ROSS LAVER July 22 1991



ROSS LAVER July 22 1991




Now that the Canadian economy seems to be pulling out of the recession, economists and business people are debating another issue—whether the recovery will be weak or strong. Among the optimists is Paul Beaupré, the 45-year-old owner of Canadian Heritage Designs Ltd., a small Vancouver firm that makes reproductions of early Canadian pine furniture. Last fall, Beaupré’s sales virtually dried up, forcing him to cut some prices and lay off five of his 16 full-time employees. “I got the stuffing kicked out of me,” he recalls, adding that the dearth of customers last February and March “was really scary.” By contrast, Beaupré says that June was one of his best months in years, “and July is shaping up quite nicely.” As a result, he plans to reintroduce a night shift this week and hire two more workers. “The turnaround has been dramatic,” he adds. “As soon as consumers feel confident about their savings or their credit-card overdrafts, they feel they can go out and spend.” For months now, similar signs of economic expansion have been cropping up across the country. Helped by lower interest rates, sales of new and existing houses rose sharply this spring in many cities—a clear signal that consumers were beginning to shrug off the worst effects of the slowdown. Meanwhile, Statistics Canada says that the country’s gross domestic product jumped by 0.9 per cent in April, the first significant increase since the recession began in the second quarter of 1990. But in spite of those positive signs, economists are

still far from unanimous in predicting the strength and duration of the upturn. They also caution that while some sectors of the economy appear likely to enjoy strong growth during the rest of 1991 and 1992, others will see little or no improvement. Declares Irene Ip, senior policy analyst at the C. D. Howe Institute, a Toronto-based economic think-tank: “The recession wasn’t homogeneous—and the recovery won’t be, either.”

One vital area that is unlikely to show much improvement during the next year is unemployment. Nationally, the unemployment rate in June stood at 10.5 per cent, up from 10.3 per cent in May. Even with a recovery, most forecasters say, the rate will probably remain above 10 per cent until late 1992. “Normally, people who were laid off get recalled at the end of a cycle,” says Maureen Farrow, chief economist in Toronto for the international management consulting firm Coopers & Lybrand. “But this time, some very large employers are still restructuring.” For unemployment to ease, she added, “ a lot of small businesses have to increase their hiring simply to offset the negative effect.”

Another major obstacle to a strong recovery is the current high level of debt, not only among consumers, but among corporations and governments—none of which are willing to mount major new spending programs. “We really can’t expect a credit-led recovery,” says Edward Neufeld, chief economist for the Royal Bank of Canada. For its part, the federal government says that in order to avoid increasing its $30.5-billion annual deficit, it will steer

clear of programs that might create jobs. “After the 19811982 recession, the government introduced tax cuts and other stimulative measures,” says Michael McCracken, president of the Ottawabased economic forecasting firm Informe trica Ltd. “This time, nothing like that is in place. That means the recovery will be slower off the mark.” Taking those problems into account, most economists are calling for a threeper-cent GDP increase during the first 12 months of the recovery. That is about half the rate of growth usually experienced in the first year after a recession. Moreover, the benefits will be spread unevenly across the country. The Royal Bank predicted last week that provincial growth rates in 1992 would range from two per cent in Prince Edward Island to 3.6 per cent in Newfoundland. In the latter case, the bank said, most of the growth will be caused by the $5.2-billion Hibernia offshore oil project, which will help the local construction and commercialservices industries.

The recovery’s impact on individual sectors of the economy will be even more mixed. The outlook for some of them:

Housing and construction: Most analysts expect mortgage interest rates to remain relatively stable for the rest of the year, attracting first-time buyers into the market while allowing others to trade up. But although sales of new and existing homes are continuing to rise, few experts predict a sudden increase in prices. For one thing, the number of unsold new homes across the country now stands at 23,000, its highest level since June, 1990. And according to William Hopkins, a Brantford, Ont., real estate agent who is president of the Canadian Real Estate Association, almost all of the people buying houses now are doing so for their own use, rather than as an investment. “There are no spurts of speculative buying as there was in the 1980s,” he says.

In contrast, non-residential construction is still mired in recession. The biggest problem is a surplus of office space in most large cities created by a construction boom in the late 1980s. In addition, many large corporations are holding back on capital spending until the recovery picks up steam. John Halliwell, president of

the Canadian Construction Association, says that he expects no significant improvement until 1992. But he adds: “We are looking forward to good years by the middle of the decade, particularly in resource-based provinces.”

Energy: With the economy as a whole showing signs of life, demand for oil and natural gas is sure to pick up. But few analysts in the Alberta Oil Patch expect a bonanza. They add that a worldwide oil glut is likely to keep the benchmark price for a barrel of West Texas intermediate crude around the $20 (U.S.) mark for several years. Moreover, the price spread between light and heavy grades of crude oil has increased in the past year, hurting Canadian producers of the lower-quality oil. Says Wilfred Gobert, managing director of research for Calgary-based investment dealer Peters & Co. Ltd.: “There are probably more tough times ahead for the oil industry.”

The natural gas industry also has been hit by low prices and excess supplies. But the completion of the $2.4-billion Iroquois gas pipeline from Alberta to eastern Ontario in order to serve the northeastern United States by November, 1992, should boost exports. Some gas industry leaders also expect to benefit from the increasing public concern for the environment.

Retailing: The yearlong economic slowdown has left consumers with plenty of pent-up demand. But until the unemployment rate drops significantly, most shoppers will likely continue to restrain their purchases. Other problems include cross-border shopping, the seven-per-cent Goods and Services Tax and the public-service pay freezes imposed by Ottawa and several of the provinces. “Consumers are running up a steep slope just to stay in the same position,” says Leonard Kubas, a Toronto-based retail analyst.

Over the longer term, retailers expect a fundamental shift in consumers’ attitudes. As the baby boom generation approaches middle age, the needs and priorities of its members have changed. “These changes have rendered the excesses of the 1980s obsolete,” says Richard Padulo, a Toronto-based advertising executive who specializes in retail accounts.

Manufacturing: About 250,000 manufacturing jobs disappeared during the recession, most of them in Ontario, and analysts say that many of them will never return. Indeed, the shakeout in Ontario’s manufacturing sector will likely continue well into the recovery. Says Farrow, of Coopers & Lybrand: “If Canadian manufacturers continue to throw up their hands and move to Buffalo, Tennessee or Korea, we’ll have a problem for another five years.”

On the positive side, the critical automotive industry is already picking up speed. Two of the brightest spots in the North American car industry are in Canada: orders and production are up sharply at Chrysler’s plant in Windsor, Ont., which makes minivans, and at Ford’s plant in St. Thomas, Ont., which produces a new line of full-sized Ford and Mercury sedans that are experiencing robust sales.

Forestry and mining: The upturn in the North American housing market has given a strong boost to B.C. lumber producers. But Quebec’s forestry sector, which is heavily dependent on newsprint sales to the United States, will recover more slowly. Analysts say that the demand for paper will rise next year as a result of a gradual strengthening of U.S. advertising markets.

As in the forestry industry, Canada’s major mining and metal companies slashed their payrolls during the 1980s and can now compete more effectively in the North American market. Improved demand from pipeline companies and automakers is already helping steel-

makers, while demand for nickel is strong. Says Frederick Telmer, chairman and chief executive officer of Stelco Inc. of Toronto, Canada’s second-largest steel producer: “The automakers have kept their inventories at such low levels that they’ve had to order again.” Financial services: Banks and trust companies, many of which suffered unusually high loan losses during the recession, have been

helped by the upturn in the real estate market. Meanwhile, the overall improvement in the economy should benefit companies that provide services to business, such as computer software designers and accountancy firms.

Travel: The hotel and restaurant industry, on the other hand, can expect only a modest improvement. Companies that have emerged from the recession with high debt loads and strained balance sheets are unlikely to ease their existing restrictions on executive travel during the early stages of the recovery.

Agriculture and fishing: Although world grain prices are still low, western farmers enjoyed near-record crop yields in 1990. But this year, the Soviet economy is in a tailspin, which should depress demand for Canadian wheat. Hopes for higher prices rest on a breakthrough in international trade talks in Geneva aimed at reducing or eliminating farm subsidies. An agreement would stem an overproduction of wheat in Europe and the United States that is holding down prices.

At the same time, federal quotas on cod fishing will depress earnings in the East Coast fishery. On the West Coast, the salmon industry is still reeling from a worldwide surplus and sharply lower prices. Fishermen in Nova Scotia are also suffering from an oversupply of lobster and reduced demand in the northeastern United States because of the economic slowdown.

Despite the variations across the country and in specific industries, the outlook for the economy as a whole appears positive. Indeed, most economists say that the damage suffered during the past year was mild in comparison with the 1981-1982 recession. After adjusting for inflation, the £ country’s GDP shrank by 2.8 per cent between the beginning of 1990 and the end of the first quarter of 1991— when the downturn likely ended. That

compares with a 5.3-per-cent drop in the last recession. Furniture maker Beaupré, for one, says that Canadian businessmen have learned from their past mistakes. “I think that most companies at this point are leaner and meaner,” he adds. Like his counterparts across the country, Beaupré says that he is not expecting a 1980s-like boom. But the storm clouds have definitely lifted.