BUSINESS

Caution lights

Predictions of recession in North America

JOHN DALY January 9 1989
BUSINESS

Caution lights

Predictions of recession in North America

JOHN DALY January 9 1989

Caution lights

BUSINESS

Predictions of recession in North America

Most economic forecasters insist that a North American recession is inevitable—in about 12 months. But even then, there is much uncertainty about just what it will take to derail the North American economy, which is now entering its seventh consecutive year of economic growth. Most privatesector forecasters say that the U.S. and Canadian economies have enough momentum to keep growing in 1989, but at a much slower rate than they did in 1988. Interest rates are at their highest levels in four years, and many economists say that they will go even higher if George Bush, when he takes over as president, does not raise taxes to reduce his nation’s staggering budget deficit of $186 billion. Forecasters say that if he fails to act decisively, the United States will likely slide into a recession. And Canada, which under the Free Trade Agreement now has closer ties than ever to the United States, would follow close behind.

The spectre of high interest rates and slower growth in America has led most economists to predict that Canada’s so-called real (inflation-adjusted) gross domestic product (GDP)— the value of all goods and services produced— will only grow by about 2.3 per cent this year, compared with a robust 3.8 per cent in 1988. At the same time, in an effort to ward off inflation and protect the value of the Canadian dollar, Bank of Canada Gov. John Crow and

Finance Minister Michael Wilson are keeping interest rates about two percentage points higher than those in America. And figures for October released by Statistics Canada last month showed that Canada’s GDP grew by only 0.1 per cent in October, down from 0.3 per cent in September and 0.6 per cent in August.

Wilson staunchly defends his anti-inflationary policies. Speaking to a group of businessmen in New York City last month, he declared, “Although anyone would prefer lower to higher interest rates at any given time, the longterm damage caused by letting inflation get out of control is just too great.” Later, Wilson told reporters that he is prepared to stick with the high rate policy in the hope of avoiding “the boombust experience we’ve had before, so that we can have what the economists like to call ‘a soft landing.’ ”

But many economists say the concern about inflation that policymakers and central bankers in Canada and the United States have expressed is exaggerated.

Wage increases and inflation rates in both countries have

averaged less than five per cent for each of the past five years, and they are forecast to rise only slightly in 1989. Said Michael Miller, director of research for the Toronto-based WEFA Group economic consulting firm: “If you look at the statistics, it is not clear that there is an inflation problem at all.” And, said Ross Preston, a senior research director with the Economic Council of Canada: “All major recessions since the Second World War have been brought about by an overreaction by the central banks of the world to inflation fears.”

Despite those views, Preston added that further increases in U.S. interest rates are inevitable if the Bush administration fails to reduce its deficit. Both government and private debt levels in the United States are at record levels. In order to avoid further rate increases, many economists predict that Bush will break his “read my bps” campaign promise not to raise taxes.

Meanwhile, growth in key sectors of the Canadian economy is already waning. George Vasic, an economist at the Toronto-based forecasting firm Data Resources of Canada, said that the pace of new business investment will slow following last year’s jump of 18 per cent, which was the biggest since 1956.

Most private forecasts predict that other sectors of the economy will experience setbacks in 1989. According to Miller, Canadian housing starts will decline for the second year in a row, by roughly 14 per cent to about 189,000 this year. Vasic says that automobile sales in Canada are expected to dip below one million for the first time since 1984. Most forecasters say that consumers will provide little economic stimulus. Miller, for one, says that consumer spending will rise only moderately because of high levels of personal debt, higher interest rates and eroding confidence.

In the resource sectors, the outlook is little better. Most economists say that prices for metals and forest products, which rose sharply in 1988, have peaked and will probably start to decline this year. At the same time, Western oil producers say that they are waiting to see if last November’s agreement by members of the Organization of Petroleum Exporting Countries to limit their output beginning this month will result in a long-term increase in oil prices.

Still, if there is a recession in 1990, economists say that Ontario, whose manufacturingand resource-based economy is especially vulnerable to changes in interest rates or raw materials costs, will probably feel the downturn first. Indeed, all provinces and industries that have experienced the greatest prosperity since the reces-

sion of the early 1980s may feel the shock of a downturn most sharply. For those who have gained the most, the fall will be hardest to take.

JOHN DALY