The worst, it seems, is over. At last, after months of agonizing and false hopes, the longest and deepest world recession since the Great Depression appears to be ending. The signs of recovery are still modest, hidden in the arcane graphs of leading economic indicators. For the most part, they have appeared in the United States. Elsewhere, the economic revival still remains more a convincing rumor than a substantiated fact. But slowly and unmistakably the U.S. economy is recuperating, fuelling hopes that once
more it will pull its trading partners back to prosperity as well.
In dozens of industries, in retail sales, in new factory orders and countless other barometers of growth, the evidence suggests that the U.S. economy has finally touched bottom and is on the rebound. Indeed, the question now haunting government policymakers and economic seers is how strong the recovery will be and whether, sparked by a deliberate easing of the money supply by Federal Reserve Board Chairman Paul Volcker, it might rekindle inflation.
However, analysts consider the risk of renewed inflation to be remote—at least for now. Factories are so idle (they are working at only 67-per-cent capac-
ity in the United States) and recent wage settlements have been so low (increases in major contracts last year were the lowest since 1968) that few economists believe inflation will pose an immediate threat. Still, the ballooning U.S. deficit—$189 billion for fiscal 1984—could well abort the recovery. Genuine growth will require vast sums of capital to underwrite new plants and equipment. But without substantial cuts in federal spending, the Treasury will crowd out other contenders in the money markets simply to finance its debt.
Currently, however, Ronald Reagan’s
administration is revelling in the stream of upbeat economic news. For the first time in a year, unemployment fell—to 10.2 per cent in January. New car sales climbed for the 10th successive 10-day period. Housing starts, a key indicator, continued to gain strength, adding buoyancy to depressed lumber industries and household durable goods sales. Consumer debt expanded—a sign of new buyer confidence. And, propelled by lower prices for fuel, inflation continued its slide. Last month the producer price index dropped by a full one per cent—the largest drop since records were first kept in 1947 and another clear sign that inflation has been dealt a decisive blow.
Administration officials have been
reluctant to declare the official end of the recession, fearful that one month’s positive statistics might simply be an aberration. But most private economists without political constraints show no hesitation in writing the recession’s long-awaited obituary. “The recovery has certainly begun,” says Chase Econometrics Vice-President Leon Taub. “The strength we’re seeing is due to a better mix of monetary and fiscal policies, a rebound from the massive inventory liquidations of 1982 and the decline in the interest rates.” But even the most sanguine observers concede that unemployment is likely to remain at
dismally high levels into 1984.
To a great extent what happens in the United States will determine the strength of Canada’s own recovery. As in the States, the Canadian stock market has been on a roll, interest and inflation rates are down and consumer confidence is on the rise. Another important bellwether of an upturn—consumer spending—has also been showing signs of life. Spurred on by buyerincentive programs, auto sales, too, are picking up in Canada, although not as quickly as in the United States. What is more, falling mortgage rates are sustaining an upsurge in the housing market that began last fall. After an abysmal 1982, residential construction is predicted to grow by eight per cent this
year, according to the Conference Board of Canada. Now, economists in Canada are confidently predicting as well that the recession is over. But with unemployment still at 12.4 per cent and with Ottawa’s deficit posing a psychological burden, the Conference Board believes that 1983 will be a year of slow rejuvenation (1.6 per cent real GNP growth), with a stronger surge in 1984. Still, those figures rely entirely on the U.S. scenario. Concedes Ernest Stokes, the board’s national forecasting director: “The crucial variable is what happens in the United States.”
Within the narrow limits of its economic autonomy, the Trudeau government is now preparing a budget that observers predict will be mildly stimulatory. Expected in mid-March, the budget document will probably expand the deficit from its current $23.9-billion range to as high as $30 billion, adding job creation programs as well as higher outlays for social welfare. But Canada’s economic fabric is so closely tied to that of its southern neighbor that the best Ottawa can do is some creative tailoring at the margins.
Overseas the Europeans seem skeptical about the strength of the U.S. recovery and its tonic effects on their own economies. The recession in Europe has been less severe than in North America, largely because of vast government welfare programs. “Expensive but less painful,” says Edmund Stillman, director of the Hudson Research Institute in Europe, of the Continent’s recessionfighting medicine. Still, such comparisons do little to blunt the hardship faced by Europeans as their economies contracted. Just as U.S. politicians were trumpeting signs of an upturn last week, West Germans learned that their unemployment rate had risen to a postwar high of 10.2 per cent in January.
Similarly, the British _
learned that their unemployment rate had soared to 13.8 per cent in the same month— the highest in the European Community.
And, as in Canada, the jobless tolls are taking the lustre off signs of a recovery in Europe. In Bonn economic uncertainty will prevail until after the March election in which the fate of Helmut Kohl’s Christian Democrat government will be decided.
But there is expected to be little momentum toward a German recovery until the second half of 1983. The government is predicting
Forecasts for Canada’s economy
Conference Board of Canada
Royal Bank of Canada
Bank of Montreal
Chase Econometrics Canada
Wood Gundy Ltd.
Pitfield Mackay Ross Ltd.
zero growth for the year, which is at least better than the 1.2-per-cent decline in 1982. In Great Britain the forecast is marginally better, with a 1.7-percent economic growth rate predicted by some experts. After a three-year battle, inflation is down to 5.4 per cent, the lowest in 13 years, and consumer spending is already increasing. In France, where Socialist President François Mitterrand belatedly joined the West’s inflation-fighting bandwagon after a brief flirtation with stimulative policies, unemployment now stands at nine per cent. And the unemployment rate is expected to increase this year despite a predicted two-per-cent growth rate in the economy.
Overall, most analysts foresee a shallow European recovery in 1983 brought on by falling interest rates and a weaker U.S. dollar. But the threat of increased protectionism and renewed U.S. competitiveness (due to the
_ cheaper dollar) hang growth over the EC, and busi-
ness confidence is at a low ebb.
Europe’s caution is echoed by U.S. budget director David Stockman. And other presidential aides acknowledge that the deficit will eventually choke off the recovery if it is not corrected. Reagan’s proposal for standby taxes to take effect in 1986 is not likely to gain wide support, and Congress lacks the political fibre I to cut spending—either > in defence or social 5 benefits—by amounts I that would make a maS jor difference.
As well, the U.S. economy may also be adversely affected by events elsewhere. While some cheer the imminent collapse of the OPEC cartel, a dramatic price plunge could force the debt-ridden oil exporters, such as Mexico, to default on debt, putting capital-weak U.S. banks at risk of bankruptcy. A gathering chorus in Congress would like to see the bankers, for once, forced to accept the consequences of injudicious loans.
In one proposed bill, banks would be required to write off a portion of their bad loans and convert the rest from short-term to long-term debt at lower rates of interest. In return, Congress would agree to increase the U.S. quota to the International Monetary Fund. The large U.S. banks are anxiously seeking a quota increase because without it the debtor nations are even more likely to declare default. In short, the American taxpayer—not for the first time—will be asked to carry the burden of bailing out the banks.
Meeting last week in Washington, the IMF’s policymaking body approved a nearly 50-per-cent increase in special drawing rights, with $6.3 billion from the United States, subject to congressional consent. This amount is less than the $8 billion or $9 billion originally expected and may make its passage somewhat smoother. But there is broad bipartisan opposition to any bailout from both conservatives and liberals. Many are against diverting funds from domestic needs.
All in all, then, while the worst of the recession may finally be over, there is no guarantee that recovery can be sustained. But Canada and Europe are betting on the United States to lead them out of a bitter period of economic contraction. And the odds are more promising than at any time in two years.
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