BUSINESS

THE CONTRARIANS

DESPITE LAYOFFS AND CUTBACKS, A CONFIDENT GROUP OF ECONOMISTS ARE PREDICTING BOOM TIMES AHEAD

SHONA McKAY February 5 1990
BUSINESS

THE CONTRARIANS

DESPITE LAYOFFS AND CUTBACKS, A CONFIDENT GROUP OF ECONOMISTS ARE PREDICTING BOOM TIMES AHEAD

SHONA McKAY February 5 1990

THE CONTRARIANS

BUSINESS

DESPITE LAYOFFS AND CUTBACKS, A CONFIDENT GROUP OF ECONOMISTS ARE PREDICTING BOOM TIMES AHEAD

For the past year, most North American economists have been issuing dire warnings that the boom of the 1980s—the longest sustained expansion since the Second World War—is winding down. A steady stream of bleak statistics and layoff announcements in recent weeks has fuelled their pessimism. Among the gloomy reports: Canada’s first monthly merchandise trade deficit in 13 years and more than 100,000 layoffs in the critical North American auto-manufacturing sector. Meanwhile, interest rates remain at punishing double-digit levels, and last week investors’ fears of mounting U.S. interest rates drove stock markets around the world into their worst single-day declines since the mini-crash of last Oct. 13. But an increasingly vocal school of economic soothsayers is predicting that North Americans will find themselves basking in good times, possibly even boom times, throughout the 1990s.

The so-called contrarians say that their predictions are based on an analysis of long-term trends in inflation, demographics and global markets. Said Edward Yardeni, senior economist with Prudential-Bache Securities Inc. in New York City and one of the foremost proponents of long-term economic optimism: “The North American economy is now too diversified and resilient to succumb to a general recession. What’s more, there are a number of positive factors that, taken together, provide a potent force for growth over the next decade.” Peter Dungan, an associate director at the Toronto-based Institute for Policy Analysis, expressed similar views. Said Dungan: “The recessionists are ignoring the sources of strength that will see the 1990s achieve the same level of growth that we experienced in the bullish 1960s.”

It is the disappointing short-term indicators,

such as the 5,700 temporary layoffs at auto plants in Ontario and Quebec last week, and Bank of Canada governor John Crow’s decision to raise the bank rate to 12.29 per cent from 12.14 per cent, that, in part, are leading the optimists to conclude that the best of times lie ahead. “What the trade deficit and layoffs show is that the heat is being taken out of inflation,” said Dungan. “And it is the fear of inflation

that’s been behind the Bank of Canada’s tight monetary policy.” Edward Neufeld, executive vice-president of economics and corporate affairs at the Royal Bank of Canada in Toronto, said that lower rates in the future “will make more money available for capital spending and that, in tum, will boost productivity.”

The optimists also point to a changing population structure, specifically the aging of the

baby-boom generation, as a critical aspect of their theories. “The 30-year-old yuppie is about to become a 40-year-old,” says Yardeni. “This means that we will see a further escalation in productivity since, traditionally, middleaged workers are the most hardworking members of the labor market.”

At the same time, the contrarians predict that the boomers will generate huge new pools of savings as their incomes rise and they put major purchases of housing and appliances behind them. Said Dungan: “They’ll be squirreling money away at an unprecedented rate.” And as they do, said Sherry Atkinson Cooper, a chief economist with Burns Fry Ltd. in Toronto, “the savings rate in Canada will move from a current nine per cent of per-capita income up into the double-digit category.” And those savings, add the contrarians, will fuel a new era of sustained growth. “For one thing,” said Yardeni, “it will translate into sizable impetus for new investment.” He claimed that the biggest impact of new savings will be felt in the United States, where, traditionally, the savings rate has been one of the lowest in the world, about six per cent of disposable income compared with about nine per cent in Canada. However,

Yardeni predicted that the U.S. rate will jump to 10 per cent by 1993. “Savings will reach $500 billion annually. A lot of that will find its way

into capital investments.” But according to the contrarian theory, the explosive growth for North American companies in foreign markets will more than offset any slowdown in domestic consumer spending. “While the markets might be shrinking here, they’ll be expanding in many other parts of the world,” said Yardeni. “Whether one looks at Europe, Southeast Asia or Latin or South America, the possibilities for increased export trade are tremendous.” Peter Pauly, professor of economics and a director of Project Link, a Torontobased international organization that specializes in economic modelling, took a similar approach. He said that the Canadian economy will expand throughout the decade because of the one-yearold Canada-U.S. Free Trade Agreement and the elimination of most trade barriers around the world, including

nations of the European Community in 1992. Added Pauly: “Just look at India alone. If current growth continues, it has the potential of creating a middle-class market that’s equivalent in size to the United States. If everything does fall into place, we definitely could be in for a world boom.”

The contrarians also claim that North American central bankers now understand that high interest rates will impair long-term growth. “What the central banks seem to finally be realizing is that short-term, quick-fix monetary policies do more harm than good,” said Neufeld. He added that the governments of Canada and the United States are also beginning to imitate the steadier, more predictable spending and taxing policies of Japan and many European countries. He added: “What we’ll

_ see is the end of the postwar

business cycle. Sure, we’ll get rolling recessions, that is, downturns in certain sectors and industries, but nothing massive like what happened in 1982. Those days are over.” But as stock markets in Toronto and New York closed down at the end of a troubled trading week, it appeared that most North American investors, at least, still believe that the traditional pattern of boom and recession continues to dominate economies.

SHONA McKAY with correspondents’ reports