BUSINESS

A GRIM RECKONING

FINANCE MINISTER MICHAEL WILSON FINALLY AGREED THAT THE ECONOMY IS IN A RECESSION

BRUCE WALLACE November 5 1990
BUSINESS

A GRIM RECKONING

FINANCE MINISTER MICHAEL WILSON FINALLY AGREED THAT THE ECONOMY IS IN A RECESSION

BRUCE WALLACE November 5 1990

A GRIM RECKONING

FINANCE MINISTER MICHAEL WILSON FINALLY AGREED THAT THE ECONOMY IS IN A RECESSION

BUSINESS

Against a background of depressing economic reports, the admission seemed almost anticlimactic. Appearing before the Commons finance committee last week, Finance Minister Michael Wilson acknowledged for the first time that the Canadian economy is indeed in a recession. Wilson was referring to the textbook definition of a recession: two consecutive three-month periods of economic decline, a situation that he predicted would be supported when the latest statistics on economic performance are released this week. But with economic reports already filled with grim statistics of mounting job losses, stubbornly high interest rates and a record number of business bankruptcies, few analysts demanded anything more convincing. Said Douglas Peters, chief economist at the Toronto-Dominion Bank in Toronto: “Wilson has finally admitted to what has been going on for nine months.”

The minister’s earlier reluctance to concede to the recession was to be expected. Despite a worldwide economic slowdown, no other finance minister from any of the world’s leading industrial countries has said that their economy is in recession. And even Wilson insisted to the committee that Canada’s recession would be mild. “We do not expect this to be a severe recession,” he said. But his prediction did little to ease the jittery nerves that were evident last week across the country from plant floors to boardrooms. “I am pretty pessimistic,” said William Somerville, deputy chairman of National Trust of Toronto. “There is no business activity, just nothing happening.”

As confidence in the economy evaporated, many critics again trained their fire on Bank of Canada governor John Crow’s determination to keep interest rates high. Many analysts blame Crow’s hard line on interest rates for strangling economic growth. But Crow continued to

argue that the policy is necessary to purge inflation—now standing at 4.2 per cent a year—from the economy. And he vowed that interest rates would remain high until the inflationary effect of higher oil prices and the federal Goods and Services Tax (GST) is known. But as Canadians prepared for a winter of economic hardship, the debate was no longer over the causes of the recession. The main concern, rather, was how long—and how deep—the downturn will be.

But many economists are clearly expecting the worst. “This is the end of an era,” said Francis Scotland, international editor of the Montreal-based Bank Credit Analyst. “It will

bring to an end the abuse of credit and debt, which Anglo-Saxon countries have exploited beyond anything imaginable 20 years ago.” Scotland said that the size of Ottawa’s debt burden, now over $400 billion, means that the government no longer has the flexibility to jump start economic activity by increasing spending. And, while Scotland maintained that high interest rates will improve the health of the economy in the long run, he added that the short-term effect will be “true economic pain, meaning unemployment of nine or 10 per cent, increased bankruptcies and defaults.”

Some of those increases are already evident.

Federal statistics released last week showed that personal and business bankruptcies in September were up by 37.3 per cent over September, 1989. And defaults on mortgage loans were up 41 per cent during the first six months of 1990 compared with last year. “If Crow keeps interest rates at these levels a while longer the recession could be deeper than the one we had in 1981-1982,” said Peters. “We need lower interest rates and a cheaper dollar.”

Canadian exporters say that the Bank of Canada’s interest rate policy—which last week left the trendsetting rate unchanged at 12.66 per cent—is pricing them out of American markets by keeping the Canadian dollar high against its American counterpart. Canada’s pulp-and-paper manufacturers have been among the hardest hit by the high dollar. “For every cent the dollar goes up we lose out on $100 million in annual exports,” said Louis Fortier, spokesman for the Montreal-based Canadian Pulp and Paper Association, whose 60 companies earn 80 per cent of their revenues from exports. “We are expected to improve efficiency and make environmental improvements at a time when our profits are cut and high interest rates are making loans too expensive.”

Last week, the Conservative government tried to dampen any economic panic by arguing that the recession is an expected—and unavoidable—part of normal business cycles. “We agree that there is a slowdown; we even predicted it,” Treasury Board president Gilles Loiselle told Maclean’s. “But by convincing

everybody that we are going down the drain, the people may start believing it and make the problem even worse.” And the Tories got support from some private sector economists, who blamed external forces beyond Ottawa’s control for the slide. Edward Neufeld, chief economist for the Royal Bank of Canada, said that the slowdown in the U.S. economy is largely to blame for the shrinking Canadian performance. He predicted that the recession will be mild, with a slow recovery made possible next year by slightly lower interest rates and a lower Canadian dollar.

But it is bankers themselves who are most unnerved by the arrested economy. Said Peters: “You cannot expect business in Canada to have the number of bankruptcies it has and not have it affect the banking system.” The drastic slump in real estate prices, which began this year, is particularly critical for Canadian banks. In their search for places to lend money, financial institutions eagerly fuelled the 1980s real estate boom. Acknowledged Loiselle: “We cannot go on buying bungalows in Toronto at $500,000 forever. It is artificial.”

Equally unsettling for financial institutions is the unfavorable publicity surrounding the recent performance of several major companies, as well as some of the country’s traditionally solid banks. One of these financial institutions, the Montreal-based National Bank of Canada, has already felt the bruising effects when big clients get into trouble. The bank’s common stock has tumbled from a 1989 high of $15.25 per share to $7.63 last week, partly because of revelations that it holds a $ 156-million personal loan to troubled Toronto financier Robert Campeau. The National Bank, Canada’s sixth largest, is also one of an estimated 60 banks owed more than $3 billion by the British electronics conglomerate Polly Peck PLC, which last week was placed into bankruptcy protection by the London High Court.

In fact, the ominous business developments made the political debate over Wilson’s reluctance to admit to the recession seem inconsequential. After eight years as finance minister of a government that has never seen the economy shrink, Wilson’s toughest political challenge is still ahead. As job losses and „ business failures mount, his I commitment to fighting infláis tion is sure to be strained. I And whether Wilson’s politi5 cal will bends under the eco| nomic pressures may deteris mine the intensity of the I recession.

BRUCE WALLACE in

Ottawa