Russell Jackson says that the announcement just did not make any sense. Late on a Friday afternoon last month, the 30-year-old Windsor, Ont., foundry worker was told to shut down the casting furnace he operated for automobile-parts manufacturer Brant Casting Ltd. Jackson says that he was surprised because, despite slumping North American car sales, the company’s production line had not shut down in the previous 18 months. The next day, he says that he drove past the plant and discovered the firm’s parking lot filled with cars. He went inside and found the company’s managers meeting in the boardroom. They told him that because of a high Canadian dollar the company could no longer match the prices of its U.S. competitors. Like the families of 75 other production workers who suddenly lost their jobs, Jackson, his wife, Brenda, and three young daughters now face the grim uncertainty of his unemployment in a city where six other autoparts plants have closed over the past year.
Says Jackson: “I’m not having much luck finding a job. It’s unbelievable how many plants have been closed.” With that, Jackson joined the list of casualties in an economy squeezed by Bank of Canada governor John Crow’s highinterest-rate policies.
Plunging: As high rates continue to drive up borrowing costs and make the dollar more attractive to investors, increasing its value, they are punishing exporters and the country’s small businessmen, farmers and homeowners. Even some of its largest corporations are suffering. As well, many western Canadians, who are just beginning to participate in the strong economic growth that Central Canada has enjoyed since 1983, say that Crow risks plunging the entire country into a recession in his fight against what they claim is largely a southern Ontario problem. Warned Alberta Premier Donald Getty: “I think it’s going to grind us to a very dangerous halt.”
Already, there are disturbing signs that Crow may be pushing the economy beyond the
breaking point. Last week, Ottawa’s department of consumer and corporate affairs reported that Canadian bankruptcies in the first three months of 1990 totalled 11,421, up a dramatic 29 per cent from the same period a year ago. The bankruptcy rate is now greater than that of the 1982 recession, when there were 41,408 bankruptcies over the course of the whole year.
A higher prime—the rate charged by banks to their best customers—has led to higher mortgage rates, now averaging about 14.25 per cent for a one-year term. As a result, housing sales, one of the most interest-rate sensitive sectors of the economy, are dropping. Last week, the Canadian Real Estate Association reported that resales of houses in 25 Canadian cities fell to 17,720 in March, a 22.2-percent drop from the same month a year ago. As well, Royal LePage Ltd. of Toronto, one of the country’s largest realtors, reported that its profits for the first three months of 1990 plummeted by 79 per cent to $1.5 million, compared with $7 million in 1989 in
the same period. Real estate agents and builders blame the Bank of Canada for the homebuying retreat. “For every percentage point rise in the interest rate,” says Gordon Thompson, president of the Canadian Homebuilders’ Association in Ottawa, “100,000 people fall out of the real estate market.”
Loss: Exporters, who are responsible for about 20 per cent of the country’s gross domestic product, the total value of goods and services produced within the economy in a year, say that they are being unfairly penalized by high rates. Last week, Hamilton-based steelmaker Stelco Inc. reported a $13.3-million loss in the first quarter of 1990, compared with a $32.7-million profit during the same period last year. Stelco chairman and chief executive officer John Allan blamed high interest rates and a high Canadian dollar for the stunning reversal, which is tied to a 10.2-percent drop in steel shipments. With its markets drying up, Allan announced that Stelco will be forced to eliminate 800 jobs from its total payroll of 16,000 by the end of 1991 through a mixture of attrition, plant closures and consolidations.
Like many manufacturers, Allan says that Crow’s self-proclaimed anti-inflation campaign may permanently damage Canada’s industrial base. He added that, by supporting the dollar at unrealistically high levels, Crow hurts Canadian exporters by increasing the cost of their products abroad. Declared Allan: “For the last couple of quarters, our prices have actually been declining, so we’re not really the cause of inflation.” Added Todd Rutley, senior economist with the Canadian Manufacturers’ Association: “Manufacturers are being squeezed by the combination of high interest rates, an overvalued dollar and the economic slowdown. Crow should lower the bank rate and let the
SOME MANUFACTURERS SAY INDUSTRY MAY BE PERMANENTLY DAMAGED
dollar drop to 78 or 80 cents, which is what it is worth.”
Crow’s policy is forging an unlikely alliance between business and labor, with leaders of the country’s major unions saying that their members are paying the price for the high cost of money. They say that automobile workers have been hit particularly hard over the past year, as high rates have aggravated a sharp decline in sales of domestic cars. Those sales—an important indicator of economic health in Central Canada—fell by 20.5 per cent in the second 10 days of April compared with the same time last year.
In addition to driving up the cost of consumer bank loans for new cars, high interest rates have also sharply increased the cost to dealers of borrowing money to keep large inventories of unsold cars on their lots. As a result, they have reduced their orders of new cars, forcing manufacturers to reduce production and lay off workers.
In the Windsor area alone, more than 1,000 members of the Canadian Auto Workers area have lost their jobs since last March as a result of plant closings and indefinite layoffs. Said Phillip Bennett, a CAW national representative in Windsor: “It’s scary.” Union leaders add that, while their members have lost jobs in Crow’s war against inflation, the wages of others have barely kept up with the increasing cost of living. Unionized wage settlements in Canada’s manufacturing sector averaged 5.6 per cent last year, compared with an inflation rate of five per cent.
Costly: Meanwhile, the Big Three automakers—Ford, Chrysler and General Motors—are counterattacking by intensifying costly rebate and interest-rate reduction incentives.
Last week, both Ford Motor Co. of Canada Ltd. and General Motors of Canada Ltd. introduced a new round of sales incentives, including 10.9-percent financing, higher cash rebates and discounts on selected vehicles.
But maintaining what is, in effect, their own low-interest-rate policy is becoming increasingly costly. Jack Clissold, Ford’s vice-president of sales and marketing, says that his company
will have great difficulties absorbing the costs of incentives if rates keep rising.
Across the Prairies, high interest rates are hurting farmers as well. Brian Cooper, a 44-
year-old Saskatchewan grain farmer with debts of $300,000, says that he does not know if he will be able to keep his farm until the fall harvest. For the past 2lh years, Cooper has been forced to operate on a cash-only basis,
because the Canadian Imperial Bank of Commerce refused him credit. Cooper says that, while local suppliers will soon be passing on their own higher interest costs through increased prices, farmers cannot charge consumers more because the federal government sets the price of their grain and it cannot raise prices because of a worldwide oversupply of grain. Says Cooper: “We didn’t cause inflation, but we’re at the bottom rung, so there’s no way to pass on [interest-rate charges].”
Saskatchewan farmers are laboring under huge debts, which totalled $5.5 billion in 1988, the last year for which statistics are available. Garfield Stevenson, president of the Saskatchewan Wheat Pool, estimated that interest payments have cost wheat growers $460 million each year since rates started to climb sharply in 1988. Moreover, each percentage-point increase in farm loan rates adds $40 million of debt to farmers’ annual operating costs. The interest rate for most new farm loans is now 16 per cent, and Stevenson says few farmers can afford it. He added that, in some g areas of Saskatchewan, up to I 15 per cent of farms are K bankrupt or operating under I debt restructuring plans. Another 30 per cent, he claims, s will face major financial difficulties this year.
Hit: Indeed, many western Canadians say that they are being unfairly punished in order to fight the government’s proclaimed inflation danger, which is negligible in the West. Alberta’s Getty, for one, told Maclean’s that his province has “only recently started to participate in what has been a very strong growth period for Canada, and as we start to feel good and have unemployment falling, investment growing and house sales strengthening, suddenly we’re being hit with high interest rates, which are going to stop that.” He added, “We think that the Bank of Canada is responding to a strong, overheated situation in a small part of our country, southern Ontario.”
Still, most economists say that interest rates are unlikely to fall until autumn at the earliest. By then, Crow’s self-described anti-inflation medicine may be more than many patients can endure.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.