COVER

READY, SET, GROW

JENNIFER WELLS February 17 1997
COVER

READY, SET, GROW

JENNIFER WELLS February 17 1997

READY, SET, GROW

COVER

JENNIFER WELLS

rt DeFehr is at the World Economic Forum in Davos, Switzerland, which he has attended for each of the past five years. A lot of big thinking goes on in Davos, and DeFehr likes to be a part of it, picking up trends, ideas, currency movements, economic prognostications. Two years ago, listening to “everyone else’s problems in the world” and assessing Canada’s own economic prospects, DeFehr, a Winnipegger, figured his home country was getting in pretty good shape. “My feeling was that Canada was moving in the right direction,” he says.

As was Palliser Furniture, the company DeFehr’s father founded in Winnipeg in 1944. In 1990, life at Palliser, and throughout the furniture business for that matter, looked dire. Consumers, says DeFehr, had “voluntarily walked south,” to more cheaply priced U.S. goods. Bankers had put Canadian furniture companies on their “donot-touch list.”

DeFehr set about reshaping the family firm. He rationalized. Instead of running product lines in three types of wood, he cut back to oak alone. He jettisoned dining-rooms, a line of business in

which he was not close to being competitive. He moved heavily into upholstered leather, “where no one had established pre-eminence and we could at least fight for a spot.” He started up two new manufacturing facilities in the United States, where before the company had just one. ‘We were told by a lot of economists we had to move south,” he says.

By the time DeFehr hit Davos in 1995, he was running a much more nimble, much more focused business. But he was not happy

with the spread of his U.S. manufacturing facilities, which made it tough to move management around quickly, and which, in DeFehr’s view, only complicated product distribution. So he made a decision. He closed the two newer U.S. plants and moved those operations back to Winnipeg. This year, Palliser will hire 300 to 400 new workers in that city, at an average hourly wage of $12. Corporate revenues have doubled since the gloom of 1990 to roughly $265 million. Staffing has increased by 50 per cent. Palliser is today Canada’s leading manufacturer of leather furniture in Canada; it is fourth in the United States, the market that had once made Palliser seem so uncompetitive.

At long last, the domestic economy is getting in gear

Palliser’s may be a small story, but it is an apt example of the comeback not only of the Canadian furniture industry, but of Canadian manufacturing—itself a microcosm of how the economy has repaired itself. Jayson Myers, chief economist with the Alliance of Manufacturers and Exporters Canada, says that between 1989 and 1992, almost 400,000 jobs were lost in Canadian manufacturing. So-called experts rang the death knell— “those jobs are gone and they’re not coming back,” they all said. But like Palliser, myriad companies restructured, pared production costs, rationalized and invested in new technology—and thrived. The auto industry began the recovery. Plastics, rubber, textiles, electronics and furniture followed. All of manufacturing grew to $400 billion in revenues last year from $280 billion in 1992. In 1995, 125,000 new jobs were created, going a long way towards reclaiming the job ground lost in the last recession. Over the past two years, furniture has been the second-fastest-growing manufacturing sector, with the dollar value of shipments increased by more than $1.2 billion. At a Davos lunch this year where the theme was the newly competitive Canada, for once Art DeFehr could say he was not hearing anything new.

But 55 per cent of Palliser’s sales are in the United States, and that percentage has been steadily increasing as retail furniture sales in Canada have remained below 1989 levels. To so many at home, with an unemployment rate of 9.7 per cent, the recovery does not feel like a recovery at all. “What is important to remember says Paul Summerville, chief economist at RBC Dominion Securities, “is that strong job growth occurs much later in the economic cycle. Many people will recall America’s so-called jobless recovery that now has the U.S. jobless rate threatening to fall below five per cent.”

Can Canadians expect to ever see such skinny unemployment numbers? Summerville says yes, but it will be a long journey, and along the way certain conditions must be met. “The key to rising job growth and rising real wages is investment,” he says,

“because that creates the conditions for rising productivity, something that has been sadly lacking in this country for the past decade.” But, says Summerville, an investment-led recovery is only sustainable if Ottawa continues its course of “fiscal responsibility”—that is, the anti-deficit agenda—and if interest rates remain stable, and if the U.S. economy does not fall into a slump. If all of that happens, he says, “we would expect that Canada’s unemployment rate will fall below nine per cent.” That does not sound like much. But that figure accommodates both the ongoing digestion of labor cuts in the public sector and the tide of Canadians coming back into the workforce as they see job prospects improve. Summerville’s assessment echoes Ottawa’s own expectations, including that of Finance Minister Paul Martin.

There is nothing terribly inspirational about incremental change. Yet Canadians have experienced dramatic change, partic-

ularly in the fall of interest rates. And that, says John McCallum, chief economist of the Royal Bank of Canada, will have a significant impact on the domestic economy. Not only do lower interest rates stimulate investment, but they will get Canadian consumers spending again, McCallum says. “To suddenly say, contrary to all these other countries and all these other years, that in Canada in 1997 they don’t work any more, is extremely unlikely to be true,” he says. He expects rising incomes and 700,000 net new jobs in the next two years, the net effect of the domestic economy kicking into growth as the export sector has already done.

5 There have already been 1 some key vital signs. Consumer confidence levels are, at last, rising. Residential construction and brisk new home sales feed consumer spending on big-ticket items—stoves, fridges, Palliser couches.

Still, there are two rather large psychological barriers to consumer growth. Debt is one. Fear of job loss is another. On the latter point, McCallum believes that the intensity of downsizing is past. “My sense is that those will be at a diminishing pace because the Canadian economy went through a massive corporate restructuring and downsizing in the early ’90s. But I think its intensity will be reduced if we’re right in thinking the economy will expand.” As with Summerville, McCallum lists a few caveats: that the U.S. economy not head into a downturn; that interest rates stay low; that the issue of Quebec separation does not reignite.

And what of consumer debt, still at a historic high? Will Canadians simply redirect any cash-flow increases to credit card balances, mortgage debt and retirement savings? ‘What do you pay attention to?” asks McCallum. “How much you owe the bank or how much you pay in interest charges? I think what really drives consumers— and what drives bankruptcies—is not so much the debt itself, but the cost of servicing that debt.”

On that score, Canadians are unquestionably better off. “I’m not saying we’re at the promised land,” says McCallum. “I’m saying

consumers had a tough time in the ’90s, possibly the toughest time since the Depression.” Now, “if we can get six months of solid job creation and rising incomes, people will start to think we’re on a roll.”

A roll is not the same thing as a boom. Will this recovery come to echo the boom of the 1980s? Summerville thinks not. “We had a sick, unhealthy economy at the end of the ’80s,” he says. “People at parties talked more about the price of their houses than they did about their children. In 1988 what did you do? Sold your house and levered up, with the confidence that the $225,000 house would be worth $325,000. It was an economy based on increasing prices rather than increasing productivity.”

The refit of the 1990s, as painful as it has been, has the makings of a protracted economic recovery. Summerville sees it as a healthier society. “Look at the conversations people have now, not about cars, houses, but about capital today for income tomorrow.” And anyway, he says, comparing the 1980s and now, “booms give you busts.” □

CHANGE IN GDP

Percentage growth in gross domestic product

■ 1993

H1997 (forecast)

UNEMPLOYMENT RATE Si993

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