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Industry News
 
Spectrum Brands Holdings to Acquire Stanley Black & Decker’s Hardware & Home Improvement Group 
 
Spectrum Brands Holdings, Inc. announced on Tuesday that it has signed a definitive agreement to acquire the Hardware & Home Improvement Group (“HHI”) of Stanley Black & Decker, Inc. for $1.4 billion in cash.

Spectrum Brands Holdings, Inc., based in Madison, Wis., and majority owned by Harbinger Group Inc., is a global consumer products company and a leading supplier of batteries, shaving and grooming products, personal care products, small household appliances, specialty pet supplies, lawn & garden and home pest control products, personal insect repellents and portable lighting with market-leading brands such as Rayovac, Remington, Toastmaster, George Foreman, Nature’s Miracle, Black Flag amongst others. The company’s products are available in more than one million stores in more than 120 countries and generated net sales of approx. $3.2 billion in fiscal 2011.

HHI is a manufacturer of residential locksets, residential builders’ hardware and faucets for residential applications with such renowned brands as Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL, Pfister and EZSET. HHI is a leader in its key markets with #1 positions in U.S. residential locksets (Kwikset), Canada residential locksets (Weiser), U.S. luxury locksets (Baldwin), and U.S. builders’ hardware (Stanley/National Hardware), and a top 5 position in U.S. faucets (Pfister).

HHI generated net sales of approximately $985 million and adjusted EBITDA of $188 million for the 12 months ended June 30, 2012. Approximately 85% of HHI’s annual revenues are generated in North America, with more than 40% coming through U.S. home improvement centers.

Spectrum Brands said the acquisition will broaden its product offerings and should add 75 cents to 80 cents a share in fiscal 2013 and add more than $1 per share in fiscal 2014, excluding one-time transaction and integration costs.

Stanley Black & Decker said the sale is part of its continuing strategy to diversify its revenue and geographic reach. The company anticipates the transaction will result in $1.3 billion in proceeds after taxes. It plans to use a majority of the proceeds to buy back shares and a smaller portion to reduce debt. The remaining proceeds, along with offshore capital, will be used to pay for its previously announced acquisition of Infastech, a Hong Kong company that makes fasteners.

Both companies’ boards have approved the transaction.

“This is a good acquisition for Spectrum Brands that will increase total revenues to over $4 billion and add renowned brands with top market share positions in the growing and profitable hardware and home products business,” said Dave Lumley, Chief Executive Officer of Spectrum Brands. “The scale and expanded product offering we gain will further balance our sales profile and provide exciting cross-selling opportunities from expanding sales of Spectrum Brands’ products to major U.S. home improvement centers and increasing HHI sales to leading global mass merchants and other Spectrum Brands’ retailers. Spectrum’s and HHI’s product lines are completely complementary, significantly expanding our portfolio of products. HHI will also give us an additional platform for global growth using our existing international infrastructure, as well as entry into the growing market of integrated residential security, fire and lighting solutions.”

Mr. Lumley continued, “We remain committed to a strong balance sheet, including our long-term objective of achieving a total leverage ratio between 2.5 and 3.5 times. HHI’s strong operating margins and relatively low capital intensity are expected to generate significant free cash flow, helping us to repay debt and return to our current leverage ratio in approximately two years. We are also reaffirming plans to initiate a regular quarterly dividend of $0.25 per share in fiscal 2013, and will evaluate increasing the dividend in future years based on free cash flow growth.”

Following the closing of the transaction, HHI will operate as a separate unit within Spectrum Brands and be managed by Greg Gluchowski, current President of the HHI Group at Stanley Black & Decker. He will report to Spectrum Brands CEO David Lumley and will continue to oversee a highly experienced HHI management team with a proven track record of innovation, operational excellence and profitable growth.

Mr. Lumley said, “We welcome Greg and his outstanding team from HHI. He is a proven leader, with a strong record of driving profitable growth and product innovation and development. We look forward to Greg and his team playing strong roles in the continued growth and success of Spectrum Brands.”

“Spectrum Brands and HHI share the common goals of building and growing strong consumer brands with a dedication to innovative product design and technology,” said Mr. Gluchowski. “We are excited to join the Spectrum Brands team, and look forward to being a strong and significant contributor to the overall business as we continue to grow HHI globally.”

David Maura, Chairman of Spectrum Brands and Managing Director and Executive Vice President of Harbinger Group, Inc. said, “We continue to be strong supporters of Spectrum Brands and believe there is significantly more value to be realized in the years ahead. Through both organic growth and acquisitions, Spectrum Brands has built a profitable $3 billion global consumer products company with a diverse stable of well-known and largely non-discretionary replacement brands. The addition of HHI is consistent with our strategy and we are confident that we are acquiring the business at an attractive entry point and that the benefits of our increased scale, diversity, margins and free cash flow generation will accrue to our shareholders over time.”

The acquisition of HHI also includes certain assets of Tong Lung Metal Industry Co. Ltd. (“Tong Lung”), a Taiwanese manufacturer of residential and commercial locksets with facilities in Taiwan and the Philippines. Spectrum Brands will pay $1.4 billion in cash at closing for HHI and the Tong Lung assets, adjusted for net debt and working capital. The purchase price and associated transaction fees and expenses are expected to be funded through a new term loan, which will replace the Company’s existing term loan credit facility, and new senior unsecured notes through the Company’s wholly owned subsidiary Spectrum Brands, Inc. As part of this transaction, Spectrum Brands has received financing commitments from Deutsche Bank and Barclays.

The transaction is expected to close in two stages. The financing and the acquisition of HHI are expected to close during the Company’s first quarter of fiscal 2013 ending December 31, 2012. The acquisition of the Tong Lung assets is expected to occur during the Company’s second quarter of fiscal 2013. $100 million of the purchase price will be held in escrow from the financing until the subsequent closing of the Tong Lung portion of the acquisition. The closing of the transaction is subject to customary closing conditions, including receipt of applicable regulatory approvals.

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Walmart Canada Embarks on Biggest Month of Grand Openings 
 
Walmart Canada announced on Wednesday that it will embark on its biggest month of grand openings in its history. By the end of October, the company will complete 30 real estate projects. They include two supercentre conversions and 28 new stores, which were formerly Zellers stores. Of the 28 Zellers locations, 10 will be supercentres and 18 will be discount stores. The 30 stores employ more than 3,000 associates and represent an addition of nearly 2.4 million square feet of retail space.

“This is an exciting month for Walmart Canada,” said Jim Thompson, chief operations officer at Walmart Canada. “We are Canada’s fastest growing retailer and our 30 openings in October demonstrate our commitment to bringing everyday low prices to Canadians from coast-to-coast.”

The 30 projects are part of 73 real estate projects planned for the company's current fiscal year, which will add 4.6 million square feet of retail space to its operations by January 31, 2013. These projects represent an investment of more than $750 million in Canadian communities and will generate more than 14,000 store, trade and construction jobs.

As of October 31, the company will have completed 50 of the 73 real estate projects planned for the year bringing the company’s store count to 367 stores: 193 supercentres and 174 discount stores.

The 30 projects listed by province are:

Alberta
Calgary, Deer Valley Shopping Centre, 1221 Canyon Meadows Drive SE
Edmonton, Meadowlark Shopping Centre, 100 Meadowlark Shopping Centre NW
Edmonton, Northgate Centre, 9402-135th Ave. NW
Edmonton, South Park Centre, 3931 Calgary Trail NW

British Columbia
Prince Rupert, Rupert Square Shopping Centre, 500-2nd Ave. W.

Ontario
Collingwood, ON, 10 Cambridge St.
Hamilton, County Fair Plaza, 499 Mohawk Rd. E.
Hawkesbury, Hawkesbury Gateway Shopping Centre, 1550 Cameron St.
Kitchener, Stanley Park Mall, 1005 Ottawa St. N.
Listowel, Carriage Shopping Centre, 600 Mitchell Ave. S.
Oshawa, Kingsway Village, 1300 King St. E.
Peterborough, Parkway Centre,950 Lansdowne St. W.
Sault-Ste-Marie, Station Mall, 293 Bay St.
Scarborough, Cedarbrae Mall, 3487 Lawrence Ave. E.
St. Catharines (Centre), Fairview Mall, 285 Geneva St.
Toronto , Sheridan Mall, 2202 Jane St.
Thunder Bay, ON, County Fair Mall, 1020 Dawson Rd.
Waterloo, Bridgeport Plaza, 70 Bridgeport Rd. E.

New Brunswick
Saint John, Lancaster Mall, 621 Fairville Blvd.

Nova Scotia
Dartmouth, Colby Village Plaza, 900 Cole Harbour Rd.
Greenwood, 1065 Central Ave.
North Sydney, North Sydney Mall, 116 King St.

Quebec
Longueuil, Place Desormeaux, 2877, chemin de Chambly
Montréal (Hochelaga), Centre Commercial Domaine, 3121, avenue de Granby
Montréal, Plaza Côte-des-Neiges, 6700, chemin de la Côte-des-Neiges
Pincourt, Le Faubourg de I’Île, 101, boulevard Cardinal-Léger
Pointe-aux-Trembles, Carrefour de la Pointe, 12675, rue Sherbrooke Est
Sherbrooke (Fleurimont), Les Galeries Quatre Saisons, 940, 13e avenue Nord
Sorel-Tracy, Les Promenades de Sorel, 450, boulevard Poliquin
Saint-Léonard, Carrefour Langelier, 7445, boulevard Langelier

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With a Healthy Dose of Humour, Zellers Says Goodbye
 
As the end of Zellers Inc. approaches, its recent going out of business social media campaign has proven to be highly successful and should be viewed as more than just a case study on how to bow out but a model for other retailers to consider in regards to their advertising approach.

Read more on the article by the Globe & Mail’s Marketing Reporter, Susan Krashinsky, from last Thursday.
 

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Stewardship News
 
ÉEQ: Company Reports for 2012 Schedule of Contributions Should Have Been Submitted    
 
Éco Entreprises Quebec (ÉEQ) would like to remind stewards that the deadline for submitting their 2012 Company Reports was October 9, 2012, so if impacted companies have not done so yet, they should do so immediately.

Also, the 2012 contribution first instalment (80%) is due by January 26, 2013, the same day as the second instalment (30%) on 2010 and 2011 contributions. The 2012 second instalment (20%) is due by September 26, 2013. Please note that filing late and missing payment dates will subject your company to administrative and interest penalties.

If you require further information or assistance, please contact Member Services at 514-987-1700,
1-877-9871491, service@ecoentreprises.qc.ca or you can contact our CHHMA Stewardship Consultants: Al Marks 416-282-0022 ext.24, steward@chhma.ca, or Duncan Deans 416-282-0022 ext.22, ddeans@chhma.ca.

Meanwhile, ÉEQ is conducting consultation meetings (you can participate online or in person) on the 2013 Schedule of Contributions on October 22nd in Montreal (Hotel OMNI Mont-Royal; 1:30 p.m. – 4:00 p.m.) and October 26th in Toronto (Westin Harbour Castle hotel; 9:00 a.m. – 11:30 a.m.). Click here for further information and to register.          
 

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Economic News
 
Canadian Housing Starts Slow as Condo Market Cools     

The Canada Mortgage and Housing Corporation (CMHC) said on Tuesday that the pace of housing starts slowed in September, due mainly to a decrease in condo development.
 
CMHC reported there were 19,750 starts across the country last month. Extrapolating that over 12 months and adjusting for seasonal variations, the September number translates to an annual rate of 220,215 starts, down 2.3% from the 225,328 pace in August.

“Housing starts in September were largely in line with the latest trend figure. The monthly decrease posted in September was mostly due to a decrease in urban multiple starts. As expected, the number of multiple starts in Ontario, particularly Toronto, reverted back to a level more in line with the average pace of activity over the last six months,” said Mathieu Laberge, deputy chief economist at CMHC. “Following a period of elevated housing starts activity due to strong volumes of multi-family unit pre-sales in 2010 and 2011, the pace of housing starts is expected to moderate.”

The seasonally adjusted annual rate of urban starts decreased 3% to 203,731 units in September. Urban single starts decreased by 1.4% to 67,643 units, while multiple urban starts decreased by 3.9% to 136,088 units. Multi-family starts remain 12% above year-ago levels, with singles tracking roughly flat.

Regionally, September’s seasonally adjusted annual rate of urban starts increased by 17.6% in the Prairies and by 20.3% in Atlantic Canada. Urban starts remained relatively unchanged in Quebec (+1.3%). Urban starts decreased by 3.7% in B.C. and by 18.2% in Ontario.

Rural starts were estimated at a seasonally adjusted annual rate of 16,484 units in September, up from a pace of 15,210 units in August.

Overall, this reports shows that homebuilding in Canada is still strong at this point, aside from the noted slowdown in Toronto’s condo market.

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Building Permits Across Canada Rise 7.9% in August    
 
Statistics Canada reported last Friday that contractors took out building permits worth $7.3 billion in August, a 7.9% increase, following a 2.8% decline in July. The increase in August was led by higher construction intentions in the non-residential sector, which more than offset a decrease in the residential sector. 

The value of permits in the non-residential sector increased 25.2% from July to $3.2 billion, the highest level in almost four years. The increase followed two consecutive monthly declines and was the result of higher construction intentions in seven provinces, led by Ontario.

The value of permits in the institutional component more than doubled in August to $1.1 billion, the highest level since March 2011. This increase followed two consecutive monthly declines. Construction intentions for institutional buildings rose in eight provinces. Ontario, which posted the largest gain, reported higher construction intentions for medical facilities, educational institutions and nursing homes.

In the industrial component, the value of permits increased for the third consecutive month, rising 26.2% to $638 million. The advance was primarily the result of higher construction intentions for utilities buildings and manufacturing plants in Ontario. Construction intentions also rose in five other provinces, including Newfoundland and Labrador and Saskatchewan.

Municipalities issued $1.5 billion worth of permits for commercial buildings, down 8.5% following two months of growth. The drop was attributable to lower construction intentions for a variety of commercial buildings in seven provinces, including retail outlets, office buildings, recreational facilities and university residences.

In the residential sector, the value of permits fell 2.3% from July to $4.2 billion. This was the second consecutive monthly decline. The decrease was mainly attributable to lower construction intentions in British Columbia and Ontario. Declines were also posted in P.E.I., Nova Scotia and Manitoba. The largest gains were in Alberta and Saskatchewan.

The value of permits for single-family dwellings declined 2.3% to $2.4 billion, the second straight monthly decrease. The decline was the result of lower construction intentions in six provinces, with Ontario posting the largest decline followed by British Columbia.

Construction intentions for multi-family dwellings fell for a second consecutive month, declining 2.3% to $1.8 billion. Of the five provinces that registered decreases, the largest occurred in British Columbia and Ontario. Strong gains in Alberta and Saskatchewan failed to offset these decreases.

Municipalities across Canada issued permits for the construction of 18,655 new dwellings, down 1.8% from July. The decline was attributable to both single-family dwellings, which declined 2.0% to 7,111 units and multi-family dwellings, which fell 1.8% to 11,544 units.

The value of building permits increased in six provinces in August, with Ontario and Alberta posting the largest gains.

Ontario registered the largest advance as a result of higher construction intentions for institutional and industrial buildings. In Alberta, the gain came from multi-family dwellings, institutional and commercial buildings.

In Saskatchewan, the increase was attributable to both residential and non-residential buildings, while in Quebec, institutional buildings explained most of the growth.

British Columbia posted the largest decline, a result of lower construction intentions for residential and commercial buildings. Nova Scotia's drop came mostly from commercial and multi-family dwellings. Manitoba and Prince Edward Island also recorded decreases.  

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Canada’s Latest Job Gains Exceed Expectations      
 
Statistics Canada reported last Friday that Canadian employers added 52,100 jobs (mostly full-time) in September, the second consecutive monthly gain and the largest increase in five months.

The unemployment rate edged up 0.1 percentage points to 7.4% however, as more people started looking for work.

September’s jobs gain was much higher than the 10,000 consensus expected by analysts.

Employment levels have now risen 1.0% or by 175,000 in the past year, driven by growth in full-time positions in the private sector. The Bank of Canada has said that employment in Canada has recovered more quickly than in previous recessions, as well as compared to other G7 countries. However, given the still elevated jobless rate, some slack in the labour market remains.

Overall, full-time employment rose by 44,100 (+0.3%) during the month, while part-time positions grew by 8,000 (+0.2%). The private sector accounted for most of the new jobs in September (+29,100), while employment fell 10,800 in the public sector. The number of self-employed people rose by 33,800 last month.

Employment rose among core-aged people (+36,000) mainly men in September. Employment for men aged 25 to 54 rose by 21,000, the first notable increase since March 2011. With this increase, the employment level for core-aged men is essentially back to its pre-recession peak of October 2008.

Employment among youths aged 15 to 24 was little changed in September, while their jobless rate climbed up to 15.0% from 14.8% in August. Compared with 12 months earlier, youth employment is down 70,000 jobs (-2.8%), while their unemployment rate has increased by 1.0 percentage points. Youths are the only demographic group that has not recovered from the employment losses observed during the recession.

In September, employment among people aged 55 and over was little changed. However, year-over-year, this group has seen a pick up of 184,000 jobs (+6.0%). Part of the big increase is due to the aging population.

Among industries, retail and wholesale trade added 34,000 positions last month but remains little changed over the past 12 months.

Construction created 29,000 jobs, reversing the prior month’s loss but is also at similar levels to a year ago.

In information, culture and recreation, employment rose by 24,000 in September. Despite this increase, employment is virtually unchanged from September 2011.

Employment in agriculture rose 8,700 during the month, bringing the total year-over-year gain to 13,000 (+4.2%).

The number of people working in “other services” fell by 19,100 from August but employment in the sector is similar to 12 months earlier.

Employment declined by 17,000 in business, building and other support services. Nevertheless, year-over-year gains totalled 26,000 (+3.9%).

Regionally, significant job gains were registered in Ontario (+31,000) and Manitoba (+6,600), while Saskatchewan was the only province to lose jobs (-3,600). Jobs numbers were little changed elsewhere.

What the analysts had to say:

Douglas Porter, deputy chief economist, BMO Capital Markets:

“Canada’s jobs data never fails to surprise. Looking at the gyrations in the monthly jobs tally, the underlying trend in Canadian employment is surprisingly stable.”

“Surprising, in a word. In some ways the Canadian number is almost the polar opposite to the U.S. number. Flashy job gain but a little bit of sour news on the unemployment side because the participation rate went up so much. I think the key point here is the economy is still churning out jobs at a healthy pace. I wouldn’t read too much into the month-to-month number but it’s impressive and it is not reversing a big decline the prior month, so we can’t brush this aside.”

“The Bank (of Canada) is still talking a fairly tough game. What they are concerned about is the economy growing faster than potential. The rise in the unemployment rate would suggest maybe not — and most of the GDP numbers haven’t suggested that things are growing faster than 2%. So I’m sure there will be some market reaction but I don’t think this is going to alter the bank’s view dramatically.”

Paul Ferley, assistant chief economist, Royal Bank of Canada:

“Much stronger than expected, in terms of the overall increase and positive news in that the increase was skewed towards full time versus part time employment … Now the issue is in terms of how much of a payback will we see in October after two months of what look like outsized increases.”

“Certainly it dispels some of the concern through the second quarter where we were getting some indication of maybe a stalling in job growth, these last two months have put to rest those concerns. Though going forward into October, you’ll probably see some correction in terms of the outsized gains you’ve seen in August and September.”

“In terms of the Bank of Canada, certainly it will take some encouragement from the strong gains in employment … we’ve just seen too much volatility in terms of employment. I don’t think they are going to take this on its own as an indication of the labor markets bouncing back.”

Mazen Issa, Macro Strategist, TD Bank:

“It’s a little difficult to square the circle on this one, just given that you have an economic situation where you have generally soft domestic demand and subdued global growth, yet businesses still have a strong appetite for hiring.”

“So whether or not this will persist over the coming months, I’m not sure about that. I think there’s a strong possibility that maybe some of that hiring has been pulled forward into September.”

“It will definitely be welcomed by the Bank of Canada, but I don’t think it will change the Bank’s thinking.”    

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U.S. Unemployment Rate Falls to Near 4-Year Low      
 
The Labor Department reported last Friday that the U.S. unemployment rate dropped by 0.3 percentage points to a near four-year low of 7.8% in September, the lowest since January 2009.

A survey of households from which the unemployment rate is derived showed 873,000 job gains last month, the most since June 1983. The drop in the jobless rate came even as more Americans joined the labour force, which had shrank in the prior two months.

However, a separate survey by the Labor Department showed non-farm payrolls increased by 114,000 in September, a less impressive result that suggests the U.S. economy is adding barely enough jobs to keep up with natural changes in the labour force from immigration and graduation.

The discrepancy between the two surveys – with one signalling a robust improvement in the U.S. labour market, and the other showing an economy that continues to putter along – will cause debate over which one is the more reliable indicator.

Generally, the payrolls survey is the more reliable of the two as it is based on hard data: the number of cheques employers deliver. The household survey is more volatile because it relies on individuals who may avoid admitting they are without work. However, some economists say the household survey is better at picking up shifts in the trend because it better captures self-employment and hiring at smaller companies.

In a positive move, the government revised July and August payroll numbers to show a combined additional 86,000 jobs were added than previously reported.

Also positive news from Friday’s labour report was that state and local governments, which cut staffs deeply during the recession, appear to be hiring again. The Labor Department changed a 7,000 decline in government payrolls in August to a 45,000 gain. In September, governments continued hiring, adding 10,000 jobs.

In addition, construction employment rose 5,000 benefiting from the rise in home construction, as demand for housing rises against the backdrop of record low interest rates.

With the revisions to the payroll readings, the U.S. economy added an average of 146,000 jobs a month in the third quarter, a significant improvement from the 67,000 average of the second quarter.

In September, the Federal Reserve announced a plan to buy $40 billion worth of mortgage-backed securities each month until it sees a sustained turnaround in employment. The central bank also pledged to keep overnight lending rates near zero until at least mid -2015, in an effort to drive down long-term borrowing costs and spur the recovery.

The Fed’s ultra-easy stance has started to free up credit, giving a lift to consumers, as demand for housing rises against the backdrop of record low mortgage rates.

What the analysts had to say:

Avery Shenfeld, chief economist at CIBC World Markets:

“The drop in the unemployment rate in September looks suspiciously like an overestimate given what we have been seeing in growth data.”

Marc Chandler, global head of currency strategy at Brown Brothers Harriman:

“The good: the 0.3 percentage point drop in the unemployment rate, the average work week edged higher to 34.5 hours, and average earnings increased 0.3%. The bad: two-thirds of the new jobs in the household survey were part-time, and factories dropped 16,000 positions, indicating that manufacturing, a previous source of strength, is now struggling.”

Russell Price, senior economist, Ameriprise Financial:

“Employment trends have been holding up better than most people expected, particularly considering the manufacturing sector has seen a decline in order activity over the last few months, which just now seems to be recovering somewhat, and the fact that the economy in general has been relatively weak.

”So the fact that employment is holding up better than would be expected in that situation is a positive. It indicates businesses have largely shed down to the bone and really have to continue to add to their employment levels just to keep up with even the smallest improvements in demand.“

Tom Porcelli, chief U.S. economist, RBC Capital Markets:

”The reaction to this report is quite interesting and the reaction is that this is a strong report. The unemployment rate is a tricky creature. The increase in part-time workers is not necessarily a positive and is worth noting. Over the past couple of years part time employment increased in September only to unwind the next month, so I would not make too much of the drop in the unemployment rate. That does not mean this is a bad report, just a ho-hum report.”

Ron Florance, managing director of investment strategy, Wells Fargo Private Bank:

“It’s a little confusing, to be honest with you. The number of jobs created wasn’t that high but the unemployment rate came down and the participation rate went up a little bit, so it’s confusing. All in all, it doesn’t change the trajectory of what the jobs environment has been really for the last year. We continue to increase jobs but not at a rate that is fast enough to significantly change the unemployment picture for American workers.

Robert Blake, senior currency strategist, State Street Global Markets:

“We think it’s a very strong report. The initial headline is bang on expectations but there is an 86,000 net revision upwards to past months and there was a huge gain in household employment. That pushed the unemployment rate down to 7.8%. It is good for risk but not good for the (U.S.) dollar and it will favor other North American currencies, such as Canada and Mexico. We still have European issues to deal with so we like selectively buying riskier currencies. We also had a very good number in Canada at the same time which is supportive of the same theme.”

Sean Incremona, economist, 4Cast Ltd.:

“There is a lot of stuff going on in this report. The headline doesn’t look very inspiring but there was a big upward revision to the previous month that is mainly effecting the government sector. The underlying private payrolls growth is unimpressive, lower than expected in September and soft beforehand. Oppositely there was a big decline in the unemployment rate with a pretty healthy breakdown there with employment and the labor force higher.

”Generally we are still seeing a mixed underlying picture that is neither too impressive nor terrible.“    
 

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IMF Cuts Outlook for Canadian and Global Economic Growth    
 
The International Monetary Fund (IMF) is warning that Canada faces increasing economic threats, external and internal, that will slow growth this year and in 2013.

The Washington-based global lender said in its quarterly World Economic Outlook (WEO) on Tuesday, that Canada’s economy will advance 1.9% during 2012 and grow 2% next year. That is down from the IMF’s July forecast of 2.1% and 2.2%, respectively.

By comparison, the Bank of Canada has estimated growth of 2.1% in 2012 and 2.3% in 2013. The central bank will issue its latest forecasts in its Monetary Policy Report on Oct. 24.

Within Canada, the IMF said the “key priority is to ensure that risks from the housing sector and increases in household debt remain well contained and do not create financial sector vulnerabilities.”

“However, housing-related credit and household leverage have risen markedly since the recession, despite measures to limit mortgage growth.”

“Thus far, mortgage credit growth has slightly decelerated in response to measures taken by the authorities, including tighter mortgage insurance standards. If household leverage continues to rise, additional measures may need to be considered.”

“A sharp or sustained decline in house prices could seriously set back the leveraged household sector and domestic demand.”

The IMF said the biggest global threats to Canada’s health remain the eurozone debt crisis and fiscal uncertainty in the U.S.

“Both external and domestic downside risks to the outlook remain elevated. In the United States, it is imperative to avoid excessive fiscal consolidation (the fiscal cliff) in 2013, to raise the debt ceiling promptly, and to agree on a credible medium-term fiscal consolidation plan,” the report said.

The IMF said the U.S. economy will grow more than expected this year, rising 2.2% from the 2% previous outlook. In 2013, however, growth will be 2.1%, down from 2.3% in the July forecast.

In the eurozone, the IMF projects a contraction of 0.4% this year and growth of just 0.2% in 2013.

Emerging markets are still expected to grow four times as fast as advanced economies, but the IMF took a sharp knife to its estimates for India and Brazil, with the latter now seen growing slower than the U.S. this year.

It also cut its expectations for China in 2012 and 2013 but warned against being overly pessimistic about the prospects of these economies, which were major engines of growth in the global financial crisis.

“Let me be clear. We do not see these developments as signs of a hard landing in any of these countries,” IMF chief economist Olivier Blanchard said at a briefing, referring to China, India and Brazil.

The IMF warned in its report that the threat of a severe world slowdown is “alarmingly high,” cutting its global forecast for growth to 3.3% this year and 3.6% next, from 3.5% and 3.9%.

“The probability of global growth falling below 2% in 2013 – which would be consistent with a recession in advanced economies and a serious slowdown in emerging market and developing economies – has risen to about 17%, up from 4% in April 2012 and 10% (for the one-year-ahead forecast) during the very uncertain setting of the September 2011 World Economic Outlook,” it said.

Ultimately, the IMF said, its forecast depends on “critical policy action” in the 17-member eurozone and the United Sates, and “it is very difficult to estimate the probability that this action will materialize.”

“Worries about the ability of European policy makers to control the euro crisis and worries about the failure to date of U.S. policy makers to agree on a fiscal plan surely play an important role, but one that is hard to nail down,” Mr. Blanchard said.

The IMF said financial conditions are likely to remain “very fragile” over the near term because repairing the eurozone problems will take time and there are concerns about how the U.S. economy will cope with the unexpected expiry of tax cuts early next year.  
 

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Canadian Productivity Continues to Lag              

Canada’s economy and ability to compete internationally is being hampered by its businesses’ inability to sustain growth over the long-term, says a report released Oct. 1 by consulting firm Deloitte.

The study shows Canada’s productivity lags behind that of the United States in “virtually every instance,” including those industries that have been the cornerstone of Canada’s economy for decades — mining, oil and gas, financial services and manufacturing. The manufacturing sector was called out as a particularly poor performer, noting that U.S. productivity in the manufacturing has grown at a rate six times faster than that of Canada since 2000.

“We have to start having conversations about a national strategy that will allow us to be more competitive,” said Bill Currie, Deloitte Canada’s Vice Chair and Americas Managing Director and co-author of the report.

The study says Canadian businesses lack boldness and must do more to invest in research and development while also exploring export opportunities. It highlights the fact that Canadian businesses spend at only 65.2% the U.S. rate on machinery and equipment and that investment in Information and Communication Technology (ICT) in Canada’s manufacturing sector is at 66% of U.S. spending levels.

Too many Canadian business people shun risk, a feature apparently engraved in the Canadian corporate psyche. Roughly half are risk averse – a far greater share than their counterparts in the U.S.

“A Canadian risk avoider really avoids risk,” says Mr. Currie. “They like government support to make investments. They are less entrepreneurial.”

The report says government can help induce Canada’s productivity and competitiveness by eliminating trade barriers, allowing greater foreign direct investment, adjusting Canada’s immigration system to deal with an aging population and looming skills shortage, and doing a better job of encouraging companies to export.

Although, economists say Canadian policy makers have got a lot of things broadly right in recent years; They’ve freed trade, cut inflation, balanced budgets and so on. And yet our productivity performance has remained as anemic as ever.

Of course, Canada has also tried a number of other things, which have proved equally fruitless. Certainly there has been no shortage of “productivity” or “innovation” programs, intended to encourage companies to engage in research and development. The federal government alone has more than 60 different programs, spread across 17 departments. At more than $5-billion annually, Canada is considered to have one of the most generous systems of R&D support in the world. So while there is plenty of room for rationalization, it would seem unlikely we will find the answer to the productivity puzzle there.

Perhaps we need to go back to first principles. One reason our productivity record is so dismal, everyone agrees, is relatively low rates of capital formation. The average American worker, Robson points out, has about $1,200 more physical capital to work with than his Canadian counterpart. And what is one of the more notorious barriers to capital formation? Taxes. In short, rather than give businesses money to induce them to invest, why not simply refrain from taking so much of it away from them when they do?

With Canadian savings rates at historic lows, moreover, Canada will need to find fresh sources of investment capital from abroad.

Also, one thing that all of the literature on productivity is agreed upon is the vital importance of competition as a stimulus to innovation. Put simply, businesses do not tend to innovate until they have to — unless they are afraid their competitors will eat their lunch if they do not. It may not be innovation of the sort that impresses politicians — world-beating new products or technologies. More typically, it consists in hundreds of little improvements to the production process, which may be no more than adopting practices already in use elsewhere. As the Council of Canadian Academies defined it in a recent report, innovation is simply “new or better ways of doing valued things.”

Certainly Canada is more open to competition than it was. But important sectors of our economy remain over-regulated, over-protected, over-priced oligopolies, from transportation to telecommunications to finance. If we are serious about meeting the productivity challenge, that is a “luxury” we can no longer afford.

The Deloitte report said Canada’s inability to improve its productivity levels to those comparable to other industrialized nations may be a deep-seated cultural attribute connected to the country’s history and culture of modesty, compromise, and most prevalently, risk aversion.

Being risk averse means avoiding the kind of things that makes companies become more competitive, grow and create jobs. That includes investing in information technology, buying new machinery and tackling export markets, according to the report.

It said the key to improving the situation would be a sustained focus on long-term business growth – growth that is currently hindered by Canadian businesses’ unwillingness to make critical investments even when it’s most opportune to do so.

At the heart of the reluctance to invest lies a long-standing culture of conservatism and risk aversion that has been one of the most profound obstacles to the country’s global competitiveness. That culture is likely only to be encouraged by the country’s recent economic prosperity that many have attributed to Canada’s more restrained and prudent financial institutions.

“I think we’re fat and happy,” says Mr. Currie. “We are affluent; we feel comfortable. The productivity issue that we document and talk about, that’s a long-term thing that will impact our children more than it will impact us. And, for many Canadians, including business owners, they don’t feel the need to go out and take risks that might be uncomfortable for them.”

Citing an Industry Canada study from 2011, the Deloitte report notes that risk and uncertainty was the greatest obstacle noted by business owners when asked about what it was that was keeping them from investing in growth through innovation. In addition, Canadian business owners’ aversion to risk transcends all industries and grows along with company size.

Where Canada’s small businesses rank fifth for R&D spending among their counterparts in industrialized nations, large businesses only rank ninth.

“What we lack is that entrepreneurial spirit — the drive to see the world globally,” says Theodore Peridis, associate professor of strategic management and policy at York University’s Schulich School of Business.

Prof. Peridis contends that while Americans “celebrate winners,” Canadians tend to be more muted. “We are a little more shy, timid. We don’t do that in our culture. We’re not boasting,” he says.

While business leaders in Canadian manufacturing have argued that high labour costs are restraining their capacity to invest in R&D, Prof. Peridis says such excuses can only go so far. “The Germans come with high labour costs, but they still can sell. Why? Because the products they produce are knowledge intensive,” he says.

Of course, a culture of modesty and risk aversion isn’t something that can be changed overnight, but must be changed over the long term in order for Canada to maintain its status as a serious contributor to global commerce.

Jamison Steeve, director of the University of Toronto’s Martin Prosperity Institute and former Principal Secretary to Ontario Premier Dalton McGuinty, says a significant culture shift in the business community has to be nurtured at an early stage.

“We need to change people coming through our business schools so they can take on a greater element of risk tolerance,” he says.

Mr. Currie concurs, noting that every level of the education system should include some form of business and economics orientation and that even students in those faculties that are not necessarily related to business should have some understanding of how the business world functions.

The Deloitte executive also notes Canada’s complacent culture can only be overcome by developing a national strategy that remains unimpeded by provincial or territorial variances, and that Canadian businesses can no longer continue to be insulated from foreign competition through protectionist measures.

“While I understand there are political realities — and you can’t remove all protections overnight – where we provide protection, it’s actually not helpful for us because we don’t get competitive intensity and we end up being comfortable instead of competitive,” he says.

One of Canada’s saving graces may be its imminent influx of immigrants, many of which come from more risk-tolerant cultures. Yet, what remains to be seen is whether or not those immigrants influence Canada’s overwhelmingly risk-averse culture to be more risk tolerant, or if they will simply assimilate to Canadian complacency.

Many newcomers to Canada will find their way into country’s burgeoning Information and Communications Technology (ICT) industry, which the Deloitte report notes has also faltered with respect to R&D spending. While, most tech startups excuse the lack of ICT success (relative to the U.S.) as a condition of Canada’s desolate venture capital landscape, it’s important to note that venture capitalists remain elusive precisely because they lost so much money during the bursting of the dot-com bubble that they are now far too risk averse to take a chance on Canadian ICT enterprises – most of which are forced to go to the U.S. for funding.

Some venture capitalists might be more inclined to invest in Canadian tech startups if more of them had the financial resources to invest in their own companies.

“It’s a question of alignment of incentives and ideally, from a fund-investor perspective, you’re looking for all parties to have some skin in the game and a commitment to the success of the enterprise, and there’s nothing that crystallizes commitment than having money at risk,” says Richard Remillard, executive director of Canada’s Venture Capital Equity Association, noting that tech startups rarely have the financial resources to make those investments because they usually have little financial backing to begin with.

While only time will tell if Canadian businesses break free from their traditional investment patterns, economic conditions demand that the culture shift happens sooner rather than later. Politicians, economists and academics will be watching closely to see if Canadian businesses adapt to the economic times or if they will simply remain “fat and happy”.

Source: The Financial Post
  

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