JOHN CROW FACES GROWING CRITICISM AS HE FIGHTS TO CONTROL INFLATION WITH HIGH INTEREST RATES
POLICY UNDER FIRE
JOHN CROW FACES GROWING CRITICISM AS HE FIGHTS TO CONTROL INFLATION WITH HIGH INTEREST RATES
No matter which way he turns, Bank of Canada governor John Crow is under fire to abandon his stubborn war on inflation. Exporters and opposition politicians complain that Crow’s high-interest-rate policy has pushed the Canadian dollar to a nine-year high, pricing Canadian goods out of foreign markets and forcing the country’s balance of foreign trade into a $421-million merchandise trade deficit for the month of October—the first in 13 years. At the same time, union leaders blame Crow’s policies for the thousands of workers who have received layoff notices in recent months. Yet, through it all, the head of Canada’s central bank shows no signs of weakening. Says Crow: “If we are to turn inflation around, it is critical to persevere on the current path.” But Canadian Exporters’ Association president James Taylor replies, “John Crow’s single-minded pursuit of inflation is obsessive.”
With the economy clearly slowing, the outcry against Crow’s policies will likely get even louder. Canada’s top banker has proven himself a tough opponent of inflation, using high interest rates to dampen consumer borrowing and spending in order to prevent prices from rising. Last week, by keeping the trend-setting Bank of Canada rate unchanged from the previous week at 12.47 per cent, Crow gave every indication that he is holding firm on his tight course. But critics say that his unwillingness to abandon his campaign against inflation in spite of a spreading weakness in the economy, a soaring dollar and a plunging trade balance could tip Canada into a painful recession, which occurs when, for two consecutive quarters, the gross domestic product (the value of all the goods and services produced in the country) registers only negative growth, after adjustments for rising prices.
Indeed, most economists now predict that Can-
ada’s GDP will show little growth in 1990. Last week,
Statistics Canada reported that in October the GDP declined by 0.3 per cent, the first monthly drop in seven months. Overall, the most optimistic economists predict that Canada’s economy will grow by only about two per cent in 1990, compared with a projected 2.7 per cent for 1989 and 5.6 per cent recorded the preceding year. Warned Bengt Gestrin, executive vicepresident and economic adviser at the Canadian Imperial Bank of Commerce: “Mr. Crow has to steer a very careful course.”
Indeed, the 52-year-old banker has been walking a tightrope since he became governor of the Bank of Canada on February, 1987, after six years as deputy-director under the low-key, but sometimes-controversial Gerald Bouey. Bom in one of London’s poorer districts, Crow studied politics, philosophy and economics at Oxford University before joining the International Monetary Fund (IMF) in Washington. Today, he lives with his wife and two children in a comfortable stone house along Ottawa’s Rideau Canal, where he takes his daily dawn jog.
The determined, blunt-speaking Crow’s con-
servative policies and personal competence have given the Bank of Canada credibility in the international financial community. And the fight against rising inflation has been the hallmark of his tenure. Fearing a return to the double-digit inflation of the late 1970s and the
turbulent early 1980s, Crow has consistently used the Bank of Canada’s powers to keep interest rates high and credit tight in an effort to keep the Canadian economy from overheating once again.
Crow’s high-interest-rate campaign has enjoyed unwavering political support from Finance Minister Michael Wilson. And like his U.S. counterpart, Federal Reserve chairman Alan Greenspan—who is also under pressure to change course—Crow says that, if he succeeds in cutting inflation to a negligible level, he will leave the economy healthier in the long run, even if the short-term pain includes large-scale layoffs across the country.
But after nearly three years on the job, he has still not declared victory in his war on inflation. Indeed, Statistics Canada reported last month that the inflation rate edged up one-tenth of a point in November to a 5.2-per-cent annual level, compared with an annual rate of about four per cent when Crow stepped into the governor’s office. On Dec. 14, a day before the latest inflation figures were released, he told the Winnipeg Chamber of Commerce that it would be “self-
defeating” and “misguided” to reduce rates as long as inflationary pressures exist in the Canadian economy.
Most businessmen and economists, however, say that Crow’s concentration on inflation is putting the whole economy at risk. Canadian consumers and some companies benefit from a strong dollar because it makes imported goods less expensive. But critics argue that high interest rates responsible for the strong dollar have caused plant closures and layoffs by driv-
ing up costs for manufacturers and inhibiting expansion by making it more expensive to borrow money to invest in new machinery and equipment.
The strength of the Canadian currency also hurts exporters by making their goods more expensive in the United States and other critical foreign markets. Economists estimate that every one-cent rise in the dollar costs Canadian companies between $1 billion and $3 billion a year in lost export sales. Said Michael McCracken, head of the Ottawa-based economic-forecasting firm Informetrica Inc. and a vocal critic of Crow’s policies: “The question is how much is the Bank of Canada willing to raise unemployment to keep inflation down.”
Added Mark Drake, president of Electrovert Ltd., a Montreal-based company that manufactures and exports equipment for the electronic circuit board industry:
“Crow has lost sight of the fact that the pendulum has swung too far in his effort to control inflation at any cost.”
Evidence supporting the exporters’ case is growing. For one thing, thousands of layoffs have been announced in recent months. The Big Three North American automakers together have given notice that more than 107,000 U.S. workers and 23,500 in Canada will be laid off temporarily this month with a further 5,200 General Motors Corp. auto workers to be laid off either temporarily or permanently in February and March, as manufacturers halt production to control growing inventories in a slumping auto market. And analysts say that even temporary layoffs will damage the Canadian auto-parts sector and steelmakers.
The pain has spread to other industries. At 3 p.m. on Sept. 22, about 290 workers at the Outboard Marine Corp. of Canada plant in Peterborough, Ont., were summoned to the plant cafeteria and told that the manufacturing operation would be closing for good in early 1990. Outboard Marine’s U.S. management had decided that it was simply cheaper and more profitable to shut down the Peterborough manufacturing plant, which makes marine engines and fuel tanks, and to shift the assembly work to facilities in the United States, Belgium ^ and Hong Kong. Said Paul Clark, a 50| year-old tool-and-die maker in a grim I understatement: “It is upsetting to ^ leave a place where you have worked % for 31 years.”
And there are other warning signs of an impending slowdown. Canadian factories operated at 81.7 per cent of their capacity in the third quarter, which ended last Sept. 30, down marginally (0.6 per cent) from the previous quarter and 2.4 per cent from the same period a year earlier. Canadian retail stores rang up sales of $139.7 billion for the first 10 months of 1989, up five per cent from a year earlier, but just keeping pace with inflation—and even Christmas purchases, once they are totalled, are unlikely to push retail sales far above the inflation rate. Declared Leonard Kubas, president of Kubas Research Consultants, a Toronto-based firm specializing in the retail industry: “More than anything else, concern over layoffs seems to be dampening retail sales.”
At the same time, the prospects for future growth also appear to be waning: invest^ ment in new machinery and I equipment dropped to $4.55 ^ billion in the third quarter of 5 1989, down 4.6 per cent from
the previous three months. Even more worrisome is the $421-million merchandise trade deficit for the month of October, Canada’s first since 1976. And if Canada’s soaring dollar does not decline, exporters warn that the trade deficit may worsen.
Some economists, however, point out that the trade flows may be only a temporary phenomenon as exporters and importers adjust their business practices to accommodate the changed dollar value. And there are other hopeful signs for beleaguered Canadian exporters. Last week, the U.S. commerce department reported that its index of leading economic indicators—the U.S. government’s main forecasting gauge of economic activity—edged up by 0.1 per cent last month, which analysts interpreted as a sign that the American economy will slow in 1990 but not topple into a recession. As a result, U.S. demand for Canadian products could remain stronger than recently expected in the coming year.
But, for the moment, exporters say that their principal concern is still the high Canadian dollar. Propped up by a Bank of Canada rate of 12.47 per cent, compared with the trendsetting discount rate of seven per cent in the United States, it has attracted foreign buyers to Canadian interest-bearing investments. Altogether, those forces have combined to keep the value of the dollar at over 86 cents against its U.S. counterpart, compared with 77 cents at the end of 1987.
That has caused headaches for firms like Electrovert, which sees a shortfall in export profits of $1.5 million in 1989 because of the higher dollar. Electrovert’s Mark Drake said that the Canadian dollar must fall to a more reasonable level—about 80 cents U.S.—if his company’s Canadian operations are to remain competitive and Canadian jobs safeguarded. Added Frederick Telmer, president of Hamilton-based Stelco Steel—a division of Stelco Inc.—which earns 15 per cent of its $2.7 billion in annual sales revenues in the United States: “The high Canadian dollar hurts a lot.”
And should interest rates remain high, executives with some Canadian companies say that they may move their firms to the United States, where the favored rate for the best customers of commercial banks was 10.5 per cent last week—three percentage points lower than in Canada.
But in spite of the growing pressure, Crow says that he will not be panicked into shifting his course. The self-confident governor seems intent on staying the high-interest-rate course. As far as the uncompromising Crow is concerned, the only acceptable inflation rate is zero. And he says that he has no intention of letting rates fall until all the inflationary pressures have disappeared. But, with the economy slowing down and unemployment lines lengthening, his determination to stay the course is apparently about to be put to its biggest test.
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