Despite the political turmoil, many companies are thriving
HOPES ON THE RISE
Despite the political turmoil, many companies are thriving
Like thousands of Canadian executives, Ed Henderson was glued to his television last week as the results of the Quebec referendum trickled in. But it was not the potential impact on his own company that kept him on the edge of his seat. Henderson, 33, is secretary-treasurer of Skyjack Inc., a booming
manufacturer of elevated platforms with plants in Guelph, Ont., Europe and the United States. For days, Henderson had been fielding anxious telephone calls from his company’s overseas investors, many of whom feared that Skyjack’s profitability would be threatened by Quebec’s drive for independence. But Henderson reassured his backers that, whatever the future holds for Quebec, Skyjack will continue to thrive. “We’re a global company,” says a confident Henderson, noting that 93 per cent of Skyjack’s sales originate outside Canada. ‘We knew we would be all right.”
For all the political uncertainty that persists in the wake of last week’s razor-thin No victory, Henderson’s bullish sentiments are widely shared among business leaders across Canada—with the obvious exception of Quebec (page 36). This year, Canadian exports are projected to hit a record $247 billion—part of a trend that should propel the domestic economy into a cycle of steady, if moderate, growth over the next three years. In Hong Kong and Tokyo, currency traders were dumping Canadian dollars when early referendum results showed the separatists in the lead, but swiftly reversed course as federalist forces edged ahead. The dollar briefly touched 75.10 cents (U.S.) in overnight trading and finished the week at 74.27. At the same time, the Bank of Canada slashed its key lending rate by 1.47 per cent—the second-biggest cut in history— to 6.18 per cent. And the Toronto Stock Exchange index ended the week 201.21 points higher, at 4536.5. Many business leaders say the economy is now poised to perform well.
We’re optimistic,” says David Kerr, chairman of Toronto-based Noranda Inc., the country’s largest natural resource company. “That’s the bottom line. We wouldn’t be spending if we were not.’”
In international financial markets, the focus quickly shifted from debate over Quebec’s future to another huge challenge facing Canadians—whether Finance Minister Paul Martin can deliver on
FISCAL TURNAROUND: MORE PROVINCES ARE BALANCING THE BOOKS Surplus/deficit (-) (in millions of dollars) 1994-95 1995-96* Nfld. 136 P.E.I. N.S. -290 183 N.B. Quebec 715 -3,975 Ontario -9,596 8,711 Manitoba 196 Sask. 119 Alberta 958 125 B.C. 370 114 Projections Source; ID Bank Ropoit on Provincial Government Finances, 1995
promise to rein in Ottawa’s deficit, which is expected to reach $32.7 billion in the fiscal year ending March 31. If Martin keeps to his commitment to reduce the deficit to three per cent of gross domestic product by 1997—no easy task, given the potential political fallout from a sharp reduction in spending—Canadians should ultimately reap the twin rewards of lower interest rates and a stronger dollar. “Now that the near-term uncertainty has lifted,” said Jeff Moore, senior analyst with the Dominion Bond Rating Service (DBRS) in Toronto, “we should see a pickup in the economy.”
His optimism is underscored by the numbers. According to the Conference Board of Canada, the economy should expand by 2.2 per cent this year, 2.7 per cent in 1996 and 2.3 per cent in 1997. Exports, meanwhile, are projected to increase by 9.1 per cent this year and another 5.3 per cent in 1996—mostly thanks to increased
trade with the United States, with which Canada currently enjoys a $15.2-billion annual trade surplus. John McCallum, chief economist at the Royal Bank of Canada, explains that a still relatively cheap Canadian dollar is giving exporters an edge in international markets. On top of that, economic growth in the United States, Europe and Asia has fuelled an increase in agricultural, commodity and natural resource prices. “The economy is not going to boom, but we will have reasonably good growth over the next year,” McCallum concludes.
Canadians who are still shell-shocked by the referendum result, says Lloyd Atkinson, an economist at MT Associates Investment Counsel Inc. in Toronto, should look abroad for a more objective indication of how well the nation is doing. Many foreign analysts now view Canada as a highly favorable place to invest, he says. Among other factors, they are impressed by Martin’s budget-cutting resolve, which could result in a reduction of interest rates to about five per cent over the next two years. And the economic recovery in Europe and Japan, coupled with continued expansion in the United States, should mean more good news for Canada’s critical resource sector. Says Atkinson: “These things are making Canada much more attractive for foreign investors.”
Salomon Bros. Inc., one of Wall Street’s most influential brokerage firms, has been telling blue-chip clients for months—in spite of the referendum— that Canada is a safe place to invest. And following the referendum, it was continuing to do so. Peter Plaut, a Salomon vicepresident, said investors are being lured back by the emphasis on spending cuts in many provincial capitals. Plaut noted I that six of the 10 provinces are forecast1 ing slim budgetary surpluses this year.
5 He expects Ontario to issue an economic I statement this month that will dramatici cally attack the province’s deficit, currently running at $8.7 billion. As well, Plaut predicts that the Quebec government will issue a “good government” statement later this year indicating that it, too, intends to trim spending. Says Plaut: ‘The Canadian fundamentals look good into 1997.”
Bullish sentiments also echoed through Japan’s financial markets last week. Nik Bonellos, head of the international bond desk at Nomura International Inc. in Tokyo, said the Japanese were heartened by the growing strength of the Canadian dollar following the referendum. Said Bonellos: “If we have some stability we can get on with business.”
As the economy improves, large firms such as Noranda—a multinational forestry and mining operation—will be among the major beneficiaries. Kerr says he expects there will be a strong demand for Canada’s natural resources over the next two years. And, undaunted by political uncertainty in Quebec, Noranda is planning to open a $500-million nickel mine in 1998 near Raglan Lake on the Ungava Peninsula in northern Quebec. Kerr is unfazed by the turmoil in Quebec. “Because we export most of our products,” he says, “our economic circumstance would not change dramatically.”
Although the cheaper Canadian dollar has also helped boost No-
randa’s earnings, Kerr maintains that the instability caused by volatile currency shifts hurts exporting companies more than it helps. For that reason, he urges the country’s political leaders to seize the momentum for a rebalancing of federal-provincial powers, in hopes of finally putting the Quebec question to rest. ‘We have a good opportunity to put a lot of the instability behind us,” says Kerr. “But it is going to take a lot of political will to make it happen.” Smaller firms are also benefiting from the surge in exports. Winnipeg-based Sullivan Strong Scott, a division of Strong Equipment Corp. of Toronto, is currently one of the country’s fastest-
‘Now that the near. term uncertainty has lifted, we j vs™, w r /j , • 7 ShOUla See a pickup
says many companies ar^ continuing to invest in the energy sector, in anticipation of a more stable investment climate. He also welcomes last week’s marked decline in borrowing costs. And like Kerr, he says Canada’s business community can only be he'ped by a peri°d ?f p““cal and economic stability. Businesses like stable, predictable environments,” said Gray. “That is the way money is attracted.”
The bad news, according to the Conference Board, is that unemployment seems likely to remain in the nine-per-cent range—in October the rate stood at 9.4 per cent, up slightly from a month earlier—until at least 1997, partly due to government layoffs and continuing cost-cutting at major corporations. Even so, DBRS’s Moore said there may be a slight improvement over the winter as lower interest rates spur consumption and boost the beleaguered home-construction sector. Retail sales, which are currently running 3.2-per-cent higher than in the first eight months of 1994, could also improve if consumer optimism remains strong. “We could have a good Christmas season,” said Moore. “And that would help with employment.”
Of course, the outlook for the economy could have been even brighter if the referendum had not resulted in a virtual tie. Sherry Cooper, chief economist at the brokerage firm Nesbitt Burns Inc. in Toronto, said that a more enthusiastic endorsement of federalism would have produced an even stronger dollar and lower interest rates. “Because of the closeness of the vote,” said Cooper, “there was a tepid response from the markets.” Still, she agrees that financial markets have been impressed so far by Ottawa’s assault on the deficit. Adds Cooper: “They are watching the government very closely.” What they see in the months ahead will help to determine whether Canada’s economic recovery remains on track.
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