BUSINESS

Waiting for a northbound train

Roderick McQueen January 4 1982
BUSINESS

Waiting for a northbound train

Roderick McQueen January 4 1982

Waiting for a northbound train

BUSINESS

Roderick McQueen

The gloom around the table was so thick you could cut it with a spoon. When the Maclean’s Panel of Economists met as the year ended, the seven members (see box) discovered there was a unique unanimity: Canada is mired in a recession and will stay stuck there until spring. Says Scotiabank’s Forrie Rogers: “The recession is getting broader and deeper than most people thought it would—and it’s going on longer.” Looking ahead to June, the panel predicted that year-over-year growth would be minus one per cent, with inflation easing only slightly to 11 per cent, unemployment edging higher to 8.6 per cent, the Canadian dollar steady at 84 cents U.S. and prime interest rates down a notch to a still brutal 15.9 per cent.

That gloomy expectation is a stunning reversal from the first six months, the salad days of 1981, when the economy was growing at a healthy five per cent. By midyear, the salad was beginning to wilt. Weakness was showing in the U.S. economy and Canadian activity began to slow during the summer. It was not noticeable enough, however, for federal finance department officials who were assembling thoughts and sifting statistics for a fall budget. Originally scheduled for October, the budget was delayed several times and was finally presented Nov. 12. By then it was so out dated that recession was not even mentioned, let alone addressed.

The slide was on. In the weeks before the budget and since, retail trade de-

clined, corporate profits plummeted (third quarter figures were the worst in a decade), 140,000 manufacturing jobs disappeared, inventories swelled and net exports and new investment slowed. At the same time, interest rates rocketed to an August high of 22.75 per cent as if tied to the U.S. space shuttle Columbia, then lumbered back down five points toward ground. It was that peak, coupled with the Bank of Canada’s tight money policy, that triggered the current recession.

The root causes, however, run deeper. As Laval’s Pierre Fortin put it, “North America is now embarked in a struggle against the four horsemen of the economic apocalypse ... a high rate of inflation, a high rate of unemployment, a slow rate of productivity growth and high-priced energy.” Those four, growing out of the energy crises of

Panel members

The Maclean’s Panel of Economists includes: Professor Clarence L Barber, department of economics, the University of Manitoba; Professor Pierre Fortin, department of economics, Laval University; Anna L. Guthrie, of Loewen, Ondaatje, McCutcheon, Toronto; Professor John Helliwell, department of economics, University of British Columbia; Tom Kierans, president, McLeod Young Weir, Toronto; F.L. Rogers, economist, The Bank of Nova Scotia, Toronto; Professor Abraham Rotstein, Massey College, Toronto.

1973-’74 and 1979-’80, may mean that Canada’s 1982 economic performance will be one of the country’s postwar worst. The havoc may be further complicated by the fact that the public’s expectations have grown too large. Says Rogers, “There’s no notion that it’s a difficult world to achieve the kind of growth we used to achieve.” He also dismissed those who argue that “we can’t just wait through the pain ... or we don’t need the pain.” Hopeful recovery signs in the U.S. include the 10 per cent tax cuts and improving inflation rate (predicted to drop as low as seven per cent). It is a recovery that is unlikely to begin until 1982’s second quarter. Added Clarence Barber: “Business has been liquidating their inventory. Traditionally, when that happens, you get a sharp turnaround.”

While other panelists also await the northbound recovery train, there is fear that punishingly high interest rates will be pulled along with it. Said Anna Guthrie of Rogers’ gradualist view, “I’m not as sanguine.” Agreed Tom Kierans, “As soon as the economy turns up, unless [the Bank of Canada] loosens the money supply, interest rates will shoot up again.” In fact, the central bank’s tight rein on money supply shows no such change. In place since 1975 to fight inflation and protect the Canadian dollar, Governor Gerald Bouey not only continues to defend it, he has even tightened the screws. Since August, growth has been below the four-to-eight per cent target range.

There was also some muttering among the panelists about the tradi-

tional policy of basing the exchange rate against the U.S. dollar. Over the past year, they said, the Canadian dollar has actually strengthened when compared with, among others, the Japanese yen and the Swiss franc. Some panelists advocated that the Canadian dollar would be more accurately reported if measured against a trade-weighted basket of several foreign currencies.

More worrisome flags waved at the meeting for the months ahead, however, were ever-higher wage settlements. With Canadian workers seeking to stay ahead of inflation rates that may run 50 per cent higher than U.S. rates, contract agreements in the 12-to-14 per cent range will become more common. Even layoffs—real and threatenedmay not keep the lid on. The result could increase public pressure for controls. It is a policy regarded by Kierans as one likely to give Canada “a binder and twine industrial infrastructure.”

While the panelists agreed that Ottawa lacks the political will to impose controls, they are favored by panelist Barber, who plans to publish a book in the spring calling for their reimposition. Fortin is also an advocate. One year of controls, he argues, could drop the inflation rate by two percentage points—all for $200 million to run the necessary bureaucracy. A similar drop, if caused by slowdown, would mean an unemployment rate five percentage points higher—and income loss of $30 billion. Added Fortin: “If there’s one government in the country waiting for controls it’s Quebec,” where major public sector contracts run out in 1982. These negotiations, he said, could lead Premier René Lévesque to call a snap election, one that Fortin predicts the Parti Québécois would easily win. Fortin is also worried about Quebec’s provincial debt reaching $9 billion by 1986. “If Quebec goes broke,” he says, “Ottawa will come in and run things.”

Potential confrontation was also sighted by the panel in other areas. There was concern, for example, over sour federal-provincial relations and any new Canadianization plans following the National Energy Program (NEP). While the panel admitted that settlement last year on energy pricing and the constitution had removed some business and investment uncertainties, they see little yet that points to any resurgent optimism. The only bright spot noted is the return of oil drilling rigs to Canada now that the economics of so-called new oil have improved.

Job-creating expenditure will, in fact, be scarce. A survey by the federal department of industry, trade and commerce predicts growth of a mere two or three per cent in 1982 real capital investment (excluding housing). By comparison, 1981 figures may reach seven

Forecast for 1982 — 1st half Performance of economy based on average of predictions by Maclean’s Panel of Economists *estimated 1981 performance

-1% GNP Real increase in gross national product over 1981 '.9%

11.1% Inflation Increase in consumer price index over 1981 *12.2%

8.6% Unemployment Percentage of labor force out of work *8.2%

15.9% Interest rates Chartered banks' prime lending rate by June, 1982 *17.25%

844 Canadian dollar Measured against $U.S. '84.16c

163,000 Housing starts Housing units (including apartments) started in 1982 * 172,000

per cent, 1980 saw 8.6 per cent and 1979, 12.1. Remarked UBC’s Helliwell: “The government has decided to let the private sector spend at precisely the time the private sector has decided not to spend.” Nor will the consumer likely lead the recovery. A recent Conference Board of Canada survey found consumer buying confidence at a 20-year low. When the bounce-back does occur, then, it will likely begin elsewhere before spreading to Canada.

It is a fragile hope, but not an uncommon one, for a country that has traditionally relied on the U.S. consumer— along with renewed spending in the auto and housing sectors—to lead the Canadian economy out of recession. This year, it is an even more tenuous thread because of a growing isolationism. Says Helliwell: “Countries are turning inward all around the world.” But, predicts Guthrie: “The American

consumer is looking at a better world. They are well over the oil price hump; they will benefit from stable world oil prices. And they know they’ll have significant tax cut.”

But the troubles that must be facedz before recovery comes are not just8 international. At home, the mood wary businessmen and consumers alike is not aided by governments grappling with growing financial needs, including hefty debt charges. Nor is there even single-minded purpose. Says Helliwell: “This country is not one country at all but a group of regional economies.” Further, acrimony is building on two federal-provincial fronts—equalization and established programs financing (EPF)—the heart, as one panelist put it, of who controls what in Canada. The provinces, Helliwell notes, are suspicious of the federal government’s intrusion into the areas of provincial con-

cern, such as health and education. First, he says, under the schemes to be negotiated by March, there will be less revenue flowing to the provinces. Second, federal proposals insist on increased and as yet uncertain improvements in health care and cost standards—with no guarantees of federal funds. “The trouble is,” notes Kierans, “that the federal government wants to constrain their expenditures and set the standards.” Pointing to the coming battle, he said: “We’ve just come out of an oil pricing confrontation where Alberta cut back its production. I wouldn’t be surprised to see the federal government act in a similar way in this case.” Rotstein added that the provinces have

failed to argue their side strongly. He characterized their positions as simply “gimme, gimme, you owe me.” The need, agreed the panel, is for new ways to separate the haves from the have-nots. One federal proposal would see Ontario used as the zero point against which the other provinces are measured, since its resource revenue is minimal and it will receive no equalization payments. While there may be some compromise on equalization, settlement on EPF is less sure. Says Helliwell, “It may go on longer than the oil situation.”

Western movies do have a way of ending happily, however. Canadianization of the petroleum industry, proposed barely a year ago, has turned from a fist fight to a much contented stroking, noted the panel. Most businessmen are now in agreement at least with the principle. Even so, claimed Kierans, no sufficient cost-benefit analysis has been done. Said he of the NEP, “The initiatives were ad hoc, badly timed and distinctly antithetical to other urgent priorities.” He said that the Canadian dollar was highly vulnerable at a time

when Americans regarded the Canadian moves as “flamboyant.” “The costs of purchasing economic nationalism,” he said, “are spread among people who can’t afford it and if it were explained, would not want to do it.” Rotstein, a founding member of the recently disbanded Committee for an Independent Canada, countered by pointing out that 55.8 per cent of Canada’s exports are merely moving between subsidiaries of foreign firms. He disagreed that Canadianization had hurt relations between Canada and the U.S., noting that “all the foofaraw” had only moved Canadian ownership up from 28 to 34 per cent. “Inadequate representation in Washington is what’s butchering relations with the U.S.,” said Rotstein. “We’re just learning about lobbying.” Kierans agreed, noting that anti-Canada bellyaching in Washington was kept to a minimum by two days of hectic lobbying before the Ontario government moved in October to purchase 25 per cent of U.S.-based Suncor. Added Rogers, “The costs [of NEP] may be large, but it’s a pretty good bet that the benefits will be large, too.” Barber saw an additional reason to applaud NEP: “It kept the exchange rate low.” Referring to the Netherlands and how its oil revenues destroyed the manufacturing sector, he said, “The Dutch disease comes when you have a strong resources sector and the exchange rate appreciates,” making exports expensive in other markets. Concluded Helliwell: “For Canada to be a scary place for the multinationals may not be such a bad thing.”

As for other government policy, the fall budget found panelists in accord with its wrongheadedness—although it was admitted that Finance Minister Allan MacEachen may have been overtaken by events. “At least the budget made for unity across Canada,” said Fortin, “because there was unanimity that it was a bad budget.” For 1982, even a change in the method of telling Canadians how badly their purchasing power fares is unlikely to bring relief. The cost-of-living index, based on 1974 spending habits, will be updated in April to reflect the higher proportion of spending going to housing, transportation and energy. StatsCan will also change some of the goods and services in its imaginary 325-item basket. Rolls will be dropped since bread is included; added will be day care, wall units and 35-mm cameras. And if few consumers have cash to squander on the reconstituted list, boxer Trevor Berbick may have supplied the answer after outpointing the aging Muhammad Ali last month in the Bahamas to earn $350,000. “Money doesn’t mean nothin,” Berbick said. “It’s how much love you have in your heart.” To which any pessimistic panel could only add: amen.