxes. A different measure of credit market debt alone also rose in the quarter, to 150.8 per cent.

That has some observers worried because that second number is so close to a comparable measure in the United States, which hit 160 per cent just before America's housing meltdown.

It also plays into speculation of rate changes, as it could stay Bank of Canada Governor Mark Carney's hand and give households more time. Consumers should use that borrowed time wisely.

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"This tells us that the BoC is willing to let imbalances increase to cushion growth," said Charles St-Arnaud of Nomura in New York. "It also indicates that if the uncertainty were to disappear, the BoC could revert quickly to a tightening bias."

Senior economist Michael Gregory of BMO Nesbitt Burns put it another way, saying that "given escalating domestic debt concerns, external headwinds are going to have to blow much harder to elicit local rate cuts."

Toronto-Dominion Bank's chief economist, Craig Alexander, said the widely watched debt-to-income ratio is an imperfect measure of stressed finances, though he does expect it could rise and he still sees problems when interest rates inevitably climb from their crisis-era lows.

Stewart Hall and David Watt of RBC Dominion Securities agree we're not there yet.

"When walking an elevated plank, the critical piece of information is the length of that board," they said. "In terms of Canadian household leverage, we have a pretty good idea of the length of that plank, given the historical experiences of the U.S. and U.K. Canada has a vulnerability here in terms of consumer leverage, but it is not yet imminently upon us."

China heads for soft landing Signals from China continue to send jitters through financial markets off and on, though the signs point to a soft landing rather than a crash.

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As Peter Buchanan of CIBC World Markets put it this week, "although we expect growth to downshift further in coming months as slower growth in Europe and other areas hits exports, other indicators are consistent with the view that the economy has cooled from early 2011's exceptionally hot pace but is at little danger of falling off a cliff,"

Numbers from Beijing this week show China's economy expanded in the fourth quarter by 8.9 per cent, year over year, a slower pace that the 9.1 per cent registered in the third quarter but still better than expected. Over the course of 2011 as a whole, the economy grew by 9.2 per cent.

Monthly numbers also suggest some strength. Industrial production, for example, increased at a year-over-year pace of 12.8 per cent in December, and retail sales, which climbed 18.1 per cent.

Beijing has already turned its attention to growth, having made huge inroads in its fight against inflation, and observers believe the People's Bank of China will ease policy further by again cutting the reserve requirements for the country's banks.

There are also warning signs, however, in the real estate sector, as holdings of unsold properties increased.

"Last year, investment in real estate accounted for 25 per cent of total investment," said Mark Williams and Qinwei Wang of Capital Economics in London.

"The sector's overall importance to the economy is much greater if we consider how much other industries such as steel and cement rely on real estate demand," they said in a research report today.

"But sales have stalled. Today's figures show that residential sales increased only 3.9 per cent in 2011. Property sales in the east of the country were flat. In the meantime, developers have continued to build. The result is that developers' inventories of unsold property at the end of 2011 were 26 per cent larger than a year before and equivalent to 30 per cent of total property completions in 2011 ... Much weaker construction activity is likely in 2012."

Setback for Keystone TransCanada Corp. suffered a setback this week in its plans for the controversial Keystone XL pipeline, but vows to stay the course, though it's tinkering with its plans.

As The Globe and Mail's Shawn McCarthy, Nathan VanderKlippe and Carrie Tait reported this week, the Obama administration won't allow the project to go ahead in its current form, but that TransCanada can reapply.

It said it will, and is working on plans to reroute the project around an environmentally sensitive area in Nebraska. It could also build the pipeline in stages.

"Plans are already under way on a number of fronts to largely maintain the construction schedule of the project," said chief executive officer Russ Girling. "We will reapply for a presidential permit and expect a new application would be processed in an expedited manner to allow for an in-service date of late 2014."

Producers have stuck by TransCanada. While the project is still seen as going ahead, the question now is "when and how many contracts flee," said analyst Chad Friess of UBS Securities Canada.

Mr. Friess does not expect a mass exodus, but he does see some erosion before a completion date in the second half of 2014.

"The 830,000 barrel-a-day XL project carries significant contractual commitments ... critical to the economic viability of the pipeline," Mr. Friess said.

"The majority of these shippers were content with the revised approval timing of Q1 '13 but we do expect some migration of commitments towards Enbridge's Gulf Coast alternative, though not enough to condemn the project," he said in a research report.

"The key question will be whether a refile will add further delays to the [Department of State's]original guidance. Ultimately, the results of this fall's presidential election may now play a significant role in the approval timing."

Mr. Girling said shippers remained committed to the project.

Ten things 1. Class distinction: Almost 60 per cent of American millionaires feel obliged to give something back to society, but 49 per cent don't think they're "in the same league" as Warren Buffett when he says the rich should pay more taxes, according to a survey by PNC Wealth Management.

2. "Although sexual activity is associated with an increased risk of cardiovascular events, the absolute rate of events is miniscule because exposure to sexual activity is of short duration and constitutes a very small percentage of the total time at risk for myocardial ischemia or [myocardial infarction]" says a study published in Circulation, the journal of the American Heart Association. "Sexual activity is the cause of <1 per cent of all acute MIs ... Individuals with higher habitual sexual activity levels experience smaller increases in risk than individuals with low activity levels." Sounds like a plan.

3. A former French minister wants France to build Napoleonland, which he believes could rival Disneyland, Henry Samuel of The Telegraph reports. What would your kids like better, Space Mountain or a recreation of the 1815 Battle of Waterloo?

4. Cartier says consumers are leaning toward "discreet" watches like its Ballon Bleu collection, opting not to flaunt their wealth. "When you are in crisis periods you show off less and you have shapes that are more discreet and more ergonomic," chief executive officer Bernard Fornas told Bloomberg News. "The feel-guilty factor is very important."

5. Tweet of the week, from @TradeDesk_Steve (the global chief of dealing at London & Capital Asset Management): "Sweden's been downgraded from AAA to ABBA." Runner-up tweet of the week, from @laurnorman (of Dow Jones): "perry drops out. says 3 reasons. can't remember third!"

6. Acropolis Now: The Economist magazine this week takes a wonderful look back at its euro crisis covers since it first put the story on its front in May of 2010. Take a peek.

7. The Associated Press reports that L.A. city council signed off this week on a new regulation that would force actors in the porn industry to use condoms. But first ... police have to decide how to enforce it.

8. A Jan. 17 memo from NYSE Euronext: "The following serves a reminder to New York Stock Exchange LLC ("NYSE") and NYSE Amex Equities LLC ("NYSE Amex") (collectively, the "Exchange") members, member organizations and employees subject to their supervision that promoting or participating in certain gambling activities on NYSE premises, including the NYSE and NYSE Amex trading Floor, is strictly prohibited by the Floor Conduct and Safety Guidelines and Exchange Rules ... Any remuneration or payment, including tips or gratuities to the individual advancing or promoting the gambling activity made pursuant to any custom or practice, can constitute an agreement or understanding to participate in the proceeds of gambling activity. For example, a sporting event pool where the participants purchase participation in the pool and each of the persons who win pay the person who organizes and promotes the pool an amount of money equal to a percentage of their winnings would be criminal and violate Exchange Rules and Policies. Other examples of prohibited gambling activity include schemes such as bookmaking, numbers games, or other organized for-profit betting activity relating to sporting activities, other outside events or games of chance."

9. French President Nicolas Sarkozy reacted to last week's S&P downgrade on Monday by suggesting that "we have to react to this with calm, by taking a step back." Seems to me Europe's leaders have been taking a step back for two years now, which is at least partly to blame for two years of crisis.

10. Interesting findings in a Journal of Consumer Psychology article by Michael Norton of Harvard Business School, Daniel Mochon of A.B. Freeman School of Business and Dan Ariely of Duke University. From the abstract: "In four studies in which consumers assembled IKEA boxes, folded origami, and built sets of Legos, we demonstrate and investigate boundary conditions for the IKEA effect - the increase in valuation of self-made products. Participants saw their amateurish creations as similar in value to experts' creations, and expected others to share their opinions. We show that labour leads to love only when labour results in successful completion of tasks; when participants built and then destroyed their creations, or failed to complete them, the IKEA effect dissipated. Finally, we show that labour increases valuation for both 'do-it-yourselfers' and novices."

Required reading this week Income disparity shouldn't be confused with equality of opportunity, Barrie McKenna writes. And guess what? Canada is a world leader in economic mobility, right up there with Denmark, Norway and other Scandinavian countries.

The Canadian government appears to have dropped plans to clarify the rules for foreign takeovers, leaving investors in the dark as to how it would react if an acquirer were to bid for a major company, Tara Perkins reports.

Apple Inc. is leveraging its massive success in the mobile device market to disrupt the slow-moving but hugely lucrative textbook industry, Omar El Akkad and Tamara Baluja write.

Bank of Nova Scotia is looking into selling its landmark

red headquarters in downtown Toronto, the 68-storey Scotia Plaza, Boyd Erman, Steve Ladurantaye and Grant Robertson report, and could fetch $1-billion.

Kinross Gold Corp.'s drubbing by investors over delays at its trophy gold mine in West Africa was a fresh reminder this week of the gulf between the fortunes of those who dig for gold, and the metal itself, Sean Silcoff writes.

What to watch for next week The Federal Open Market Committee, the Federal Reserve's policy-setting panel, announces it decision Wednesday, to be followed by a press briefing. But something different will be in store this time out.

"Chairman Bernanke will boldly go where no Fed chief has gone before with the publication of interest rate forecasts from all 17 policy makers," said senior economist Sal Guatieri of BMO Nesbitt Burns.

"The forecasts, to be unveiled at the end of the meeting, will cover the final quarter of 2012 and the end of subsequent years. Each policy maker will also state the period in which he/she expects rates to increase, as well as his/her outlook for the Fed's balance sheet. If the modal forecast and starting date of rate hikes suggest that rates will rise much later than the market anticipates (late 2013 or early 2014) or much later than mid-2013 (recall, the conditional pledge of no change 'at least through mid-2013'), then longer-term interest rates should decline, an effective easing in policy. A somewhat more dovish slate of incoming policy makers could lean in that direction, though recent better economic data suggest otherwise. "

On the earnings front, Canadian National Railway Co. reports quarterly results Tuesday, followed by Canadian Pacific Railway Ltd. on Thursday. CP will be certainly be worth watching given its battle with activist shareholder Bill Ackman of Pershing Square Capital Management LP.

Also, watch for fourth-quarter results Thursday from Potash Corp. of Saskatchewan , whose stock is well down over the course of a year.

"We expect Q4 results to benefit from strong potash pricing, partially offset by lower sales," said analyst Brian MacArthur of UBS Securities Canada. "... We note that the main focus will be on 2012 guidance."

Other heavyweights are also due to report, including Apple Inc. and McDonalds Corp., on Tuesday, Boeing Co. on Wednesday, AT&T Inc., Caterpillar Inc., Colgate-Palolive Co. and Starbucks on Thursday, and Chevron Corp. and Procter & Gamble Co. on Friday.

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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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