Why economic recovery is elusive

Dian Cohen October 3 1983

Why economic recovery is elusive

Dian Cohen October 3 1983

Why economic recovery is elusive


Dian Cohen

Finance Minister Marc Lalonde says that Canada’s economic recovery is going along just swimmingly. In his first major statement since the House of Commons resumed sitting last month, Lalonde noted that although there were signs that economic growth was slowing this in itself was a good thing. His implied analogy: like a champion runner pacing herself, the economy is gearing down from its heady sprint of the past six months to a steady, indefinitely more sustainable lope.

Economics has never been the strong suit of the federal Liberal party as it is incarnated under Pierre Elliott Trudeau. The current finance minister is adhering to that tradition. Not that economic forecasters in general can do much boasting about their predictions of the past few years. In re-examining a variety of economists’ forecasts made since the beginning of this recession, it becomes crystal clear that economists can see no farther than six months ahead: virtually every short-term forecast by nearly every private forecaster has proved accurate only because they make revisions every three months. But at least the private forecasters can see six months into the future, a talent that the federal department of finance does not seem to possess.

A study of past economic statistics reveals that the broadest indicator of economic well-being, the gross national product, has, between January and June, grown by 3.6 per cent—our economy’s highest growth rate since the booming 1960s. Between November, 1982, and this past July, the rate of inflation dropped from 9.8 per cent to 5.5 per cent, employment has increased by three per cent—Canada’s rate of unemployment now stands at 10.9 per cent— and productivity, the measure of the efficiency of our resource use, has, since July, 1982, increased by three per cent. By any of those measures, the economy has rebounded strongly from its malaise of 1981 and 1982.

Of course, the lowering of interest rates is primarily responsible for the recovery. That, coupled with the now expired federal Home Ownership Stimulation Program and Ontario’s temporary lifting of its seven-per-cent retail sales tax, from May 11 to Aug. 8, which encouraged a significant number of Canadians to increase their personal spending by more than two per cent

over the first six months of this year.

But Canadian consumers are neither stupid nor are they financially suicidal. They cannot continue to finance the recovery. In the first place, their incomes are not keeping up with inflation. On Sept. 15, Statistics Canada reported that Canadian incomes have not kept pace with inflation since mid-1982. The rate of inflation may be down, but wages from negotiated settlements have dropped even more. Employment may be up, but much of that improvement consists of part-time workers—a category that does not represent a significant increase in earnings.

The truth is that Canadians have been financing the recovery by dipping into their savings. According to an Aug. 30 Statistics Canada report, in the fall of 1982 worried consumers were saving more than $15 out of every $100 of their income. By July they were saving only $10.

‘Lalonde argues that our economy is well on the road to recovery, but economic indicators suggest it is not9

There are already visible signs that consumers are reducing their spending. Now that the Home Ownership Stimulation Program is over, housing starts are already down from the level they had attained in May. The retail trade flourished after the federal government announced in its April budget that it would permit Canadians to use Registered Home Ownership funds to buy home furnishings and appliances from May to December. But that budget measure simply moved up spending decisions that Canadians had already made. Such spending will not continue: indeed, businesses are finding that they now need fewer workers, and employment in the retail trade is dropping. For some inexplicable reason, the finance minister finds all of this reassuring: “The economy is finding a more sustainable level of growth,” he says.

It is difficult to determine where that growth will come from. Governments often spend money. But with the preoccupation Ottawa has with its multibillion-dollar deficit, it seems unlikely that new spending will come from the federal government. Foreigners repre-

sent another important source of potential spending. But our current huge trade surplus—$1.4 billion — comes not so much from foreign demand for our goods as from the fact that we have been importing so little.

Still, there is one area in which economic growth-fuelling spending could originate—the corporate sector. After all, if any sector has done well in the past six months it is business. Corporate profits have increased by almost 60 per cent since the third quarter of 1982.

But will the corporate sector pick up the spending momentum that consumers are losing? It does not seem likely. Businesses are still liquidating their inventories at an annual rate of $2 billion, an indication of the caution with which our corporate leaders view the recovery. The latest estimates of their investment-spending intentions show that they are likely to spend seven per cent less than last year. Businessmen justify their modest spending by pointing to their excess capacity and to inordinately high interest rates.

So much for the recovery that Lalonde describes as a sustainable rate of growth. That recovery is simply not going to occur. In fact, according to a report by the Paris-based Organization for Economic Co-operation and Development released on Sept. 22, the unemployment rate in Canada will remain in the range of 12 per cent into 1984, a much higher rate than forecasted by Lalonde in his April budget.

As a final indicator that serves as proof that we are not yet out of the economic doldrums, we need only look at the most maligned, but most accurate, forecaster of them all—the stock market. During the past two months it has headed in a lateral to downward direction. That is proof the economy will be taking that same direction in four to six months’ time.

Although economic policy in Canada leaves much to be desired, all is not lost for Canadians. Our economic recovery is on a parallel track to that of the United States. The Americans, however, will recognize the “rightness” of letting interest rates fall to keep their recovery from losing steam.

Let us all pray that the federal Liberals, after eight years of playing follow-the-leader with interest rate policy, do not decide that what this country needs is something made in Canada.

Dian Cohen is a Montreal-based economics writer.