BUSINESS WATCH

This recession does not a depression make

Canada is awash with debt and only a long, slow rebuilding of confidence will prevent us from drowning. But it can be done.

Peter C. Newman December 31 1990
BUSINESS WATCH

This recession does not a depression make

Canada is awash with debt and only a long, slow rebuilding of confidence will prevent us from drowning. But it can be done.

Peter C. Newman December 31 1990

This recession does not a depression make

Canada is awash with debt and only a long, slow rebuilding of confidence will prevent us from drowning. But it can be done.

BUSINESS WATCH

PETER C. NEWMAN

It took Michael Wilson most of the year to bring himself to use the “R” word, and with the gloomy storm of statistical indicators raining on us from every side, many Canadians are beginning to wonder if the “D” word might be more appropriate. So far, it isn’t. We may be in the first half of a serious recession but we are not, by any of the accepted definitions, in a depression.

Most economic trends can be accurately categorized only in retrospect, which is why the finance minister was technically correct to wait before announcing the obvious. It wasn’t until Nov. 30 that Statistics Canada reported that our gross domestic product had fallen for the second quarter in a row, the officially recognized signal for the start of a recession. Yet the acknowledgment caused shock waves, with everyone assuming the worst. This, despite the fact that the actual decreases in goods and services produced amounted to a secondquarter drop of only 0.1 per cent, followed by a 0.3-per-cent fall in the third quarter. Economists expect further and sharper declines in the first three quarters of 1991. There will be higher unemployment and much individual misery. But that doesn’t add up to a depression. In the last real depression, between 1929 and 1933, the gross domestic product plummeted 29 per cent.

The differences between recessions and depressions are fairly precise. A recession is a business cycle caused by monetary conditions, and it can usually be reversed by changes in fiscal and monetary policies. It is cyclical, cools off the economy through higher interest rates and is not a long-term phenomenon. Since the end of the Second World War, we’ve suffered seven recessions, averaging 11.8 months: Oct., 1948, to Sept., 1949—11 months May, 1953, to June, 1954—13 months April, 1957, to April, 1958—12 months Jan., 1960, to Feb., 1961—13 months June, 1974, to March, 1975—nine months Nov., 1979, to June, 1980—seven months June, 1981, to Dec., 1982—18 months

Between those blips the economy has been expanding, and only once before—between the winter of 1961 and the spring of 1974—have we enjoyed a longer upturn than in the past seven years. With each slump there have been predictions of economic doom. In the recession which ended in 1982, interest rates soared to 21 per cent (compared with a prime-rate high of 14.75 per cent this time) while inflation peaked at 13 per cent (as against a high, so far, of five per cent now). On June 23, 1982, Canadian Manufacturers’ Association president Roy Phillips flatly decreed that Canada had tumbled into a depression. Six months later, the economy had started to expand again. (A depression is generally defined as a period of widespread unemployment, seriously declining prices, negative capital investment and a surge of business failures—a phenomenon qualitatively as well as quantitatively different from a recession, which lasts a much shorter period of time and has little global impact. Apart from the 1930s, the only full-fledged depression in Canadian history occurred between 1873 and 1879.)

In his evangelical zeal to bring inflation to heel, Bank of Canada governor John Crow has been artificially hiking Canadian interest rates

from two to five percentage points higher than in the United States for the past two years. He has since eased off, but may be at it again when the full bite of the GST rekindles inflation by an expected 1.5 percentage points. (Should there be war in the Gulf, skyrocketing oil prices could trigger a much more serious inflation spiral.) Crow’s monetary manoeuvres were designed very deliberately to drive the economy into a tailspin to prevent hyperinflation. His hardhearted policy has worked only too well; the cure now looks worse than the disease.

Most economists are calling for no growth or a one-per-cent contraction of Canada’s gross domestic product for 1991, with the replenishment of inventories kicking off another growth period by year’s end. That doesn’t mean it’s going to be a jolly decade. There are only three ways of reducing the collective and individual debts piled up during the greedy 1980s: by repaying them; devaluing the currency through inflation; or going bankrupt. All three approaches will be required to survive the 1990s. What we seem to be experiencing is what the economists call “a self-feeding liquidity crisis,” which in English means that the Canadian economy is awash with debt—private, public and corporate—and only a long, slow rebuilding of confidence will prevent us from drowning. But it can be done.

The length and seriousness of this recession will depend largely on how well the major banks survive their own liquidity crunch. So far, Canadian banks are reporting record profits, but they are at the same time savagely cutting their credit risks, and if they don’t begin to loosen up soon, we could reach the unenviable position already being experienced by most of the large American banks. As the U.S. financial institutions continue to refuse credit to those customers whose fiscal survival is at stake (at the moment, most banks are lending money only to those who can prove they don’t really need it), more and more personal and corporate assets slip into receivership. That trend towards contraction and asset liquidation depresses prices, which in turn reduces values, and that triggers more liquidations. That’s particularly prevalent now in North American urban real estate markets, where banks are calling in more and more loans.

The current outlook is as harsh as it has been in a decade, and it will take slow, tough sledding to get the economy moving again. But there’s no point making things worse by applying the self-fulfilling mentality of a depression to what is—at the moment—no more and no less than a serious recession. It’s worth remembering that economies cannot boom forever, and that this slowdown comes at the end of seven years of uninterrupted growth. During at least half those years, the Canadian economy was expanding faster than any other in the West, including Japan’s.

Being in a recession is neither new nor incurable. The seven significant pauses in economic growth we’ve experienced since 1945 all seemed—while people were struggling through them—terminally gloomy.

But those cycles did tum—and so will this one.