BUSINESS WATCH

Dollar signs floating in the crystal ball

A recession is due for 1989, but, whenever it comes, the downturn could parade as a mere pause in a surge of renewed prosperity

Peter C. Newman January 2 1989
BUSINESS WATCH

Dollar signs floating in the crystal ball

A recession is due for 1989, but, whenever it comes, the downturn could parade as a mere pause in a surge of renewed prosperity

Peter C. Newman January 2 1989

Dollar signs floating in the crystal ball

BUSINESS WATCH

PETER C. NEWMAN

A recession is due for 1989, but, whenever it comes, the downturn could parade as a mere pause in a surge of renewed prosperity

Economic guru Milton Friedman got it right when he recently proclaimed that there are no business cycles— "there are only ups and downs." With the Canadian economy heading into its 25th quarter of uninterrupted growth, a recession is due for 1989. But, whenever it comes, the downturn will probably not be too severe and could parade as a mere pause in a surge of renewed prosperity.

Barring unexpected developments (such as Dan Quayle’s becoming president, or a major default on Third World debt), there is now simply too much momentum in the system for a serious recession—particularly because interest rates are expected to peak by midyear. The rate of growth of Canada’s gross domestic product will almost certainly drop to about 2.9 per cent or less from this year’s 4.3 per cent, but that should not push the national unemployment average much beyond eight per cent. The Canadian GDP increase may appear modest, but it is still higher than the growth rates forecast for such highly developed economies as West Germany (2.2 per cent), Switzerland (2.4 per cent) and the United Kingdom (2.3 per cent). Among the Western industrialized nations, only Japan (3.5 per cent) will expand more quickly than we will.

Housing starts will decline to about 175,000 from last year’s 200,000, but world oil prices may drift upward, with long-term predictions of up to $27 a barrel being bruited about. The Free Trade Agreement will begin to exercise a mild impact on the Canadian economy, as some American branch plants are downgraded to a new and unwelcome role as distribution warehouses. The long-term hope is that U.S. multinationals will use Canada as a base for their “world product mandating”—converting factories to supply one line of merchandise or one part for their overall operations. What will make that transition particularly difficult is the high exchange rate of the Canadian dollar, now at its six-year peak and not expected to drop much in the next 12 months. Canadian industry will be able to compete only by dramatically increasing its productivity—and that will require unusually high standards of corporate planning and labor-management co-operation.

The most volatile factor in this or any other year will be interest rates and their effect on inflation levels. Because the Bank of Canada and the Federal Reserve Board have dug in fairly effectively against allowing a renewed inflation spiral by raising their prime rates, it is unimaginable that they would buckle to government pressure and support higher spending by increasing the money supply. That inevitably will mean tough budgets in both countries, particularly in Ottawa, with Michael Wilson pledged to introduce the downside of his tax reforms, including new federal sales and transfer levies. Said Peter Spiro, head of Ontario Hydro’s economic forecast section: “The common prediction that interest rates will fall quickly when the federal deficit is reduced is likely to prove incorrect. It is not the deficit but the overall size of the national debt that is the important determinant of interest rates.”

What makes Canadian economic forecasting a sketchier proposition these days than usual is that, through the FTA, we are even more intimately tied in with an economy that is bound to take unexpected turns as the Americans try to extricate themselves from their horrendous debt burdens. Brazil, Mexico and Argentina are supposed to be the great debtor nations, but their foreign liabilities (at $348 billion combined) are much smaller than the $440 billion owed by the United States. So far, the Americans have survived by selling off their bonds, their factories and real estate to outsiders, but as The Economist magazine noted, “The United States has continued to borrow as if there were no tomorrow, which, if it carries on borrowing, there may not be.”

Internally, there is something like an estimated $400 billion worth of high-yield junk bonds floating around Wall Street, creating corporate debts that are becoming increasingly difficult to service, much less pay off. The world’s commercial banks hold about half of the $1.4 trillion in Third World debt that no one any longer expects to be repaid. While individual Canadians continue to increase their instalment debts, saving rates of disposal income have plunged to seven per cent—half the usual average. That is a sure signal that consumer spending will drop in 1989, causing many retailing bankruptcies.

The crash of Oct. 19, 1987, and the subsequent doldrums as individual investors stayed out of the market, made it clear that what happens on Bay and Wall streets no longer has much to do with economic health. Fourteen months later, none of the predicted calamities has occurred—except among brokers who depend on sales commissions. “I expect it will be an extremely volatile year,” forecasts Andrew Sarlos, the sage of Bay Street, “but I’m starting to get a bit bullish, primarily because of Gorbachev’s peace offensive. It opens up the possibility of real and massive progress on disarmament. This will help the stock market because, as American troops are brought back from Europe and other world fronts, it could mean a significant drop in the American defence budget, and that in turn would reduce the deficit and stabilize the American dollar, which would lower interest rates. Just as Roosevelt saved capitalism by becoming a socialist, Gorbachev will save capitalism by becoming a capitalist. I don’t expect the Dow to break below 2,000, and it could go as high as 2,400.”

The greatest impact of the FTA on the Canadian economy will be to accelerate its rate of change. The Japanese have mastered that concept and have even coined a new term for it: “TAT,” or turnaround time. They have reduced to weeks rather than years the time between the perception of the need or demand for a new product to the moment of its mass manufacture. One Tokyo management consultant recently compared his country’s electronics manufacturers to fashion designers in producing enticing new offerings with each new season.

That kind of accelerated timetable will not be easily imposed on or adopted by the somnambulant sectors of Canadian business. But 1989 will be the first year of a new era in Canadian economics—and any chief executive officer who assumes that tomorrow will be like today had better leave the game.