Heeding the Times from Harry Antonides' Desk

The Recession: A Few Items of Good News, But . . .

January 1, 1983 -

Although there are a few items of encouraging news about the Canadian economy, predictions of continuing sluggish performance and high unemployment rates still dominate.

First, the good news. Canada's trade balance looks good at an impressive estimated $17 billion for 1982—although this is in part due to the recession's effect of a fall in imports. This large trade balance will produce the first current account surplus since 1973. (The current account includes all in- and outflows of capital, including the servicing of foreign debt and travel out of the country.) The end of 1982 saw the first time that the inflation rate (at 9.8%) has dropped to a single digit percentage since May 1980. Another encouraging sign is the drop in the prime lending rate, from a high of 22.75% in August 1981 to 12.5% in December 1982.

The question is whether these trends indicate a recovery of health in the Canadian economy. There are some signs that this is not the case. In 1982, the Canadian economy experienced an estimated 5% drop in the Gross National Product. The number of unemployed continued to climb and at year's end exceeded 1.5 million, or about 13%. Company profit figures are extremely poor and the deficit in the federal budget is now estimated at nearly $25 billion.

We have obviously not yet turned the corner. All predictions about the future by Canadian and international research organizations foresee, at best, slow improvement in economic performance. Nearly all predicitons, however, contain warnings about continuing high unemployment despite any economic recovery. (The figures of the unemployed in the past years indicate an alarming trend: 251,000 in 1966; 476,000 in 1970; 727,000 in 1976; 867,000 in 1980; and over 1.5 million in December of 1982.)

The Conference Board of Canada reported that a majority of business analysts expect an upturn in the economy during 1983. The prediction is for a 2.5% increase in real Gross National Product, fuelled in part by increased consumer spending, and a slight improvement in house construction (a predicted 156,000 housing starts compared to 130,000 starts in 1982—which in turn compares to 280,000 in 1977). However, this modest improvement is not expected to make much of a dent in unemployment, which the Conference Board predicts will settle at around 12% for 1983.

House construction is an important indicator of the economy's performance. It has an immensely favourable impact upon employment in general, because of its high labour content and its demand for many related products and services. It is significant for the Canadian forest industry, particularly affecting the B.C. economy. Since the U.S. has traditionally been an important market for Canadian lumber, Canadian lumbermen keep a watchful eye on the housing industry in the U.S. as well. (The National Association of Home Builders in the U.S. has predicted that 1.4 million houses will be built in 1983, which is one fifth more than in 1982. Some predictions have gone as high as 1.8 million.)

The Organization for Economic Cooperation and Development recently predicted that unemployment in its 24 member countries will increase to a staggering 35 million. The OECD Report suggested that the prevalent mood of pessimism about the economy will continue for some time in view of the unprecedented severity and depth of the current recession. The report said that spending, especially on fixed investments, will likely remain subdued in nearly all countries.

The news for Canada was particularly bad. The OECD said that a significant recovery will not occur in at least the next eighteen months. It predicted that Canada's Gross National Product will grow 1.25% in 1983, while its unemployment rate will remain one of the highest in the OECD countries.

The OECD Report suggested that the United States' economy may begin a recovery in 1983, but there is not much evidence for this. The bright spot in the report was that inflation continues to fall and is now at its lowest point in almost ten years. However, it was pointed out that the price paid for defeating inflation may have been too high in terms of furthering a deep recession and high unemployment. It has become clear that much damage has been inflicted by high interest rates on large debtor countries, while the most disturbing feature of the long-term outlook is the reappearance of protectionism in a number of different forms. The OECD stated that unemployment and growth prospects are worst in Europe, and it warned: "The longer slow growth continues in Europe, the greater the risk that it will become self-perpetuating."

The World Economy

In December of last year a 26-member group of leading economists from 14 countries issued an extraordinary document about the world economy. These economists, including the Canadians John Helliwell and Richard Lipsey, warned that the policies of President Reagan and the ideas of Professor Milton Friedman will result in more troubles ahead. They agreed that inflation must indeed be reduced, but that the U.S. policy is excessively restrictive and monetarist, while Canadian policy is too much concerned with maintaining the value of the Canadian dollar. They warn that there is "now a real danger that the inflationary psychology of the 1970s could give way to stagnation psychology that could rule out any significant recovery in the 1980s."

This group of eminent economists was especially concerned about the prospect of a breakdown in international trade caused by the emergence of protectionist, or "beggar-thy-neighbour" policies, and they saw many signs of a move in this direction. While arguing that no country is able to propel itself back to prosperity, they found that four of the seven largest OECD countries have a sufficiently strong trade and inflationary performance to undertake a concerted move to improve world demand. These countries are the U.S., Japan, Germany, and Britain, where the current rates of inflation are: U.S.—5.1 %, Japan—3.2%, West Germany—4.9%, and Britain—6.8%. These economists considered Canada to be in a second category, unable to expand on its own, but able to join in a "concerted expansion primarily by a more expansionary monetary policy." This is how this group of leading economists described the present predicament:

The world economy is in a crisis—using that term to connote a situation where there is a threat of breakdown, although no breakdown has yet occurred. There is scant prospect of any prompt spontaneous recovery from the present deep recession. Until recovery occurs there is a continuing danger of an outbreak of trade warfare and competitive devaluation, or of a financial collapse, that could destroy the interdependent world economic system that emerged in the post-war years. Removing that threat, and thus resolving the crisis, requires a recovery in economic activity.

 Canada's International Ranking

Canada has a vulnerable economy because of its heavy reliance on exports and imports. On the other hand, Canada is in a very favourable position because of its ruch supply of natural resources. One of the reasons for the weakness of the Canadian economy is Canada's tradition reliance on its rich resources to compensate for our lack of excellence in other areas, particularly in manufacturing. In this context the question of productivity and competitiveness is a very important one. The European Management Forum, a Geneva-based business research organization, recently concluded that countries lacking their own natural resources have been more successful in adjusting to the changing world economy than countries which rely on their resources for growth, including Canada.

The concern about Canada's productivity and competitiveness is legitimate. What is needed is not merely quick-fix solutions nor the solution of immediate problems, but a careful analysis of irreversible long-term trends and structural changes.

Donald J. Daly, of the faculty of administrative studies at York University, recently completed the study Canada in an Uncertain World Economic Environment (published by the Institute for Research on Public Policy, Montreal). In his concluding remarks, he points out that Canadian exports have traditionally been heavily concentrated in the raw materials area, but these materials have constituted a declining share of world trade since before World War 1. In addition, the Canadian share of world markets in some of these products has begun to decline during the 1970s. This must be contrasted with the growth in relative importance of world trade in manufactured products. Thus Canada has had an advantage in the areas that have experienced a decline while it has not performed well in the manufacturing sector. It has lagged behind the U.S. in the adoption of new technology at a time when even the U.S.' technological leadership was being eroded by producers in Europe, Japan and in the developing countries. While Canada has approximately 70% of its exports going to the U.S., the U.S. market has been growing more slowly than most other countries.

It is these changes that will make it more difficult for Canada to achieve growth in real output per capita and per person employed. Daly continues: "Solutions to Canadian problems will hopefully continue to be found in an open, outward-looking attitude. The costs of more protectionist, inward-looking nationalistic policies would be high, whereas policies to make Canadian producers more efficient internationally would benefit consumers through lower prices and producers through higher incomes" (p.31).

This article originally appeared in Comment magazine, a journal founded by Harry Antonides. Find all of Harry’s pieces, and thousands more, at http://www.cardus.ca/comment