THE COUNTRY’S ECONOMIC HEALTH IS UNLIKELY TO IMPROVE BEFORE THE MIDDLE OF THE YEAR
WAITING FOR A RECOVERY
THE COUNTRY’S ECONOMIC HEALTH IS UNLIKELY TO IMPROVE BEFORE THE MIDDLE OF THE YEAR
Their long and often frustrating hunt ended last week as Steven Fletcher and Carol Park finally achieved their goal. In June, the Vancouver couple will take possession of their first house, a detached two-bedroom home in the city’s east end for which they paid $190,000. “A year ago I thought, ‘We’ll never get a house,’ ” said Park, 27, adding that the recent decline in real estate prices and interest rates had put their dream within reach. While both Park, a biomedical engineer at Vancouver General Hospital, and Fletcher, a chemical engineer for forestry giant MacMillan Bloedel Ltd., say that they feel confident about their economic prospects, they add that they are unlikely to spend much money furnishing their new home. “We owe enough money as it is,” says Park. “Rather than going further into debt to buy stuff for the house, we’ll make do with what we have.”
With the recession now a year old, many other Canadians are taking a similarly cautious approach to their personal finances. And although real estate sales have picked up recently in Vancouver, Toronto and several other cities, few economists see that as a sign that the long-awaited economic recovery has begun. Philip Cross, the chief of current analysis for Statistics Canada, said last week that with the exception of housing sales, the latest economic signals are “almost universally negative,” indicating that the recession may actually be getting worse. Even the most optimistic forecasters say that the economy is unlikely to bottom out until later this spring—and that when the recovery does start, it will be slow and uneven. The unemployment rate, now at a sixyear high of 10.2 per cent, appears likely to rise further“ and remain high well into
1992. On top of that, manyö consumers remain burdened | by high levels of debt accu^ mulated during the 1980s. As a result, most economists say 9
that they expect consumer spending, the traditional harbinger of economic turnarounds, to remain soft this year and next, dampening the prospects for a strong recovery.
Rather than planning for new growth, many large companies appear grimly determined to continue cutting costs. Canada’s second-largest steelmaker, Hamilton-based Stelco Inc., last week suspended its annual dividends to stockholders for the first time since 1916—a move that will save it $32.5 million. The money-losing company has already slashed
about 500 non-union employees from its 6,500strong payroll since last August. For its part, General Motors of Canada Ltd. announced plans to shut temporarily its Ste-Thérèse, Que., assembly plant on July 19 and lay off 1,800 workers; a GM spokesman said that the plant would likely remain shut for up to a year. The Canadian division of GM is also planning to cut 900 white-collar positions, about 15 per cent of its non-union workforce, over the next three years. As well, the de Havilland division of aircraft manufacturer Boeing of Canada Ltd. said that it would be laying off another 110 employees on April 19, bringing to 410 the number of workers laid off since January.
In yet another indication of the financial problems in Canada’s boardrooms, Montrealbased Dominion Bond Rating Service Ltd. an-
nounced last week that it was reviewing the credit ratings of four companies in Peter and Edward Bronfman’s vast corporate empire. Robert Yeoman, senior vice-president of corporate development for Brascan Ltd., one of the companies affected by the decision, said that the credit agency’s announcement “was not unexpected, considering the severity of the recession.”
In the past, Canadians have tended to look to their governments for help in priming the economic pump during periods of slow or nonexistent growth. But the prevailing mood of austerity has recently spread to the public sector, as well. In his Feb. 26 budget, Finance Minister Michael Wilson reduced the level of transfer payments to the provinces while announcing no new spending programs to stimulate the economy. Wilson also capped pay increases for 215,000 federal public servants at three per cent a year for the next three years. In addition, Ottawa plans to trim as many as 6,000 public servants from its payroll this year. Last week, Quebec followed suit by freezing the incomes of 450,000 public employees, including doctors, teachers and judges. In January, Saskatchewan announced that it would slash 600 jobs from the government payroll and limit civil-service salary increases to four per cent. And Newfoundland’s government plans to cut 2,500 public-sector jobs—eight per cent of the total.
Those measures may well drive the economy deeper into recession. Even so, some economists and most business leaders applaud the cutbacks on the grounds that the alternative would lead to an increase in the country’s $387-billion national debt, which they say is the biggest threat to Canada’s long-term prosperity. In the 1991-1992 fiscal year, Ottawa will
spend an estimated $43 billion to service that debt, an expense that helps to keep taxes high and raises the cost of borrowing for Canadian businesses. Declared Judith Maxwell, chairman of the Economic Council of Canada: “That burden will really hold us back.”
For Canadians on the unemployment rolls— more than 1.4 million in February—the clearest sign of the recession’s impact is the scarcity of work and the prospect of a painfully slow growth in job opportunities. Almost 290,000 manufacturing jobs have disappeared over the past two years. In the past year alone, in all, 430,000 permanent positions, have vanished while part-time jobs have grown by only 98,000. The search for work will likely grow even more frustrating in the months ahead. Far from planning to take on more workers, most large companies—including the Big Three North American automakers, Canada’s two major airlines and virtually all of the country’s major oil and gas producers—are learning how to get by with fewer employees, in part by relying on computers and robots to do tasks formerly done by workers.
At the same time, some analysts say that the downturn in Canada’s manufacturing sector is so severe that it will be impossible to stage a quick recovery. According to Douglas Peters, chief economist for the Toronto-Dominion Bank, the country’s total manufacturing output until the end of 1992 will remain below the level reached in January, 1990. Peters added that pre-recession unemployment levels of about 7.5 per cent of the labor force will be unachievable for at least four or five years. “The end of this downturn will not mark the return of happy times for the unemployed,” Peters warned.
To a large extent, the prospects for recov-
ery depend on lower interest rates. Since last faU, the Bank of Canada has relaxed its trendsetting bank rate by about three percentage points, to 9.91 per cent last week. That has resulted in lower mortgage and consumer lending rates, and made it easier for businesses to borrow or service their debt. The drop in North American interest rates was a primary reason for the surge in activity on major stock markets earlier this year.
But that early euphoria has begun to fade. On Friday, the TSE composite index closed at 3457, down 114 points from its 1991 peak on March 6. Analysts say that investors are worried because of a recent surge in U.S. inflation. Excluding food and energy, prices in the U.S. rose 0.7 per cent in February—a factor that will likely convince the U.S. Federal Reserve Board to maintain interest rates at or near current levels. In Canada, meanwhile, economists welcomed the drop in the inflation rate, reported last week, to 6.2 per cent in February from 6.8 per cent in January, but cautioned that it would not be enough to convince Bank of Canada governor John Crow to relax interest rates substantially.
Retailers, already battered by a prolonged slump in sales, are particularly pessimistic about Canada’s recovery prospects. Says Peter Woolford, vice-president of the Retail Council
of Canada: “Consumers will be cautious coming out of the recession. There’s a healthy fear of inflation out there.” Moreover, many experts say that the gradual aging of Canada’s population will have a significant impact on consumer spending throughout the 1990s. During the previous two decades, spending rose rapidly as members of the baby boom generation entered the workforce, purchased houses and rushed to acquire cars, appliances and other big-ticket items. But according to John Clinkard, senior economist of the Canadian Imperial Bank of Commerce, most baby boomers have already satisfied a large portion of their needs. As a result, he said, demand for such items as high-fashion clothing and video cassette recorders is likely to fall over the next decade.
Another factor that will tend to dampen consumer spending is the high level of personal debt. In 1990, according to Statistics Canada, the average Canadian adult owed an amount, including mortgages, consumer loans and credit-card balances, equal to 77.8 per cent of his or her personal after-tax income. As a result, says Toronto economist and forecaster George Vasic, many consumers will be preoccupied in the early stages of the recovery with paying down their financial obligations. He added that they will continue to be discouraged from spending
by high levels of unemployment. “Consumer spending won’t pick up significantly for another few years,” Vasic said.
But the impact of the current recession may be even more far-reaching than many Canadians yet realize. Some economists say that unlike the experience of the 1981-1982 recession, many of the jobs lost during the current downturn may never return. Observers have referred to this phenomenon as deindustrialization—the gradual erosion of Canada’s industrial base because of relatively high interest rates, wages and taxes, which together have weakened the country's ability to compete in international markets. Said Paul Darby, director of forecasting for the Conference Board of Canada: “The recession is much worse than people thought it would be, and the issue now is whether we are slowly sinking into non-competitiveness.” The Economic Council’s Maxwell, however, contends that the past decade has left Canadians more outward-looking, and that a renewed spirit of entrepreneurship will pull the country out of its economic malaise. Many of the 1.4 million Canadians who are now out of work are hoping that she is right.
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.