BUSINESS

THE ECONOMIC OUTLOOK

CANADA’S ECONOMY IS TAKING A LONG TIME TO RECOVER—IT MAY NEED SEVERAL MORE MONTHS

BRENDA DALGLISH December 9 1991
BUSINESS

THE ECONOMIC OUTLOOK

CANADA’S ECONOMY IS TAKING A LONG TIME TO RECOVER—IT MAY NEED SEVERAL MORE MONTHS

BRENDA DALGLISH December 9 1991

THE ECONOMIC OUTLOOK

BUSINESS

CANADA’S ECONOMY IS TAKING A LONG TIME TO RECOVER—IT MAY NEED SEVERAL MORE MONTHS

Raymond Ouellette and David Landon are wrestling with the same problem. Ouellette, who runs a small manufacturing firm in the Montreal suburb of Ste-Julie, and Landon, an automobile dealer in Port Hardy, B.C., had both been enjoying reasonably profitable years until October. Then, suddenly, their sales plummeted. Says Landon, who has been selling cars in the Vancouver Island mining town for 22 years: “The first three-quarters of the year were excellent. But the fourth quarter looks like it is going to be entirely different. People are scared.” Ouellette, whose company, Novatech Glass Inc., makes stained-glass door windows, shares that bleak assessment. “It is a long time since I have seen it this quiet,” he says. Consumers, the two men agree, are nervous about the economy, worried about their jobs and reluctant to spend. Declared Ouellette: “Everyone you talk to is pessimistic about one thing or another. Somehow, that has to turn around before people start buying again.”

The latest volley of economic statistics will probably do little to allay that gloomy mood. Statistics Canada announced last week that the combined number of personal and business bankruptcies across the country hit a new record high, 6,896 in October. That compares with only 5,922 bankruptcies in the same month of 1990. The federal agency also reported that Canada’s gross domestic product (GDP) grew by only 0.2 per cent in the three months that ended on Sept.

30, adding to fears that the economic recovery that began last April is already running out of steam.

In fact, most Canadians appear pessimistic about the chances for sustained economic growth, despite Finance Minister Donald Mazankowski’s claim last week that the country was experiencing a “modest to moderate recovery.” A preliminary analysis of a nationwide poll of 1,697 adults conducted late last month for Maclean’s by Toronto-based Decima Research Ltd. shows that 55 per cent of respondents believed that the economy was actually getting worse. Only nine per cent responded that the economy was improving and 35 per cent said that they detected no change. In addition, 29 per cent said that they were either pessimistic or very pessimistic

about their personal economic prospects—the highest level of pessimism recorded by Decima in the eight years it has asked this question. The full results of the eighth annual Maclean ’sj Decima poll will be published in the Jan. 6 issue of Maclean’s.

In contrast to the widespread gloom among Canadians in general, most economists are sticking with their predictions of a gradual recovery through 1992. Ruth Getter, senior

WAITING

FOR

GROWTH

Most economists predicted a modest recovery in the second half of 1991. But in the third quarter, the nation’s gross domestic product grew by just 0.2 per cent. And other indicators show that the economy is still far from healthy.

INTEREST RATES HAVE FALLEN.

... WHICH HAS SPURRED HOUSING CONSTRUCTION ...

economist at the Toronto-Dominion Bank, for one, cautioned against reading too much into last week’s indicators. She said that the impact of strikes by federal public servants and employees of Canada Post hurt the economy in the third quarter of the year, but that the performance of several other sectors offered reason for hope. Although the economy shrank by 0.1 per cent in September, the production of goods across the country actually grew by 0.4 per cent that month. That growth helped to offset a 0.3-per-cent decline in the services sector.

Says Getter: “The signals are terribly mixed. But I’m fairly optimistic. I do not see enough hard evidence yet to say that we are going back into recession in the fourth quarter.”

For consumers and businesses, the most favorable development by far is the dramatic decline in borrowing costs. Most major banks now lend money to their best corporate cus-

..BUT CONSUMERS ARE STILL CAUTIOUS

. AND BANKRUPTCIES ARE RISING

tomers at 8.5 per cent, down from 13.25 per cent in November, 1990. Moreover, Canadian rates have been falling faster than rates in the United States. In the long run, that should encourage new business investment in the country and help make Canadian companies more competitive in foreign markets.

Most economists say that interest rates will likely decline further as the risk of inflation continues to subside. In the month of January, the consumer price index jumped 1.8 percentage points to 6.8 per cent, in large measure

because of the introduction of the seven-per-cent Goods and Services Tax. But since then, prices have risen by less than one per cent, as companies refrain from passing along higher costs. Declared George Vasic, an economist with forecaster DRI Canada in Toronto: “Canada is poised to become a low-inflation country, joining the ranks of Germany and Japan.”

The combination of low inflation and declining interest rates will also result in substantial savings for the federal government. Although government spending has increased this year because of the recession and tax revenues have been less than Ottawa projected, those two factors have been offset to some extent by the fact that it now costs Ottawa less to service the $420-billion national debt. Indeed, federal officials estimate that every one-percentage-point drop in shortterm interest rates over a 12month period results in a

$1.7-billion savings in annual interest costs.

The Mulroney government is clearly hoping that the sharp fall in inflation and borrowing costs will give Canadians a psychological boost early in 1992. Speaking on condition of anonymity, a senior finance department official said last week that because of lower rates, the government is still expecting to meet its deficit

target of $30.5 billion for the current fiscal year, which ends on March 31. As well, the deficit will likely drop to about $25 billion in 1992-1993, he said. “The underlying situation right now is actually quite good, but a lot of people have not realized it,” the official added. “By next February, we think there should be significantly more public confidence in the direction of the economy.” i For Canadian businesses, one of the biggest problems is the sluggish pace of economic growth in the United States. The current recovery in Canada began as expected in the interest-sensitive sectors of housing and automobile sales. But at that point in a recovery, economists would normally expect export sales to the United States, which account for more than 20 per cent of the Canadian GDP, to add to the momentum. Said Vasic: “The third and fourth quarters of 1991 are going to be worse than we had hoped, primarily because of the prolonged weakness in the United States. We just have not been able to pass the baton from housing to exports. We are holding it out, but Uncle Sam is not grabbing it.”

Despite the sluggish economy, some companies are making inroads into the U.S. market. A case in point is the Burlington, Ont.-based Stanley Tools division of Stanley Canada Ltd., which recently landed a $l-million contract to supply tool storage boxes to K Mart stores in the United States. David Talbot, the division’s president and general manager, says that the poor state of the North American economy is making it harder for companies like Stanley to achieve increased sales. He added: “The markets are not growing. There are opportunities, but they only come at the expense of a competitor.”

The weak state of the U.S. economy is also putting pressure on President George Bush, whose four-year term expires at the end of next year. In an apparent bid to kick-start the

economy and improve his chances of re-election, the President last week called on Congress to cut taxes. At the same time, Federal Reserve Board chairman Alan Greenspan is leading a charge for lower interest rates. Either of those two measures would help Canadian exports. Observed Getter: “In Canada when things get tough, everyone talks about raising taxes. But in the United States, the worse things get, the greater the pressure for a tax cut.”

Usually in a recovery, increased consumer spending can be counted on to help sustain economic growth. But except for the earlier rebound in housing and automobile sales, Canadian consumers are holding back. In September, the most recent month for which figures are available, consumer spending increased just 0.8 per cent, before inflation, to a seasonally adjusted $15 billion. That increase, however, was almost entirely caused by strong motorvehicle sales—and in the following month, auto sales plunged by 36 per cent. Declared Victor Regimbai, sales manager at Crosstown Motors, a General Motors dealership in Sudbury, Ont.: “It is not at a standstill yet, but sales are down. People are hanging on to their almighty dollar.”

One reason for that is that unemployment remains stubbornly high, at 10.3 per cent of the workforce. Since the economy began growing again last April, it has produced about 99,000 new jobs. That compares with 254,000 new jobs generated in the first seven months of the last recovery, which began during 1983. The contrast between those two figures provides stark evidence of the economy’s fragility. With 1.3 million people still out of work and looking for jobs, it may be some time yet before consumers regain the confidence necessary to kick-start the economy with a burst of buying.

BRENDA DALGLISH