Business

The rebound

As the economy keeps rolling, layoffs keep growing

JOHN SCHOFIELD October 28 1996
Business

The rebound

As the economy keeps rolling, layoffs keep growing

JOHN SCHOFIELD October 28 1996

The rebound

Business

As the economy keeps rolling, layoffs keep growing

JOHN SCHOFIELD

The economic news flew fast and furious last week and, for once, it all sounded so good: interest rates reached a 37-year low, stock markets and exports hit historic highs, and the once-lowly loonie continued its upward flight. Politicians wrestled their deficits to the ground, while foreign investors whistled with delight. But for all the fanfare, the 3,000 men, women and children who frequent the Mustard Seed food bank in Victoria just weren’t enjoying the party. The number of people seeking sustenance there has increased 50 per cent since January, says Rev. Tom Oshiro, executive director of the Mustard Seed Street Church, which runs the food bank in the B.C. capital. “There is definitely a climate of frustration and anger out there among the people who are economically strapped,” says Oshiro. “Survival is the key. To survive, they’ll do anything.”

The shamed, strained expressions on the faces of patrons at the Mustard Seed and other overburdened food banks across Canada spell out the real meaning of the term “jobless recovery.” As millions

of Canadians wait patiently for the rewards of a growing economy, work seems even harder to come by. Last month, employers shed 47,000 jobs, pushing the unemployment rate to 9.9 per cent.

But at the same time, foreign investors and financial mandarins are growing more enthusiastic about Canada by the day, undeterred by the lack of work, stagnant incomes, and this year’s anemic, 1.5-per-cent rate of economic growth. As a result of government belt-tightening and lower interest rates, the Geneva-based Organization for Economic Co-operation and Development predicted in June that the country’s growth rate for 1997 will lead the industrialized world, leaping to 3.5 per cent. On Wall Street, some market watchers believe that, next year, the red-hot Toronto Stock Exchange will actually outperform the stronger New York exchange. ‘You’ve got this wonderful guy named Paul Martin, who is taking the deficit for the federal government down, down, down” says Tom McManus, an equity strategist with Morgan Stanley and Co. in New York City. “And every time he does, the market sits up and takes notice.”

Wall Street’s collective pat on the back—and solid backing from

Prime Minister Jean Chrétien—is all the encouragement Finance Minister Martin needs to stay the course. But with the unemployment rate hovering depressingly close to double digits, Opposition parties are demanding tax cuts to boost the economy and create jobs. Last week, Canada’s Catholic bishops joined the call for action, criticizing the federal and provincial governments for putting balanced budgets ahead of the needs of people. Chrétien sounded a note of sympathy—and raised immediate skepticism among his critics—by telling Winnipeg schoolchildren that he occasionally chats with homeless people about their problems. But the Prime Minister’s New Age sensitivity ended at a $500-a-plate, Liberal party fund-raising dinner in Toronto, where he steadfastly refused to budge on tax cuts. “I’m not about to sacrifice the gains we’ve made,” Chrétien told an audience of 2,500.

Instead, the government is looking to the Bank of Canada to keep the economy growing—and, with luck, the job count, too. Last week, the central bank reduced its key lending rate for the 18th time in 17 months, cranking it down to 3.75 per cent—the lowest since July, 1963. The benchmark prime rate of the chartered banks fell in step to bring the cost of borrowing to rates not seen since the 1950s. Another cut is widely expected within the next three months—if the dollar keeps climbing. The rate adjustments last week and earlier in the month were both aimed at igniting sluggish consumer spending to compensate for the higher dollar’s drag on exports, said Sal Guatieri, a senior economist with the Bank of Montreal.

The steady slide in rates over the past 17 months has been a boon to Canadians shopping for a home or about to renegotiate their mortgage. But it does not help fans of fixed-income investments like Canada Savings Bonds, which went on sale offering a modest three-per-cent return initially (although carrying the promise of rising rates after the first year). Those seeking a bigger bang for their buck are turning to the stock market, especially in the form of mutual funds. Canada’s $187.5-billion fund industry is even attracting many older, conservative investors, who would once have dismissed the stock market as the preserve of pin-striped capitalists and slick high-

rollers. Dan Richards, a Toronto-based marketing consultant for the mutual-fund industry, calls them “GIC refugees,” people who have been forced by low rates to abandon their customary security blanket—guaranteed investment certificates. “They’re really reluctant brides,” says Richards. “They don’t want to be in funds, but there are relatively few alternatives.”

It is not unusual for stock markets to soar when interest rates slip, but steady rate cuts have helped fuel raging bull markets that have shattered all previous records. On Bay Street, the TSE 300 stock index “has been hitting all-time highs almost every day,” notes Craig Hurl, the manager of index operations. And it has been doing that regularly now since the end of 1992, when the index stood at about 3,350. By the end of last week, it closed at 5,492. But Toronto’s climb was completely upstaged by the stunning performance of the New York Stock Exchange, which burst through the Dow Jones index’s 6,000-point mark—less than a year after breaking 5,000. “It’s almost unbelievable the way these markets have gone in the past few years,” said Dunnery Best, chief market strategist for Richardson Greenshields of Canada Ltd.

Indeed, the Dow’s latest milestone has left many investors wondering if New York’s longest bull market in history—almost 2,200 days—is too good to be true. The last record, of course— a total of 2,138 days of steady gains—ended with the Crash of 1929 and the subsequent Great Depression. Predicting the latest bull’s ultimate demise has become a favorite parlor game among armchair and swivel-chair traders alike, and has spawned an impressive array of offbeat theories. Morgan Stanley’s McManus, for example, believes the growing popularity of cigars is a sure sign the market is bloated with money and ready to burst. But diehards like John Bart, president of the Canadian Shareowners Association, a nonprofit investors’ club based in Windsor, Ont., see no reason why the good times cannot go on indefinitely. Low interest rates, and the baby boom generation’s love affair with equity mutual funds, could keep the stock market booming for years, he argues. “I think we’re in unprecedented times,” says Bart.

The speculation is meaningless for the majority of Canadians, who do not own stock and are more concerned with such dayto-day matters as finding work or paying off debts. South of the border, the average American is only now feeling that times are better, according to a recent poll. After three years of declining unemployment, low inflation and moderate growth, a slim majority of those surveyed said they are better off than they were in 1992. Canadians, on the other hand, are nowhere near as confident. Consumer spending, often a gauge of the public mood, is still sluggish—rising only 2.2 per cent in the past two years.

Not everyone is certain that rock-bottom interest rates will spark the buying sprees that Ottawa is counting on to accelerate economic growth and create jobs. “I’ve seen too much fear in people,” says Ralph Hoehne, a real estate broker in Winnipeg, where the demand for new and used homes remains slow. The only real antidote, suggests the Bank of Montreal’s Guatieri, is putting more people to work and putting more money in their pockets. Because of high unemployment and the resulting surplus of labor, real income growth has been flat or declining for the past six years, he says. “That has been the major impediment to a sustained recovery,” adds Guatieri. Until that barrier can be breached, Ottawa will not only face a fiscal deficit, but a deficit of hope. □