BUSINESS

Shifting into a higher gear

Canada’s economic recovery is gaining momentum and leaving most competing nations behind

JOHN DALY March 28 1994
BUSINESS

Shifting into a higher gear

Canada’s economic recovery is gaining momentum and leaving most competing nations behind

JOHN DALY March 28 1994

Shifting into a higher gear

BUSINESS

Canada’s economic recovery is gaining momentum and leaving most competing nations behind

JOHN DALY

At first glance, it might appear that Bob Findlay, president of Vancouver-based forest .products giant MacMillan Bloedel Ltd., has plenty to worry about these days. Last week, his company lost a $3-million order for pulp from a British tissue-maker in the wake of a continuing protest campaign by environmentalists over MacMillan Bloedel’s logging operations in Clayoquot Sound on Vancouver Island. But like a lot of other Canadian executives, Findlay is in an upbeat mood this spring. A quick look at his company’s annual report shows why. Having shaken off much of the impact of the recession, MacMillan Bloedel’s sales and profits are climbing—fast. Fuelled by a surge in demand for lumber and other building materials in the United States, the company’s revenues jumped by 24 per cent last year to $3.8 billion. Over the past three

years, MacMillan Bloedel has rebounded from a loss of $93 million in 1991 to a profit of $53.2 million in 1993. And Findlay expects another strong performance this year as the recovery in Canada starts to pick up steam, and Europe and Japan bounce back from economic reversals last year. “The turnaround in the marketplace is happening,” Findlay said. “We’re looking for it to take hold this year.” Signs that the recovery is gaining momentum are multiplying. Last week, Statistics Canada reported that its index of 10 leading economic indicators, which includes such measures as manufacturing orders and furniture and appliance sales, climbed by 0.8 per cent in February—the strongest increase since 1991, when the index first began signalling a recovery. The Canadian Real Estate. Association, in turn, reported that house sales in the nation’s 25 largest markets were

up 14.3 per cent in February compared with the same month a year ago. Economic renewal is even starting to make a dent in the unemployment rate. Last month, the rate declined by 0.3 percentage points to 11.1 per cent, representing a gain of 66,000 new jobs.

Until now, the recovery has been powered largely by rising exports to the United States, rather than consumer spending at home. But with job prospects improving, and both the inflation rate and interest rates holding at their lowest levels in three decades, many economists say that Canadians are poised to start opening their wallets again. Declared

Jeffrey Rubin, chief economist of the Torontobased brokerage firm Wood Gundy Inc.: “We’re not that far away from the point where we would expect the consumer to kick in.”

Already, Canada’s economy is growing faster than those of most of the world’s leading industrialized nations. Last year, Canada’s gross domestic product (GDP), after adjusting for inflation, expanded by 2.5 per cent, only slightly behind the 2.8-per-cent growth in the United States, which led the major free-market economies (page 44). Meanwhile, Japan’s economy shrank by 0.5 per cent, and Germany, which is mired in a recession that has bogged down almost all of Europe, saw its GDP decline by 1.5 per cent. For this year, most forecasters predict that Canada’s growth rate will surpass that of the United States. The Paris-based Organization for Economic Co-operation and Development, for one, projects that Canada’s GDP will expand by 3.7 per cent, followed by the United States at 3.1 per cent, while Japan and Germany will lag behind at 0.5 per cent and 0.8 per cent respectively.

But while Canada may be pulling ahead in the growth sweepstakes, it still has one of the highest unemployment rates. Despite a decline last month, it is still nearly double the U.S. rate of 6.5 per cent. However, there appears to be little that Ottawa can do about it. Last week, at a special summit of finance and employment ministers of the so-called G-7 group of leading industrialized nations hosted in Detroit by U.S. President Bill Clinton (page 46), all the participants expressed grave concern about the prospect of a jobless recovery. But they also failed to agree on any concrete solutions. Canada’s delegates—Human Re-

sources Minister Lloyd Axworthy, Finance Minister Paul Martin, Industry Minister John Manley and International Trade Minister Roy MacLaren—all argued that expensive government job creation programs are no longer the way to combat unemployment, and that governments must do more to assist private sector employers to hire and train workers.

Given Canada’s huge $45.7-billion federal budget deficit, Prime Minister Jean Chrétien and his ministers have few other choices. But even without flashy job creation programs, the domestic recovery is gradually generating new jobs on its own. Last year, total employment increased by 144,000, and this year forecasters expect that the increase will be about 200,000 jobs. According to Rubin, that will only be enough to match the anticipated growth in the labor force—young people entering for the first time and students and welfare recipients who will start to look for work again as the job market improves. As a result, the unemployment rate will likely decline only slightly. But like many economists, he argues that one of Ottawa’s most effective job creation strategies may be to do nothing. Said Rubin: “The best thing to do now is sit tight, because the economy is pumping out jobs on its own.”

So far, however, the impact of the recovery has varied widely among regions and among industries. Unemployment ranges from a low of 7.4 per cent in Saskatchewan to a high of 19.1 per cent in Newfoundland. Looking at key sectors of the economy, the mining in-

dustry is still reeling from low commodity prices on world markets for copper, nickel and other metals, while the auto industry is booming, fuelled largely by rising exports to the United States. Some strong growth companies in the computer sector barely felt the impact of the recession at all—and are continuing to expand. At Softimage Inc. in Montreal, which creates three-dimensional imaging software used by moviemakers and video game developers, sales jumped to $28.9 million in 1993 from $14.6 million in 1992. The company’s staff has expanded to 218 people, 139 of them in Montreal, from 70 at the beginning of 1993. Last month, giant Microsoft Corp. announced plans to buy Softimage for $175 million. Softimage executives say that they will likely hire another 50 software designers by the end of the year.

For many larger and more traditional companies, however, the return to growth and profitability has been much rougher—and has not g yet resulted in new hiring. MacMil| lan Bloedel, in many respects, is a ° textbook case. Since the end of 1991, Findlay and his managers have eliminated

I, 400 jobs from the company payroll in Canada, which now totals 9,500 employees. In fact, like many formerly dominant Canadian resource and raw materials producers, Findlay said that MacMillan Bloedel wants to get out of the pulp business entirely, and concentrate more on newsprint, packaging and building materials—more sophisticated but less laborintensive products. Earlier this month, the company announced plans to build a new plant in Port Albemi, B.C., on Vancouver Island, to manufacture lightweight, recyclable magazine paper. “We’re putting in $200 million worth of equipment,” said Findlay. “But we’re only hiring 30 people.”

Other key sectors, however, are still waiting for the turnaround. Retail sales, in particular, although rising, are still sluggish. Last year, the Hudson’s Bay Co., with 102 Bay stores and 286 Zellers discount department stores across Canada, saw its sales increase by seven per cent to $5.2 billion. ‘"When we came out of the 1982-1983 recession, you saw that great big hockey stick effect,” Lukassen said, referring to a sharp upswing in sales charts. However, this year Lukassen expects only a “modest improvement” in overall retail industry sales. Consumers, he says, are still worried. “You see the joblessness—it’s still

II. 1 per cent,” said Lukassen. “And wage increases are moderate.”

But even those indicators are improving. And with more hard evidence of a turnaround emerging every week, it appears that the only major ingredient needed to kick the recovery into high gear is a more positive attitude.

JOHN DALY