Michael Manning had something to smile about last week. Manning, head of bond-market operations for Ontario Hydro, had spent weeks organizing the sale of at least $1 billion worth of 10-year bonds—part of the utility’s $4.6-billion borrowing program this year. Citing the grim outlook for Ontario’s economy, many analysts predicted that demand for the issue would be weak. But in the end, the rush of orders from Asia and Europe was so strong that Manning decided to increase the issue to $1.5 billion. Declared the Hydro official: “We were getting signs from investors that we could have gone as high as $2 billion.” He added: “Canadians tend to be more pessimistic about their own country than people overseas. In this case, the offshore demand really helped us out.” In fact, many economists outside the country are strongly bullish about Canada’s economic prospects. What is more, they say that the outlook is brighter in many respects for Canada than for the United States.
Still, Manning’s experience is surprising because of the mood of economic gloom that has settled over the country recently. For months, Canadians have been bombarded with announcements of business bankruptcies, corporate restructurings and massive layoffs. A few high-profile analysts have even declared that Canada is sliding into a depression, dragged down by high unemployment and huge government and private debts. The Conference Board of Canada, for its part, said last week that it saw little hope of a healthy recovery during the next two years.
But in some areas, Canada enjoys a clear advantage over its giant neighbor:
Inflation: Central bankers in both countries have waged war on inflation by keeping a tight rein on monetary policy. But the Bank of Canada has had more success in restraining prices than the U.S. Federal Reserve Board. In the most recent six-month period, Canada’s consumer price index rose at a 2.4-per-cent annual rate, excluding the volatile food and energy components. The comparable U.S. figure was 4.1 per cent.
Many economists also praise Bank of Canada governor John Crow for establishing inflation targets—three per cent by the end of 1992 and two per cent by the end of 1995. By contrast, the U.S. administration has refused to endorse a formal target of low inflation by the mid-1990s. On the contrary, President George Bush seems willing to tolerate higher inflation to spur short-term economic growth. Crow’s resolve, many economists say, will help to attract investment to Canada and keep interest rates low for consumers.
Government deficits: By raising taxes and curbing the growth of federal spending, Brian Mulroney’s Conservative government has reduced the size of its deficit as a share of gross domestic product—from 8.7 per cent in 1984-1985 to four per cent in 1991-1992. In fact, Ottawa would be running a surplus if it were not for the cost of servicing the national debt—$42 billion in interest this year. Washington, on the other hand, still spends more each year on programs than it collects in taxes. The Paris-based Organization for Economic Co-operation and Development estimates that Canada’s deficit will shrink by 1993-1994 to 1.5 per cent of GDP, compared with 3.2 per cent for the United States. “Americans still refuse to pay for the services they get,” said Rudolph Penner, a former director of the U.S. Congressional Budget Office and now a senior fellow at the Urban Institute, a Washington think-tank. “Frankly, I wish our politicians were as courageous as those in Canada. I think that as the economy recovers, Canada will be better off.”
The banking system: The recession has exposed serious weaknesses in the U.S. banking system. Almost 300 banks failed or required infusions of government money in the past two years. As well, a massive overhaul of the U.S. savings-and-loan industry will eventually cost taxpayers an estimated $570 billion. The Bush administration tried last year to rewrite the banking laws and rid financial institutions of restraints that were adopted in the 1930s— including a law preventing banks from operating across state lines. But the legislation died in Congress. David Wyss, an economist for DRI/ McGraw-Hill in Lexington, Mass., says that the banks’ problems have made it harder for small and midsize firms to borrow money. Canada’s banking system, he adds, is far more stable, a factor that should promote long-term economic growth.
But perhaps the most telling sign of international confidence in Canada’s economy is the low level of concern among foreign investors about the country’s constitutional problems. Far from panicking about a possible breakup, said Leo de Bever, an economist with Nomura Canada Ltd. in Toronto, most investors seem convinced that Canada will overcome its difficulties. Added de Bever, who recently toured Europe and Asia to gauge investor sentiment: “In the big scheme of things, Canada’s constitutional problems are pretty minor. Most people would trade places with us any time.” In a season of deep economic pessimism, it is a heartening claim.
COMPARING DEFICITS Federal government deficits as percentage of GDP
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