Adam Affleck

A significant number of Canadians are at risk of defaulting on mortgages and other loans if the global financial crisis deteriorates and triggers a deeper recession, the Bank of Canada warns.
In a sobering assessment of the financial crisis, the central bank concludes that significant risks remain for both the global economy and Canada if credit conditions don't begin to improve.
"With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth, and record-high debt-to-income ratios, a severe economic downturn could result in a substantial increase in default rates on household debt," the bank writes in its December financial systems review released Thursday.
The Bank of Canada says the number of "vulnerable households" - the three per cent with a debt-to-income ratio above 40 per cent - could double by the end of next year under this pessimistic scenario. That would mean tens of thousands of households could face crushing debt as Canadians lose jobs and family incomes drop to the point where they can't pay their bills.
The central bank notes that this would be a worst-case scenario. The "most likely outcome" is for global markets and credit conditions in Canada to gradually improve, it states.
This is partly because central banks and governments around the world have leaped into action with extraordinary measures such as cash injections, asset swaps and credit guarantees to backstop financial institutions to pump addditional billions of dollars of credit into the economy.
But the Canadian central bank's top officials also warn that the crisis is far from over and that there is "a significant risk of mutually reinforcing weakness in the financial sector and in the real economy."
That's the kind of negative feedback that felled the American economy, noted Douglas Porter, deputy chief economist with BMO Capital Markets, the brokerage arm of Bank of Montreal, adding it is no longer far-fetched to think it could happen here.
"Given the fact we're looking at the recession in the teeth, some of the worst-case scenarios have to be studied a little more closely," he said.
"It looks like we're going to get as close to the bank's worst-case scenario than anyone would have imagined possible as recently as three months ago."
After resisting the call for months, the Bank of Canada declared the economy in recession Wednesday when it slashed its trendsetting interest rate to the lowest level in 50 years at 1.5 per cent.
Most economists are forecasting growth at or below zero for 2009 with job losses of more than 100,000 and an unemployment rate above seven per cent.
For much of the last year, experts said the Canadian economy would perform better than the recession-ravaged U.S., where the housing, financial and manuufacturing sectors have been battered and the services sector is now feeling the effects.
But now, the slump in the auto, manufacturing and forestry industries in Ontario and Quebec has spread to the resources-based West as oil projects get shelved because of low crude prices and mines close because of slumping prices for nickel, copper, zinc and other primary metals.
Pressure is mounting on the federal government to shock the economy into recovery with a big stiumulus spending plan in its Jan. 27 budget. Late Thursday, Bank of Montreal's Porter urged Ottawa to spend as much as $16 billion next year to arrest the economy's slide into recession.
Porter said such a package should include spending on roads and bridges as well as a one-time bonus for seniors on public pensions, temporary cuts to payroll taxes and the GST, and spending vouchers that would give Canadians government cheques on the condition they spend rather than save.
As well, Porter says Ottawa should consider a one-time financial transfer to the provinces, which could put the money more directly to use.
Given the rising uncertainty, the Bank of Canada officials outlined five potential risks for the world and Canada, including a deeper and more prolonged recession as banks compelled to restore cash reserves tighten the screws on credit conditions even further.
For Canadians, the repercussions will be profound - higher joblessness, lower income growth and more home defaults from crushing debt loads, the bank says in its worst-case assessment.
And while Canadians' access to credit has not tightened significantly during the financial crunch, this could change if the crisis persists, the bank says.
The risk assessment is noteworthy for its predominantly gloomy outlook - although it remains a hypothetical one - and for the fact it was written by the bank's governing council headed by governor Mark Carney, rather than by lower-rank bank staff as is usually the case.
In the United States, millions of Americans have lost their homes in the last two years with the collapse of the sub-prime, or high-risk mortgage market, which led to sharply higher interest rates for homeowners with poor credit and produced widespread foreclosures.
In Canada, however, the housing sector has been more stable, but the jump in home prices that led to soaring values in Vancouver, Calgary, Toronto and other cities has begun to reverse. Statistics Canada reported Thursday that new home sales fell for the first time in a decade in October, dropping 0.4 per cent from September.
According to the latest figures compiled by the Canadian Bankers Association, the percentage of mortgages that have gone unpaid for at least three months as of September was 0.29 per cent, or 11,362 of about 3.9 million mortgages in the country. Arrears in the U.S. are 6.5 times higher.
"Canadian trends are stable. American trends are worsening," according to the bankers' group.
In its report, the Bank of Canada says consumer debt woes will also cut deeply into bank profitability. In their recent financial reports, the six biggest Canadian banks reported a 38 per cent drop in profits for the just completed 2008 fiscal year to about $12 billion.
Much as has happened in the U.S., the central bank officials say the contagion could spread through the banking system and further restrict the availability of credit.
The Bank of Canada does caution that the vulnerability of Canada's housing sector should not be overstated.
It notes that lending practices in Canada have been far more conservative than those in the U.S. and that subprime mortgages account for about five per cent of the market as opposed to 14 per cent in the U.S. Banks are also insulated for defaults through government guaranteed mortgage insurance.
As well, although debt is high, low interest rates means that at present most households are able to comfortably manage their financial obligations.
Merrill Lynch economists David Wolf and Carolyn Kwan warned back in September that Canada was experiencing a similar housing meltdown as occurred in the U.S.
But Derek Holt of Scotia Capital agreed with the Bank of Canada that the situation here is not as dire.
"If we start off by looking at the household balance sheet it's 20 cents in debt for dollar of assets in Canada versus 26 cents in the United States. So we have 30 per cent less debt per each dollar," he explained.

Adam Affleck

Charlottetown Remax

www.adamaffleck.com

What should be done

The federal government should move decisively on a fiscal stimulus package of as much as $16 billion next year to arrest the economy's slide into recession, the Bank of Montreal says.
In a four-page note released late Thursday, deputy chief economist Douglas Porter argues that a $16 billion stimulus in the Jan. 27 federal budget is appropriate. After 12 years of budgetary surpluses, Ottawa can well afford to spend to boost growth and put more money into ordinary Canadians' pockets to help grow demand, spur buying and create jobs.
"After all, the string of budget surpluses in the past decade were the public sector equivalent of saving for a rainy day, and it's starting to pour," said Porter.
Porter says many economists still object to governments going into deficit to stimulate the economy, preferring that central banks carry the load through interest rate cuts to encourage consumers and companies to borrow, spend and invest.
That is a reasonable position under normal circumstances, he says, but adds that the current situation is dire and time is of the essence, noting that monetary stimulus typically takes 12 to 18 months to fully take hold.
As well, the Bank of Canada has already chopped interest rates by three percentage points in the last year - the latest coming in this week's three-quarter point cut - and the short-term trendsetting rate now stands at a 50-year low at 1.5 per cent.
"Monetary policy could use an assist," said Porter, whose bank is one of Canada's big financial institutions, with profits of nearly $2 billion in fiscal 2008 and 36,000 employees in Canada and the United States.
Prime Minister Stephen Harper said this week the Jan. 27 budget would contain "significant" stimulus, but did not give number.
However, leaders of the G20 suggested last month that stimulus should be around two per cent of the size of the economy - which would amount to $32 billion for Canada - although it was unclear whether that would be over one year or several.
Porter argues the economy badly needs a stimulus, citing November's 70,600 job losses and recent sharp declines in home sales, housing starts and auto sales.
Earlier Thursday, the Bank of Canada also warned of a "significant risk" of a deeper recession than previously anticipated, after officially declaring the country in recession earlier in the week.
The central bank said that if the economy worsen, many more Canadians could face defaulting on mortgages and other consumer loans.
"A stimulus package of ($16 billion) would be both substantial but also affordable ... it would be unwound without significantly slamming growth in the ensuing years," Porter writes.
And he offers a number of suggestions on how Ottawa can spend the money effectively beyond the already expected construction projects on roads, bridges and sewer works to improve the country's infrastructure.
These include a one-time bonus for seniors on public pensions, temporary cuts to payroll taxes and the GST, and spending vouchers that would give Canadians government cheques on the condition they spend rather than save.
As well, Porter says Ottawa should consider a one-time financial transfer to the provinces, which could put the money more directly to use.
Porter's recommendations partly coincide with a ranking of options open to Finance Minister Jim Flaherty for his upcoming budget issued by IHS Global Insight economist Dale Orr.
Orr and Porter agree that the key criteria for choosing the best form of fiscal stimulus is that measures should be tailored to impact the economy as quickly as possible, be targeted and be temporary so they can be withdrawn once the economy recovers.
Orr places small infrastructure projects at the top of the list, followed by a temporary cut to the GST, followed by cuts to personal income taxes.
He does not say how big the stimulus should be, but says with the opposition parties threatening to topple the government over perceived inaction on the economy, "They must design a fiscal stimulus package acceptable or they will be defeated."
The recommendations from the economists come as the Finance Department opened public consultations on the Jan. 27 budget beginning Friday in Saint John, N.B., where Flaherty is scheduled to speak.
"The government is open to innovative new ideas that would help shape the plan for economic recovery in the 2009 budget," the finance minister said in a release late Thursday.
The department said ideas for stimulus already proposed include investing in housing, expediting infrastructure spending and incentives for worker training.

what do you think?

Adam Affleck

Charlottetown Remax Realty

www.adamaffleck.com

Canadian hospitals are improving the chances that patients will survive, new statistics suggest. The hospital standardized mortality ratio (HSMR) data released by the Canadian Institute of Health Information (CIHI) shows that nationally, the rate of in-hospital deaths has fallen four per cent over the past year, said Dr. Indra Pulcins, director of indicator and performance measurement at the group. While the data shows some hospitals and health regions have made progress in cutting patient mortality, there are variations by hospital and region. Nonetheless, the trend is down. "The bar gets lower every day," Pulcins said. Among the 76 large acute-care hospitals or hospital corporations across Canada (excluding Quebec, where the data is collected differently), 47 reported drops, two were unchanged and 25 reported increases. CIHI says the data should not be used to compare hospitals because of the different factors involved, but "provides an important starting point for hospitals and health regions to assess their mortality rates and identify areas for improvement." But even hospitals that are below the national average of can improve, Pulcins said. And CIHI would also like the variation between hospitals and health regions to drop. Hospital mortality ratio The hospital standardized mortality ratio is a statistic showing the number of deaths that occurred in a hospital or health region divided by the number of deaths expected, times 100. An HSMR greater than 100 suggests that the hospital or region's mortality rate is higher than the national average; under 100, that it is lower. The HSMR focuses on the people with ailments that account for the majority of in-hospital deaths. It's adjusted to take age, sex, length of stay, admission category, diagnosis and other factors into account. CIHI cited Ontario's Scarborough General Hospital in the Greater Toronto Area as a success story. The HSMR declined from 125 in 2005-06 to 109 in 2007-08. A number over 100 suggests that the hospital has a mortality rate over the national average. Scarborough General adopted "a culture of patient safety" — including cutting adverse drug reactions and surgical infections — after the first public release of HSMR data last year, CIHI said in a news release Thursday. "Unfortunately, sometimes it takes something very dramatic to get people's attention focused in the right direction," Dr. Steven Jackson, chief of staff at the hospital, said in the release. There are still things the hospital can do better, "but the HSMR initiative has helped motivate people to take this on." It's not just mortality rates that can be improved, Pulcins said. "A number of years ago, it was thought impossible to prevent pneumonia" among patients on respirators, but now some hospitals go for months without a case. HSMR rates for some urban areas, 2007-08 and 2004-05 Health region No. of hospitals/corporations Rate '07-'08 Rate '04-'05 Vancouver 10 83 98 Calgary 11 88 87 Winnipeg 7 105 115 Toronto 6 97 96 Halifax 6 93 125 St. John's 8 102 114 Source: CIHI

The price for gas and heating oil has dropped on P.E.I. for the fourth week in a row.

Current prices (¢)
Gas	69.9
Heating oil	70.1
Diesel	92.9

As of 12:01 a.m. Monday the price of gas fell 3.0 cents per litre. Heating oil was down 3.8 cents a litre and diesel by 2.0 cents. Propane was unchanged.

A continuing global economic slowdown is the main reason for the falling prices, said IRAC in a news release. Relatively mild weather is also lowering the demand for heating oil.

This was a scheduled petroleum product price review from IRAC, which normally looks at prices at the beginning and middle of the month, but falling oil prices have prompted weekly changes since Nov. 15.

The next scheduled price review is Jan. 1.

General Motors will suspend much of its North American production in January as it cuts 250,000 vehicles from its first-quarter output.

The company's car plants in Oshawa, Ont., will close for January, plus the first week of February.

Stew Low, a GM Canada spokesman, said the company's Oshawa truck plant will be down beginning the first week of January and not go back into production until the middle of March.

A total of 20 GM plants across the continent will be shut down for all or part of January. A GM spokesperson said normal production for the quarter would be about 750,000 cars and trucks.

Jim Stanford, an economist with the CAW, said October and November auto sales were weak, with no indication that December will be any better.

"With auto sales collapsing like that, you know you're going to have significant downtime at your plants. That's not unexpected," he said.

"The bigger problem for us is to ensure that temporary collapse in auto sales ... does not take the industry itself down," he added.

The announcement comes following the failure of the U.S. Senate to pass a $14-billion US bailout package for the Detroit Big Three automakers.

However, the White House has said it could tap into its $700-billion bailout fund for banks to support the auto sectors.

The Big Three automakers have been seeking $6.8 billion in loans and credit lines from Ottawa and Ontario.

Ken Lewenza, the president of the CAW, called on governments in Canada to go ahead with a support package for the Canadian auto industry, conditional on a U.S. bailout getting done.

"Don't sit back," he encouraged governments. "That could help break the logjam in the United States."

"We think if Canada was to move, and move swiftly, that would put pressure on the United States to respond more appropriately than as of last night."