Maclean’s Panel of Economists predicts a continued squeeze
Anthony Whittingham,David CoatesJune291981
Economies of scale in a minor key
Maclean’s Panel of Economists predicts a continued squeeze
By Anthony Whittingham and David Coates
Even in the darkest hours economists are not without a sense of humor. Back in the days when federal governments in Canada actually did things to manage the economy, many a wry economist used to liken those efforts to the rearranging of deck chairs on the Titanic. Now, when the federal government does nothing, there’s a new nautical joke circulating among economists. “Surface immediately,” radios the captain to his underwater diver. “The ship is sinking!” Abraham Rotstein, professor of political economy at the University of Toronto, shared this paraphrased McLuhanism last week with his fellow members of the Maclean's Panel of Economists. As an indication, however, that economists are only partially pessimistic and still as academic as ever, it was Douglas Peters, vice-president and chief economist of the Toronto-Dominion Bank, who drew the biggest laugh later in the day: “I think we can safely conclude,” he chortled, “that any forthcoming government policy will not add to consumer incomes.”
Last week’s semiannual meeting of the Maclean's panel provided an opportunity to assess economic prospects for the coming months and, as well, to track the changes that have occurred so far in 1981. What emerges is that the performance of the Canadian economy so far in 1981 has been better in some areas but worse in others than they had predicted six months ago at their last meeting. While interest rates hover at 20 per cent (six points higher than they predicted last December), real GNP growth of one per cent in the first quarter outstripped their expectations and will achieve a healthy four per cent by year-end if it continues. Inflation and the unemployment rate reacted equally unpredictably to the monetary policies that produced high interest rates. Expected to decline, inflation has, in fact, crept upward to a current level of 12.3 per cent. The anticipated rise in unemployment, on the other hand, has not
materialized: the country’s jobless rate continues to fall and now sits at about seven per cent. It’s obvious that a consumer-led recovery—anticipated following 1980’s strong fourth quarter and a continued surge in this year’s first quarter—won’t materialize this year, not with inflated prices and the high cost of money. Instead, predicts Anna Guthrie, economist for the Loewen, Ondaatje, McCutcheon & Co. brokerage house, reduced real income and consumer uncertainty will curtail 1981 spending. Those with money are making real gains by depositing savings in high-yielding savings accounts; others, says John Grant, director and chief
economist of Wood Gundy Ltd., are using savings to pay off high-interest loans at a faster rate.
On the positive side, new jobs, housing starts and business investment outpaced expectations early in the year. In Ontario, for example, where auto industry problems and a rash of plant closings have threatened to wound the manufacturing sector, job growth last month alone was up four per cent. In housing, the réintroduction of tax credits for construction of rental units and the removal of rental ceilings in Al-
berta have sparked a welcome resurgence. As many as 181,000 new units may be built this year, up from last year’s 158,601.
Three key underlying problems dogged the economy a year ago and continue as problems today. Some resolution must be achieved, says the panel, in dealing with the three devils: inflation, energy pricing and the vulnerability of the Canadian dollar in world markets. A year ago, the panel was optimistic that conditions, and prospects, were better in Canada than in the U.S. Inflation was lower, growth was higher and Canada seemed poised to emerge from the 1980 recession more quickly and with greater buoyancy than the U.S. This year, in what Abraham Rotstein calls the “seesaw effect,” those roles have been reversed. Though its economic battles are far from over, Rotstein says, the U.S., under the new Reagan administration, seems to be making greater strides than Canada in putting its house in order—a growing gap which, if anything, will likely widen further into 1982. Panel members were somewhat skeptical of the evangelical, almost fundamentalist, fervor characterizing the prevailing “supply-side” school of economic management guiding the policy-makers of “Reaga-
nomics,” but they acknowledged it is having a powerful psychological impact in convincing Americans to “tough out” the current anti-inflationary program of tight money and high interest rates. In Canada, by contrast, where Bank of Canada Governor Gerald Bouey’s monetary policies are perceived as the sole source of economic management—making Bouey the main lightning rod for public anger—the panel says there seems to be little support among Canadians for a program of economic restraint. The panel argues that the fed-
eral government should find fiscal measures to augment the monetary restraint imposed by the central bank. But they’re not convinced the U.S. route holds the answers, especially the much touted U.S. tax cuts—aimed at stimulating production and promoting investment—as these are already in place here through Canada’s system of tax indexation and business capital cost depreciation. And so far, they haven’t produced any of the spectacular results the U.S. is so boldly predicting. “Maybe the
difference is the confidence factor,” says Gerald Angevine, director of the Canadian Energy Research Institute. “It’s sort of the John Wayne school of economic management.”
What makes Canada’s interest rate problems more complex than the U.S., says Douglas Peters, is that rates have to take into account not only inflation but currency exchange levels as well. “Because of the bad press worldwide generated by the National Energy Program [NEP] and Canada’s generally poor investment climate at the moment,
we’re tied to U.S. interest rates more than ever before.” When U.S. rates go down later this year, Peters says, Canada’s rates will probably have to remain slightly higher than U.S. rates. And panelists predict both will be up again in 1982 to levels above the 1981 record.
Worse, Canada has yet to absorb the impact of world energy price increases, even though prices in Canada are up nearly 50 per cent at the gas pump since the launching of the NEP last October. Throughout the ongoing federal-pro-
vincial stalemate over oil revenue sharing, producers’ returns have barely changed, Angevine says, while close to 90 per cent of the increase—the equivalent of 24 cents per gallon on gasoline alone—has gone into federal coffers in the form of disguised excise taxes. This has led to what John Grant refers to as a “false wave” of inflation—meaning prices are up while the underlying problem remains unresolved, with still higher prices yet to come. The U.S., on the other hand, moved quickly to absorb world prices in less than two years and
has now largely absorbed the shock. That’s a convincing argument, Angevine says, for Canada to take the same step, though his own estimate is that Canada won’t match current world prices until the end of 1985 at the earliest.
What the recent mixed performance signals for the general health of the economy isn’t entirely clear. With the economy expanding while the squeeze on consumers and businesses continue, the panel foresees labor unrest later
this year as unions vie for wage settlements that amount to little more than a “catch-up” to inflation’s gallop. Without a well-defined cure for the country’s ills, the depressing prospect is that the country will simply muddle along treating only the symptoms. It adds up to what Grant describes as “a hell of a gloomy year in 1982” for the federal government.
If Canada’s economy in 1981 seems to be sending out a blur of conflicting messages, the danger ahead may lie in an even greater blur of social and political responses. The slow ache of inflation and the jabbing pain of high interest rates—combined together in a disorganized infirmary with no doctor apparently present—clearly place a painful strain upon Canadian society at all levels, from labor and business to the politicians and policy-makers who must strive for remedies. The greatest challenge may lie in seeking to forge the political consensus necessary to carry the country through the current sustained period of economic stress. All too often, says the panel, Canada relies on the elephant south of the border to get moving so the mouse can be dragged along behind. This time, the old methods may not be enough.
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