BUSINESS

Merging crystal balls

The outlook for 1991: more hard times

January 14 1991
BUSINESS

Merging crystal balls

The outlook for 1991: more hard times

January 14 1991

Merging crystal balls

BUSINESS

The outlook for 1991: more hard times

For almost eight years, Canada’s economy steamed forward, helped along by strong export sales and moderate oil prices. But in the past 12 months, the economy stalled and then dipped sharply into recession. Many Canadians understood the grim implications before hearing the numbing statistics. For much of1990, tens of thousands of people lost their jobs, interest rates rose to their highest levels since the recession of1981-1982, and hundreds of companies either closed their doors or moved to more favorable locations in the United States and Mexico. To assess the outlook for the coming year, Maclean’s interviewed a range of business leaders, politicians and economists. Their comments:

ISRAEL (IZZY) ASPER, chairman, CanWest Group Inc. and Global Communications Ltd., Winnipeg:

I am normally an optimist, but I think this recession is going to be

much worse than anybody predicted. We are already seeing cost cutting throughout the broadcast industry in Canada. The watchword is, ‘Fasten your seat belts, kids. It’s going to be bumpy out there.’ We are conducting a cost review of all of our operations to see what is discretionary and what isn’t. To get us out of this, the government should get interest rates down significantly. And in order to do that, the government should announce its own austerity program, as we in industry are doing.

WENDY DOBSON,

senior fellow in management studies at the University of Toronto and former associate deputy minister of ñnance in Ottawa (1987 to 1989):

The outlook for large companies in Canada in 1991 is quite good. They’ve learned a lot from the 1981-1982 recession and they are lean. They’ve avoided large inventory buildups and they have been working like crazy on raising productivity and in-house training. They are exporting into the U.S. market, and I don’t expect that the slowdown is going to be prolonged in the United States, as long as there is a diplomatic solution in the Gulf. In that event, oil prices should begin to ease significantly in the

spring. But if there is a war, anybody would be crazy to try to forecast what is going to happen. The outlook for small and medium-sized firms is quite troubling. They are the job creators, and they are having a hard time because of the general economic environment, but especially because of the drying-up of credit from banks. Overall, unemployment is likely to go higher before it falls in 1991, and interest rates will continue to ease. The strength of that downward trend will depend on Canadians’ awareness that they have to swallow the GST rather than pass it on in higher wages.

WILBERT HOPPER,

chairman and chief executive officer,

Petro-Canada,

Calgary:

The oil business has been performing well because of the rise in oil prices caused by the cri-

sis in the Gulf. But that is not a long-term circumstance. When it is resolved, and Kuwait and Iraq come back on stream, we are going to have more capacity than ever before. So I think prices for crude oil are going to drop back down (from the current level of about $29 a barrel) into the teens next year. We should be making a greater effort at conservation, but that will have to be done either with artificially higher prices or with government programs. There is no shortgage of oil in the world.

FRANK McKENNA,

premier of New Brunswick:

We have not been hit as severely as the rest of the country, but we are certainly feeling the effects of the recession.

Our major markets in

the United States are becoming much more difficult to access, so we are seeing a slowdown. But as the year progresses, we’ll see an improvement in the economic performance of the province and of our country. We have reason to be bullish in Atlantic Canada, with major capital projects taking place such as upgrading the Trans-Canada Highway and Hibernia. The worst enemy is uncertainty. The continuing constitutional uncertainty will cause shakiness in Canadian financial markets and will make foreign investors wary of our country. It may sound strange, but I continue to be very optimistic about Canada—economically, politically and constitutionally. I think we will

come out of this soul-searching with more certainty. And I think that the fact that we are having this debate about the Constitution may augur well for long-term political and economic stability.

WILFRED POSLUNS,

chairman, Dylex Ltd., Toronto:

I think 1991 will be a tough year. For the first half of the year, people will be turned off spending because of the GST.

Christmas spending was

spotty last month, and overall I think 1990 will turn out to have been a disastrous year for all retailers. You never saw retailers go broke before Christmas in the past. For consumers, the problem is not so much a lack of money as a concern about jobs and the future of the country, and whether there will be a war in the Middle East. When you are nervous, you save and you pay off your debts. It’s a downward spiral. The worse it is, the worse it gets—until it bottoms out. But I think that increased consumer spending will pull us out of this, and I am hopeful that it will begin to happen by the third quarter of 1991.

GRANT DEVINE,

premier of Saskatchewan:

The recent failure of international trade talks means that we are fighting a commodity war. It is expensive and it hurts. Prices for wheat

should be running around $5 or $6 a bushel. Instead, they are around $2. The cause is international unfairness. It is dangerous and it has to be addressed with some good ammunition so that we can win the war. We can’t let other countries put us out of business. We need a good round of multilateral trade negotiations. And I’m optimistic in that respect. If you gave us three things—a breakthrough at the General Agreement on Tariffs and Trade, lower interest rates and a lower exchange rate— you’d see Saskatchewan really start to hum.

HELEN SINCLAIR,

president, the Canadian Bankers' Association, Toronto:

The banks are well positioned for the next year, in part because they have largely dealt with their Third World debt.

But whether they do better this year than last is really a function of where the economy is going. Loan losses domestically are up and nonperforming loans are up. The only question is whether they will continue to go up before they come down. The brunt of this recession is

being felt in the industrial heartland, which is disquieting because this sector is not generally cyclical, as the resource sector is. People say that banks should tide them through the recession. That is right, but banks also have a duty to protect their depositors. So banks can’t afford to make a lot of bad calls. When you come to us with a proposal for a major expansion, we are going to be very cautious because we think you should be cautious. It is our duty to ask hard questions and do some extra probing. That is the tough part right now—sifting out good risks from bad ones.

ADAM ZIMMERMAN,

chairman and chief executive officer,

Noranda Forest Inc.,

Toronto:

We are being battered more than any other sector right now, and it has been going on for the better part of a year. The rest of the world is just catching up with us. I don’t see anything on the horizon that is going to make things a whole lot better, unless and until the Canadian government decides to let interest rates come down and perhaps the dollar with it. The government’s current policies are beginning to cut into the bone. In round figures, the U.S. forestry industry is down about 40 per cent and the Swedish industry is down about 60 per cent. Our profits were completely eliminated in 1990. There will be considerable layoffs and readjustments of ownership. There are not many big Canadian forestry companies now, and I think we could see even more consolidation in the future. I don’t know of anything that is going to change our situation except lower interest and exchange rates. That is absolutely pivotal.

FLOYD LAUGHREN,

treasurer of Ontario:

We are definitely doing worse than other provinces. In Ontario, three things hammered us last year: revenues from retail and corporate taxes

each fell by about $500 million, and the cost of social services skyrocketed to about $500 million more than we had budgeted. We are expecting virtually no growth next year, and no increase in employment. That is why we put together a recession package of about $1 billion worth of public works. We are particularly nervous about the downturn in manufacturing because of the record number of bankruptcies and the relocation of many firms to the United States. The loss of companies and jobs is partly a result of the Canada-U.S. Free Trade Agreement, but increased global competition is having an impact, too.

KENNETH HARRIGAN,

chairman and chief executive officer,

Ford Motor Co. of Canada Ltd.,

Toronto:

We are predicting that car and truck sales will improve in the first quarter, as fleet and individual buyers come back to the marketplace to take advantage of lower prices. Now that the GST has replaced the federal manufacturers sales tax, fleet owners are saving upwards of 10 or 11 per cent and individual buyers between three and four per cent. Foreign car manufacturers will continue to increase their capacity in North America, so

there’s always that additional competition. I predict that incentives of various types will continue to be offered as we move through 1991. We expect some layoffs, but only temporary ones to adjust to inventory demands. In fact, we are going to be spending more money in Canada over the next two years than we have in the recent past. We have committed nearly $1 billion to future product lines in our Canadian plants. So we really haven’t backed off, even though the economy has dropped. We have to make sure that we keep investing for products in the future.

GEORGE VASIC,

director of Canadian economics for DRI Canada, a Torontobased economic forecasting firm:

For 1991 as a whole, there is going to be no real increase in econom-

ic activity. The worst news is that we don’t believe most organizations will be able to tell the difference between the recession and the rebound that is expected to begin by the second half of 1991. We will continue to see unemployment rising, perhaps to as high as 10 per cent during the summer, with only a very slow decline after that. Construction is suffering most right now, as housing starts plummet and the resale market falls. But almost every sector has been affected—there is blood all over the floor. The only bright light is energy, where investment should grow this year by more than 20 per cent. Growth in that sector will be fuelled not by rising oil prices but by long-term megaprojects, such as Hibernia, the TransCanada Pipelines expansion, the heavy-oil project in Lloydminister, Alta., and the hydroelectric program at James Bay in northern Quebec. □