Preview

Business

No room for the boom to zoom through an uncertain 1977

PETER BRIMELOW January 10 1977
Preview

Business

No room for the boom to zoom through an uncertain 1977

PETER BRIMELOW January 10 1977

Business

Preview

No room for the boom to zoom through an uncertain 1977

The Canadian economy is clearly running out of steam. Economists tend to treat questions about their forecasts for 1977 with the exasperated patience of adults attempting conjuring tricks at noisy childrens’ birthday parties. “It’s a numbers game,” they protest wearily, and in fact the variables are virtually infinite. But the numbers currently are looking sharply worse. The projections of the Conference Board in Canada, a respected if pessimistic private forecasting unit, overshadowed the more cheerful longer-term view of the semiofficial Economic Council when both were issued in late December, partly because the Conference Board was using more recent data. (See box for other forecasts.) The differences are significant. If unemployment averages 7.9%, as the Conference Board predicts, its peak and its regional impact could be much higher. Releasing the report, Robert René de Cotret, the board’s president, spoke darkly of the danger of “an abortion of the current economic recovery such as occurred in the early 1960s.”

Figures for the third quarter of 1976, released in late November, show, for example, that business investment (apart from residential construction) fell at the equivalent of an annual rate of 22.8%. “Canada has little hope (in 1977) of attaining a rate of economic growth close to its

Forecasting the 1977 economy

long-term average of 4Vi% to 5%,” says Judith Maxwell, a senior economist of the C.D. Howe Research Institute. “The momentum is simply not there.”

This is a particularly ominous development for the federal government. It’s generally accepted that Gross National Product growth of at least 4% is the minimum required to employ each year’s new entrants to the labor force. Below that unemployment will rise.

But looked at another way—economics can always be looked at another way—Ottawa is proclaiming itself encouraged. Whether because of the Anti-Inflation Board, the slowdown in world and domestic demand or the fortuitous decline in food prices, inflation is gradually being wrung out of the system. The Consumer Price Index was up only 5.6% from November, 1975, to November, 1976, compared with 10.4% for the previous 12 months, and other indices show similar abatement. Since Canadian wages are running 12% to 20% higher than similar costs in the United States, this trend could signal the beginning of a return to competitiveness on a world scale. But precisely because of the fight against inflation, the economy has been receiving less stimulation than normal from government spending and fiscal policies. The Bank of Canada has been over-achieving its goal of

holding money supply growth down to 8% to 12%, and has even felt able to reduce the bank rate by a full point in two moves in the closing weeks of the year. A further fall is expected in the spring.

However much quarreling there is about estimates for growth in the major sectors of the domestic economy, such as housing and business investment, even optimists concede that, essentially, Canada’s prospects next year depend upon the health of her major trading partners, especially the United States. Strong demand for Canadian exports will have to supply the stimulus that neither private nor public action seem able to generate. That means the U.S. Gross National Product probably will have to grow by at least 5%; current estimates generally vary between 4% and 5 Wo. “That 1% or \Wo will make or break us,” says Barry Zukerman, superintendent of investments at Toronto-Dominion Bank.

For the sake of the North American economy, if not specifically for Canada, the financial community is pleased with the presently fashionable view that Jimmy Carter is a closet fiscal conservative who is not about to over-stimulate the U.S. economy into inflation to appease his welfare and liberal constituencies. Canada’s de* pendence on the U.S. economy during 1977 is the price of policy decisions taken by Ottawa in the early 1970s. At that time, the Trudeau Liberals decided that unemployment rather than inflation was the main enemy, particularly in the 1972 and 1974 campaigns.

Ottawa is hopelessly entangled in a net of its own making. It cannot reduce unemployment much during 1977 without risking further inflation. In any case, the public sector deficit is already running at about 6.8% of GNP, double that of the United States and unpleasantly close to the United Kingdom’s 10.7%. Yet if individuals’ real disposable incomes actually do increase by only 3.2% in 1977, against 5.9% in 1976, as one forecast predicts, there may be a public outcry that would make the Canadian Labor Congress’ Day of Protest look mild.

“Steering a middle course” is the euphemism economists use to describe the pragmatic way Ottawa is expected to respond to its problems in 1977. Already, through the bank rate reductions, some direct employment programs, and further restrictions on textile imports, tentative stimulation is under way. But there will be intense pressure for more economic pump priming after the government’s expenditure estimates are published in early Feb-

ruary, and the April budget may well contain substantial tax cuts.

Many private sector economists are praying for the demise of the Anti-Inflation Board this year, partly as a move to restore business confidence, and partly because they believe the underlying sluggishness of the economy renders it superfluous. But evidence is that the govern-

ment will not abandon its child without some tangible anti-inflation safeguards.

Beyond all these considerations is of course the problem of Quebec and separatism. Although most Canadian economists characteristically prefer tacitly to ignore the issue, there is the persistent suspicion that Ottawa may stimulate the economy solely in order to defeat the Parti Qué-

bécois’ referendum, whenever it may be held. The Liberals don’t appear to have made up their minds yet but it is inconceivable that a year that sees such a mortal threat to an entrenched governing party could be anything other than a year in which politics dominates over economic policy. In which case, all forecasts will prove irrelevant. PETER BRIMELOW