BUSINESS WATCH

Steady as it goes for the new year

Peter C. Newman January 5 1987
BUSINESS WATCH

Steady as it goes for the new year

Peter C. Newman January 5 1987

Steady as it goes for the new year

BUSINESS WATCH

Peter C. Newman

A flat economy and a buoyant stock market—contradictory as it sounds, that is the prevailing view of what is in store for 1987.

Andrew Sarlos, the resident gnome of Bay Street whose past predictions have been amazingly accurate, forecasts that the Dow Jones Index (currently hovering at 1,920) will hit between 2,400 and 2,600 during the next 12 months, following a dip in the first quarter. His long-term prediction is even more bullish. He sees the Dow moving past 3,000 by the end of 1988, but foresees a sharp and prolonged slide after that.

“The economy, however, will be flat,” he told me. “Because the Democratic Congress will not approve a rise in defence spending while a Republican President won’t allow any increases in social benefits, the U.S. budget deficit will stay at a reasonably stable level. In Canada, for very different but equally valid reasons, the deficit will also not grow and the economy will stay on its currently horizontal trend.”

He is betting that interest rates will move down from their already low levels, which should make bonds and financial assets a good buy. “That stock correction during the first quarter,” he says, “will only create buying opportunities for those who are not yet in the market and a chance to fully invest for people who are already in it.” His judgment is that the best performing issues will be American blue-chip multinationals in service fields, such as Eastman Kodak, General Electric, Merck, 3M, IBM and Apple. In Canada he sees the best prospects for the Canadian Imperial Bank of Commerce and any companies connected with what he calls “the Big Three Families”—the Reichmanns, the Bronfmans and Paul Desmarais.

Most economists don’t quarrel with that assessment, calling for little more than a three-per-cent increase in the gross domestic product for 1987, with unemployment dipping less than one per cent. That would compare with a predicted economic expansion of 3.1 per cent in the United States, with other countries, including Japan and West Germany, growing even slower than we are. The gross domestic products of Switzerland, Britain and Japan are predicted to rise only 2.5 per cent. Canadian housing starts will be down from the near-record levels set in 1986, but overall labor productivity will start a slow climb upward. What driving force there is in the economy will come from more rapid capital spending by industry in Central Canada. That could drive the indicators a little higher, because this kind of expenditure has considerable multiplier effects. While unemployment moves down only marginally, exports will grow with a gradual recovery in commodity prices, leaving us with a better trade surplus by the end of 1987. Consumer spending, which has fuelled the economy in the past years, will slow down, mainly because the backlog of pent-up demand for cars has now been satisfied.

The major question mark about any future projection, of course, is the price of oil. It is just about impossible to make much of a meaningful prediction, because so much will depend on how long OPEC will be able to act as a viable cartel. With world oil consumption growing at only about 1.2 per cent a year, prices will not likely move beyond the $22to $24-per-barrel range—with a long-term rise to $33 possible by the end of the century.

Other commodity quotes, especially metal prices, are expected to rise. Aluminum prices have already rebounded, and even copper futures are looking better, but the bottom will drop out of lead as battery sales decline. The shift to service industries, which accounted for more than half of Canada’s gross domestic product in 1985, will continue.

Unfortunately, the continuing evolution of this sector will hive even more of Canada’s economic growth into Ontario. “The fact that Toronto is the international banking centre of Canada and the head office location for most of the large service companies suggests that Ontario is in a much better position than other provinces to encourage future service-sector development,” says Mitchell Rothman, chief economist for Ontario Hydro.

Rothman accurately points out that the present pattern of Canadian economic development is likely to continue, which means the perpetuation of Ontario as the engine that drives the whole economy. Ontario consumers are not only more confident than the citizens of any other province, they are sitting on sizable savings and seem willing to spend them. “This province,” Rothman insists, “being the centre of national economic gravity, will be in a favorable position to attract investment.”

During 1986 unemployment in Ontario, or at least inside its thriving Golden Horseshoe at the eastern end of Lake Ontario, was below the national average. Also during the past 12 months private and public investment in manufacturing increased an amazing 33 per cent—and that on top of a 39-per-cent jump in 1985. Total capital investment in the province was up 16.2 per cent for this year, while the same figures for the rest of Canada showed a 0.1-per-cent drop. For 1987, Ontario Hydro’s predictions for the province are 2.6 points under the national jobless rate of 9.3 per cent.

That is wonderful for residents of that magic Horseshoe sector, but hell for those who live in the underprivileged regions of the country—which is rapidly turning out to be everywhere else.