OVERCAST IN ’99
Business leaders forecast a year of sluggish growth and slow recovery
An old joke has it that God created economists to make weather forecasters look good. Fair or not, it is certainly true that most economists a year ago underestimated the extent to which the Asian economic crisis would spill over into Canada. Amid falling resource prices and weakened exports, the domestic economy expanded by an estimated 2.8 per cent, a full percentage point less than some analysts were expecting. The experts, as always, are ready with their predictions for the coming year, but this time many Canadians will be hoping that they have erred on the cautious side. The consensus among private-sector economists is that Canada’s economic growth rate will decline to somewhere between 1.5 and 2.5 per cent in 1999. Sherry Cooper, a normally bullish senior economist at Nesbitt Burns Inc. in Toronto, is among the more pessimistic: she expects that the gross domestic product will increase by 1.8 per cent, marking the third consecutive year that Canada will have underperformed the United States. Along with many other analysts, she foresees lingering weakness in manufacturing, residential construction and export-oriented industries such as oil and gas, mining and minerals, and forest products. An even bleaker scenario is painted by chief Canadian economist Ted Carmichael at J. P. Morgan Securities Canada Inc. He expects a mild recession in mid-1999, with some relief possible in the form of tax cuts.
If either of those forecasts prove accurate, the coming year may be a disappointing one for job-seekers. Across the country, an estimated 425,000 net new jobs were created in the first 11 months of 1998, the strongest performance since 1979. The unemployment rate fell to eight per cent from about nine per cent, but many economists believe the trend will reverse itself by the spring, with the jobless rate rising to about 8.5 per cent by year-end.
The biggest problem Canada faces is an anticipated slowdown in the U.S. economy, which is now heading into its ninth consecutive year of growth, the longest peacetime expansion in its history. Few analysts expect a U.S. recession in the coming year, but even a moderation of growth would hurt by reducing demand for Canadian-assembled cars—Canada’s most important manufactured exports—as well as lumber, steel and a wide range of other raw materials.
If there is a silver lining in those forecasts, it is that interest rates seem more likely to fall than rise, as the U.S. Federal Reserve Board attempts to offset the deteriorating economic environment. The Bank of Canada would follow suit, which means 1999 could bring good news for anyone thinking of buying a house or renewing a mortgage. Rates for car loans and other consumer credit are also expected to ease slightly.
Whether that will be enough to maintain consumer confidence is an open question, however. In 1998, consumer spending was one of the driving forces in the economy, accounting for nearly three-quarters of the country’s gross domestic product growth, says Rob Palombi, an economist with Standard & Poor’s in Toronto. So far there has been little sign of a slowdown in demand, but economists warn that the rising levels of consumer indebtedness could eventually force a sharp reduction in spending.
For a sense of what to expect, Maclean’s spoke to a range of business leaders and other Canadians to get their predictions for 1999.
chief economist of the
Canadian Imperial Bank of Commerce
The global picture: “There will be continued weakness in emerging economies. While there are signs that the financial crisis in Asia has bottomed, the real economic effects of the crisis are very much with us and many countries, including Japan, are still suffering deep recession. There’s not much hope for Russia, and Latin America remains at high risk, with Brazil being a focus point.
“If Japan gets through the recession and if Brazil doesn’t blow up on us, we’ll see a turnaround in late 1999, early 2000. But we’ll have a slow first quarter 2000 as Y2K (the feared millennium bug) unwinds. If it’s a catastrophe, then you rewrite the history books, but we don’t think it will be that big a problem in North America because it has been so hyped.”
On North America: “The U.S. economy will be slowing down more sharply than Canada’s (to 2.3-per-cent growth in 1999 from 3.7 per cent in 1998) due, in part, to slowing in investment because of poorer profit performance. That will take some steam out of Canada because our exports won’t grow.”
JEAN MONTY, president and CEO of Montreal-based BCE Inc.
On telecommunications: “The capability to connect to networks, to the Internet at higher speeds with more functionality and at lower prices will just accelerate in 1999. We’re going through a major transformation of the telecom network that we used to call the telephone network. The Internet is going to be a way of life as opposed to strictly an element of your life.
“There are possibly 200 million Internet connections today in the world, and 600 million telephones. Everybody believes that every telephone is going to be an Internet connection over the next 10 years. So that means that you’re going from 200 to 600 million Internet connections. To me that’s the perfect example of why the Internet is becoming the new communications medium. It’s the
new network as opposed to strictly another gizmo. It is becoming the telecom network of the next century.”
On the Y2K computer bug: “The industrialized world, I believe, will be quite ready. But the less developed countries, I really put a question mark on it.”
STEPHEN JARISLOWSKY, chairman and CEO of Jarislowsky Fraser Ltd.
On the economy: He foresees flat to slight growth in 1999. Canada will continue to suffer because there “will be no recovery from the brain drain to the United States and little new investment in natural resources, which have been hard hit. And it will be a slower year than this year.”
On interest rates: “If there’s a material slowdown in the United States, interest rates will go down by as much as 50 basis points.”
On stock markets: “If rates go down, the markets will stay relatively stable and possibly go up a bit. But we’ve had four years of 20-percent returns. The Internet craze has been overdone. None of these crazes last too long. So I wouldn’t be into them. Really, there is not much to buy. Stay on the sidelines and wait for a good opportunity. The higher the market goes, the more volatile it becomes. Cash can’t hurt you. Don’t fly too close to the sun; keep your feet on the ground.”
JACQUES MENARD, deputy chairman of Nesbitt Burns Inc., chairman of Hydro Quebec and chairman of the Montreal Expos On the economy: ‘The issue we’re going to ask ourselves some time in mid-1999 is, will we have a recession in the year 2000? I’m sure the economic growth numbers are going to be sobering in the last quarter of 1999 and the first quarter of 2000, what with the millennium bug and some economic behaviour that might be affected by the imminence of the year 2000. For instance, we know a number of people will significantly curtail their travel plans in the last quarter. At
Hydro Quebec, we’re spending over $60 million a year to deal with the bug. We’re well on course and we’ll have ourselves all done by the end of March. That kind of economic injection is not going to take place in the year 2000. Nesbitt Burns is about half of that—some 30-odd million dollars. That’s a lot of money.”
JOCK FINLAYSON, economist and vice-president of policy, Business Council of British Columbia
On the economy: ‘We may do a tiny bit better in ’99 than ’98, but I don’t see any strong recovery here [in B.C.] at all. There’s no basis for it. We are the only province in Canada currently in a recession.
“Our largest industry, forestry, is in the worst economic condition in half a century. Our population, which has been growing at close to 2 !/2 per cent a year—double the Canadian average—has plummeted to less than one per cent a year now because people are leaving British Columbia for other provinces. We have the lowest levels of consumer confidence and optimism.” Finlayson predicts a slowdown in the U.S. economy will have a bigger impact on British Columbia than other provinces.
Rays of hope for ’99: Lower interest rates, help for exports from a low Canadian dollar and tax relief at the federal and provincial levels.
JURI KOOR, chairman, president and CEO of Call-Net Enterprises Inc., the owners of Sprint Canada
On the economy: “I’m sort of a pessimist. I think consumers are probably not spending as much money as they were last year or the year before. Although unemployment does not seem to be increasing, I think the big difference is that overtime in most places is down pretty significantly. I believe we’re going to have a recession in the next year or two, for sure. It’s knowing when, not whether, that I’m worried about.”
On the phone industry: “Consolidation will continue big time. This is not a Canadian trend
WHAT LIES AHEAD? Maclean’s charts the coming year with three differing sets of quarterly economic predictions
The dollar in ’99
Personal savings rate
alone, this is a worldwide trend. Over the next decade, we’ll probably end up with three or four huge multinational carriers, and some regional guys and some very marketspecific people with their own product niches or geographical niches.”
MICHAEL MACMILLAN, chairman and CEO of Alliance Atlantis Communications Inc.
On the economy: “I am afraid the economic outlook is choppy. We will see a certain amount of battening down the hatches and a decrease in corporate and personal spending. [However,] the entertainment industry will fare relatively well in 1999.” Research shows that even in times of stress, people continue to watch TV and videos and go to the movies.
“It’s cheap and it’s relaxing. So whatever happens, we believe the outlook for our industry is one of significant growth.”
‘We have spent the past few months completing the merger [of Atlantis and Alliance] and getting our arms around the new company. So we enter 1999 with huge enthusiasm. We are expanding all our current businesses—motion-picture production and distribution, television production and distribution. Also, we are looking at possible acquisitions.”
MICHAEL ADAMS, president of Environics Research Group
On general trends in 1999: “The joy of consumption, the quest for novelty, these are both in decline. The cheap thrills, buying everything that is new—this is not there among the general populace. People are
adopting new technologies when they are in fact easier or cheaper. E-mail is something that people are finding more convenient and indeed less expensive than posting a letter.
“Canadians are price sensitive and they’re experience sensitive. Of course, the ultimate experience is tourism, which is the No. 1 industry in the world. So while we’re very price sensitive, we often splurge on our tourism, and believe that we deserve one, two or three vacations a year.”
PAT BURNS, executive director of the Greater Vancouver Food Bank Society
On the poor: “There is not a lot of optimism that things will get better for low-income people.” He says that over the past three years, the number of people using food banks in his area has risen almost 60 per cent, to 8,000 from 5,000. He does not expect this to change in 1999. ‘With the number of mills
closing in many of the small towns, people who used to support food banks may now find they are relying on them.”
SAM BLYTH, president of Blyth & Co., a Toronto-based tour company
On vacation plans: “The number of people travelling to U.S. dollar destinations, both to Florida and the Caribbean, has gone off a lot and that will continue to be the case. Many more Canadians are realizing that we have a basket case of a currency, so lots of people will travel within the country and lots of Americans will join them. Canadians are also travelling more to softer currency countries, exotic ones. We’re seeing a big trend towards places in the Far East, Thailand, Indonesia. They’re cheap to get to because airfares are extremely low, and when you get there they’re extremely inexpensive to live in. First-class hotels that were in the
PETER MUNK, chairman and CEO of TrizecHahn Corp. and chairman of Barrick Gold Corp.
On the economy: “Canada will have a prosperous and good year with good growth— not excellent though. The reason for my forecast is simply that the resource sector will remain depressed principally due to the Asian economies. It will take longer than a year for them to fully recover.
“As we enter the new millennium, Canada will accomplish a great deal on the
world stage. My confidence is founded in part on the coming of age of our Canadianbased international business enterprises. I see this in my travels, I see this in our willingness to take on the world, and I see this in some great companies doing well abroad— the Magnas, the Northern Telecoms, the Hollingers and the Power Corps.—just to name a few obvious ones. We have trained people, the technology, the health and education systems, and the right trade agreements to make it happen.”
On gold mining: “I see the industry as a whole being driven to make defensive moves, ones that are driven by weakness and a yearning to get bigger for the sake of it. All the talk about consolidation is premature and often driven by wishful thinking. You have to make the right moves at the right time.”
HEATHER REISMAN, president and CEO of Indigo Books, Music and Café
On the book industry: “I think we’re at the beginning of a whole new era of book publishing and distribution.” She says her industry is finally beginning to accept the idea of quick inventory turnaround. “The concept of publishing just in time and sending quantities [of books] more closely to what’s required and then selling them where they are received, I think that’s what’s going to happen.”
On Internet selling and culture: “The whole question of culture and how a country enhances and strengthens its
culture in a global world is something that has to be fundamentally rethought. But it is not going to be protected by putting barriers on distribution. We have completely archaic, ill-conceived regulation on ownership of publishing and distribution.
“The most important thing that could happen in 1999 would be legitimately raising the question as a question, not as an answer: “What does one do in a global society when you want to ensure that your voices are heard?”’
On the economy: “Cautiously optimistic.”
$200-to-$300 range can now be bought for $40 to $50 a night.
“Lots more people are going on ships, too. There was 15-per-cent growth in the cruise industry worldwide in 1998. There will be huge opportunities in ’99 for discount cruise programs. The supply is growing faster than 15 per cent, which will result in lots of twofor-one offers and deep discounts.”
DAVID KERR, president and CEO of Noranda Inc.
On metals and mining: “There has been a significant amount of negative news in the past year. I think in the months ahead this view will be discontinued. Despite continued low prices, we expect good demand. I feel really quite good that in the year ahead we expect to see a quantum leap in rates of return. In the immediate future, copper and nickel prices will remain soft, but zinc should start to see some improvement.”
JOY CALKIN, president and CEO of Extendicare Inc.
On health care: “Many Canadians are disputing the adequacy of health-care funding, the merits of restructuring and who should control the provision of services. I believe that meaningful answers will elude us unless we ask the right question: what measurable outcomes do we expect of an effective and affordable Canadian health system? We need a consensus on acceptable outcomes to determine how to allocate finite resources and to formulate a new kind of Canada Health Act. Otherwise, 1999 will just bring more fruitless debate.”
BRIAN WHITE, head of market analysis at the Canadian Wheat Board
Outlook for wheat: He expects a better year financially. ‘Weighing on the market has been a sizable wheat crop. In 1998, we saw the second-largest world wheat crop. In 1999, we expect it to be about 575 million tonnes; that’s down substantially.”
CHARLES CAVELL, president and CEO of Quebecor Printing Inc. and designated chairman of the newly merged Quebecor Inc. and Sun Media Corp.
On the economy: “I think the economy is going to be reasonable—not necessarily buoyant—but clearly reasonable. We’re looking forward to a very strong year in 1999.”
On newspapers: “I think the restructuring that has been taking place within the sector augurs well for a very strong year. And I think that the big winners are going to be the readers and the advertisers as people put more and more effort into presenting highly desirable products. The changes that we’ve seen, largely precipitated by Conrad Black’s move with the National Post, have caused everybody to pay a lot more attention, and I think this is extremely healthy.” □