More than 31,000 new jobless in Alberta as EI rolls climb to 544,200

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Five ways low oil prices and the falling loonie can affect the federal books

By Andy Blatchford


OTTAWA _ Five ways tumbling oil prices and the sliding loonie can affect the federal government’s bottom line:

1. The biggest impact from falling oil prices is the fact they chew into Canada’s nominal gross domestic product (the country’s economic output before adjustments for inflation). That, in turn, erodes federal revenues. The Finance Department views nominal GDP as “the single broadest indicator of the tax base.”

2. The fallout of lower crude prices could also have negative effects on the Employment Insurance balance, said Pedro Antunes, deputy chief economist for the Conference Board of Canada. As oil producers cut costs and lay off workers, the EI fund may be forced to pay out more cash and receive less than before.

3. Cheaper oil can also have indirect consequences, such as a stock market decline, Antunes says. From there, he says consumer confidence can take a hit, particularly if people feel like they have less wealth or a shrinking nest egg. This scenario can dampen economic activity, which translates into lower tax revenues for the government.

4. Thanks to declining bond yields linked to the grimmer economic outlook, the federal government could find savings down the road, says CIBC chief economist Avery Shenfeld. It would be able to borrow at cheaper rates and lower its interest costs in future years, he adds.

5. The weaker exchange rate could have a minor negative effect on Ottawa’s budgetary balance if, for example, any resulting inflation pushes up the costs of buying equipment, Shenfeld says. However, he points out it wouldn’t have a big impact on the government’s fiscal situation since it spends most of its cash on things like salaries and transfer payments.


Ottawa should take out economic insurance – by running a bigger deficit

One year ago, Bank of Canada governor Stephen Poloz decided, as he put it, “to take out some insurance.” He surprised markets by cutting the bank’s benchmark interest rate. That move, followed by another quarter-point cut a few months later, turned out to be the right one: Lower rates, and the lower Canadian dollar they encouraged, helped to cushion the blow of falling oil prices.

But the Canadian economy remains fragile, with a further plunge in oil prices over the past few weeks raising new worries. It’s why the betting is that on Wednesday, Mr. Poloz will cut rates by another quarter point. It’s also why there are growing calls for the government to roll out some extra spending this year, and post a shortfall larger than the $10-billion deficit promised during the election campaign. The loudest appeals for deficit stimulus are coming from Bay Street economists, and Mr. Poloz has dropped his own supportive hints.

All things considered, it’s not a bad idea. It makes sense for the federal government to take out some insurance of its own, by running a bigger-than-expected deficit in 2016-17.

But before we start prescribing the medicine of deficit spending, we have to identify Canada’s economic illness. In its nature and severity, the current ailment is unlike what the country was suffering from the last time the feds opened the spending taps.

In 2009, the global economy was threatened with cardiac arrest. One of Ottawa’s responses was a multiyear stimulus plan, led by a 2009-2010 deficit weighing in at more than $55-billion. Faced with a worldwide financial crisis and recession, it was the right call.

So far, that is not what 2016 looks like. Our main trading partner, the United States, has recently been enjoying modest but real growth, and while there may be another big global downturn in our future, there isn’t one in the present.

But Canada is having a recession – or at least part of the country is. Because of the collapse in oil prices, and the impact on investment and jobs, the economy of Alberta, Saskatchewan and Newfoundland and Labrador has been contracting, even while the rest of the country’s economy has continued to grow, albeit slowly.

However, just as the global financial crisis proved to be more devastating than anticipated, Canada’s oil-price shock risks causing a lot more pain beyond the oil provinces. Unless prices bounce back, it’s difficult to tell a story that ends with anything other than less business investment and more layoffs, with knock-on effects beyond the oil patch.

Critics of the run-a-bigger-deficit school point out that Canada is experiencing a supply shock – there is too much oil in the world, which has driven prices down. The way to respond is through a floating currency, with a lower loonie stimulating other sectors, such as exporters in Quebec and Ontario. They’re largely right, and it’s largely what is happening.

But the transition to an economy with less petro-employment is painful, as a rapid downturn in the oil sector is not being perfectly matched by a pickup everywhere else. The Bank of Canada’s latest Business Outlook Survey showed business hiring and investment intentions at their lowest level since 2009, and that was before oil’s most recent plunge.

At the same time, interest rates have never been lower. The government of Canada can borrow for 10 years at less than 1.2 per cent. And Ottawa’s debt-to-GDP ratio, at 31 per cent, is also relatively low, and it would take a recession or a deficit topping $20-billion to nudge it higher. The cost of a fiscal stimulus insurance premium has never been lower, even as the need for it, though far less than in 2009, is higher than any time since.

In other words, Ottawa could easily rerun 2009’s giant deficit if it had to, many times over. Luckily, there is currently no need for that. These are not desperate times and desperate measures are not called for. But they aren’t exactly sunny economic days, either. Ottawa should make some prudent, targeted moves, delivering real benefits to those hurt by a painful economic transition. For example, the feds could front-load more of the decade-long, $125-billion infrastructure program into 2016, or temporarily offer greater unemployment and retraining benefits to jobless Canadians, as was done in 2009.

So long as the new, stimulative spending is time-limited, and doesn’t involve permanent program expansions, it’s difficult to see the downside of a spring budget with a deficit well above the Liberal platform’s $10-billion target. Economic insurance isn’t free, but it has never come cheaper.

Questions Arise Over Canadian Oil Sands As It Lays Out 2016 Spending Plans

CanOilSandsCanadian Oil Sands Ltd., fighting a hostile takeover bid by Suncor Energy, has laid out spending plans and performance targets for next year that it says demonstrate shareholders are well-served under the status quo.

Throughout the heated takeover debate, Suncor (TSX:SU) has cast COS (TSX:COS) as a risky investment as a stand-alone firm, given the likelihood of a prolonged oil price downturn.

But on a conference call Dec. 1, 2015, COS CEO Ryan Kubik said with major project spending complete and cost savings taking hold, the company is poised to enter 2016 in good shape.

It’s expecting capital spending to come in at $295 million next year. In October, it estimated 2015 spending at $368 million.

“Canadian Oil Sands is becoming more resilient and will emerge from this oil price downturn even stronger,” said Kubik.

At least one investor on the call wasn’t convinced.

Robert Cooper, with Calgary investment dealer Acumen Capital Partners, expressed frustration at COS’s share price performance and dividend growth compared to Suncor. And he wondered why COS turned down a higher friendly offer in the spring.

At the time that Suncor made its all-stock hostile approach on Oct. 5, 2015 it was worth $8.84 a share. An earlier friendly attempt was valued at $11.84 as of March 31.

Based on Monday, November 30’s  close, the offer is now worth $9.23 a share, or $4.5 billion.

suncor_syncrude_logoCooper said COS should be trying to negotiate a better deal with Suncor.

“I really want to know, after shareholders have really got their face ripped off in the past year, who’s looking out for them?” Cooper asked.

Kubik responded that his company is much more sensitive to swings in crude prices _ on the upside and downside _ than Suncor.

COS says for every US$10 per barrel increase in oil prices, cash flow is bolstered by about $300 million.

The company expects to generate $338 million in free cash flow next year. It is basing its 2016 assumptions on US$50 U.S. benchmark crude, versus about US$42 currently.

COS’s main asset is its 37 per cent share in the Syncrude oilsands mine north of Fort McMurray, Alta.

Suncor is much bigger and more diversified, with a huge oilsands footprint as well as refineries, gas stations and offshore platforms. Suncor has a 12 per cent stake in Syncrude, meaning it would own just under half of the mine if it’s successful.

Kubik added shareholders should “take comfort” in a process underway to seek another bidder. A COS adviser has said 25 parties have expressed some degree of interest.

On November 30, 2015, the Alberta Securities Commission allowed COS to keep its so-called poison pill, a defensive tactic to buy time, in place until Jan. 4.

In an interview, Cooper said he wasn’t impressed with how Kubik responded to his questions.

“I think that’s a standard non-answer answer,” he said.

Thanks to the Suncor bid, COS has seen a boost in its share price, which has surged above $10 at some points since Suncor’s hostile approach in October.

If Suncor walks _ which it has threatened to do _ the stock will drop back to $5 or $6, said Cooper.

He acknowledges another suitor could emerge, but so far the most likely one _ Syncrude partner Imperial Oil (TSX:IMO) _ has been silent.

“The reality is you’re really worth what someone’s willing to pay for you,” said Cooper.

“There’s a real risk that Suncor does walk. As a Canadian Oil Sands shareholder, you’re going to get a swift kick in the shins.”


The Government’s Plan to Bring 25,000 Syrian Refugees to Canada: By the Numbers

syrian-refugeesThe Liberal government has unveiled how it aims to bring 25,000 Syrian refugees to Canada. Here is a by-the-numbers look at the plan:

5 – The number of phases for Canada’s Syrian refugee plan which includes identification, processing, transportation, arrivals and integration.

6 – The number of years in the government’s financial plan.

678 million – The estimated federal cost of the refugee program, not including help for provinces.

500 – The number of staff from all departments working on the Syrian refugee file overseas.

10,000 – The number of refugees expected to come to Canada by Dec. 31, 2015.

15,000 – The remaining refugees expected to come to Canada by February 2016.

10,000 – The number of privately-sponsored refugees.

15,000 – The number of government-sponsored refugees.



U.S. Steel moves closer to separating from Canadian operation

U.S. Steel says an Ontario court has approved a transition plan that will help it separate from its Canadian branch.

The company says highlights of the plan include U.S. Steel not generating any sales on behalf of U.S. Steel Canada and moving away from providing any technical and engineering services associated with product development or sales with the Canadian arm.

U.S. Steel Canada – which owns the former Stelco operations – employs about 2,000 people at the Hamilton Works in Hamilton and Lake Erie Works in Nanticoke, Ont. It has been operating under court protection since last year while attempting to reach a compromise with its creditors.

Ontario finance minister Charles Sousa says the transition U.S. Steel Canada is undergoing is having a tremendous impact on retirees and families who rely heavily on health benefits provided by the company.

He says the province is providing $3 million to establish a transitional fund administered with the support of the company and union representatives.

Sousa says as the restructuring continues, it is important to remember that the company is still operating and retirees are still receiving their pensions.

But NDP Leader Andrea Horwath says the decision allows U.S. Steel to shed its Canadian pension obligations, as well as post-employment health benefits and insurance.

She also says it means the company will be stopping payment of $6 million in municipal taxes to the City of Hamilton.

Horwath says the New Democrats are demanding accountability on the matter.



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