BUSINESS WATCH

The smoothest since Sir John A.

Peter C. Newman December 31 1984
BUSINESS WATCH

The smoothest since Sir John A.

Peter C. Newman December 31 1984

The smoothest since Sir John A.

BUSINESS WATCH

By Peter C. Newman

The detailed anatomy of the Mulroney government’s implementation of a new economic and social order will become clear only after Michael Wilson’s 1985 budget, but the process of massive change is well under way. Its genesis in the Sept. 4 election will be 1984’s main legacy.

Like jaded priests at a tedious ritual, the country’s professional doomsayers have been disseminating cranky arguments against Ottawa’s optimistic intentions. We may indeed be dragged down by factors beyond Canadian control, but except for some spectacularly inept staff work by Wilson’s officials and Joe Clark’s string of trip-ups, Brian Mulroney has engineered as smooth a confidence-building start as that of any Canadian government since Sir John A. accidentally started this country.

The signs and portents of Canada’s recovery began to emerge last fall, surprising the economists who had been drawing gloomy graphs of our lag behind the miracle of the great American business recovery. What happened was that the pace of Canada’s economic output for the third quarter of 1984 exceeded that of the United States, and even the suspect productivity of Canadian workers was growing at a faster rate than that of their colleagues south of the border. Efficiency has at last been linked to survival.

The third-quarter results documented a startling 7.5-per-cent real annual growth rate—more than double the previous quarter’s. Part of that welcome surge was an overflow from the superheated pre-election U.S. economy, but there were also gains in Canadian manufacturing, especially in the automobile sector. Consumer spending stayed flat because most people had used disposable income surpluses to pay off past debts. With the exception of a few wellmanaged companies in specialty sectors, corporate profits stayed stagnant, with the continuing shake-out in the financial sector denting even the castiron balance of the Big Five banks. Inflation, last season’s great bogey, became a negligible factor and our exports boomed, with trade surpluses setting new highs.

The departure from power of Pierre Trudeau seemed to affect foreign investment decisions long before Mulroney had fully set out his welcome mat for outsiders to come and buy out our economy. Nearly $2 billion in foreign capital

had flowed in by the end of September, compared with only $200 million in the whole previous year, and a net flight of capital in 1982.

Even a few of the traditional smokestack industries responded to Mulroney’s preaching about the importance of the private sector’s revival. Dofasco Inc. of Hamilton, Ont., for example, boldly announced a $l-billion expansion program. The integrated steelmaker (headed by the appropriately named Paul J.

Phoenix) has found new life in an industry that continues to be depressed in the United States. At de Havilland, Ottawa’s perpetually troubled child, losses were reduced to $120 million from $123 million a year earlier—although its first Dash-8 had to be sold to Norontair at below list price. Canadair was earning a paper profit, having placed its 1984 quota of 15 Challengers, but both aircraft companies remain high on Ottawa’s fire-sale list.

It is dubious if any government, including the wartime business/govern-

ment coalition of C.D. Howe, ever set out so deliberately to woo Canada’s business community. Energy Minister Pat Carney, in effect, asked the leaders of the Alberta Oil Patch just exactly what they needed to give the industry a kickstart. Perrin Beatty, the tax reformer now capably ensconced in the revenue portfolio, offered advance rulings to companies and executives willing to launch new initiatives—even if they were designed to avoid paying taxes.

The service sector, which first accounted for more than half the Canadian economy’s output in 1981, has been showing the most sustained growth, with two-thirds of new jobs being created outside the manufacturing and resource areas.

Montreal staged an unexpected business comeback: one of the little-noticed economic signals of 1984 was that, on June 5, the value of trading on the Montreal stock exchange exceeded totals for the day on the Toronto Stock Exchange for the first time in decades.

Canada’s mining sector was hard hit in 1984 because of the continuing decline in commodity prices, due to bargainbasement quotations from Third World countries caught in a debt squeeze. Many of the Canadian staples—nickel, copper and iron—are being replaced by synthetic alternatives, and the outlook continues grim.

Even with a shooting war in the Middle East, oil prices are not likely to change much. Ontario Hydro projections call for the real cost of Canada’s imported crude to escalate by only 0.8 per cent per year to 1990.

The toughest dilemma facing the Mulroney government is that no matter how hard it tries to reawaken the near-dormant entrepreneurial impulses of Canadian businessmen, the pace of recovery will ultimately depend on a drop in U.S. interest rates and corresponding reductions in the Canadian prime lending rate. The PC government will have trouble living up to its promises because so much of our national finances (7.1 per cent of our gross national product, compared with 4.4 per cent in the United States) is taken up with the deadweight of budget deficits and interest on the national debt.

The Mulroney ministers would much rather enjoy the spoils of office than try to manage an economic revolution, but the state of the Canadian economy during 1984 amply demonstrated that future prosperity will require a megadose of structural rethinking.