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The Hard Times Are Even Harder North of Border : Economics: The recession started earlier in Canada and is expected to last longer than in the U.S. Manufacturing, hit hard by the 1989 free trade pact, is a special worry.

TIMES STAFF WRITER

When Winnipeg graphic artists Jan and Kay Kristiansen decided to go into business this year publishing Recession magazine, they figured that they would be running a humble mom-and-pop operation with a small local following.

Instead, Recession has wound up with an initial press run of 20,000, a coast-to-coast subscriber list and profitability from the very first issue.

“It’s just amazing,” Jan Kristiansen said of his new monthly, which contains inspirational stories, tips on how to barter and brew beer at home, and a package of vegetable seeds bound into every issue. “I’m getting (free-lance) articles every day, from people all over the country.”

Misery loves company, and across Canada, no one’s lonely. Canada’s economy went into a recession months before the American economy and is expected to stay in the dumps longer. It under-performed all serious forecasts for 1990. Interest rates climbed so high last year that for a time Canadians were wryly pointing out that their prime rate had edged above Prime Minister Brian Mulroney’s dismal popularity rating.

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Some economists are already arguing that this recession will be Canada’s worst since the Great Depression. Not everyone agrees with that--optimists expect to see early signs of recovery by the third quarter of this year--but all concur that if the Gulf War becomes protracted, the Canadian recession will worsen.

A few indicators:

* With nationwide unemployment at 9.7%--a five-year peak--some 1.32 million Canadians are out of work in a population of 26 million. During January alone, about 40,000 Canadians lost their jobs; 26,000 were in the vital industrial heartland of Ontario.

* Canadian construction slipped about 15% last year, with the hardest-hit sector--factory construction--declining 30%. Residential construction fell 18%, and housing sales have dropped to an eight-year low.

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* A record 42,782 Canadians went bankrupt in 1990, 46% more than in 1989. The last time Canadians went into bankruptcy in such large numbers was during the 1981-82 recession--but in 1982, by contrast, a mere 32,000 people filed for bankruptcy. Business bankruptcies were also up last year, climbing 34% to 11,642.

* Canadian foreign trade is off, a serious matter in a country that exports 40% of its private sector output. Exports fell about $737 million in November, of which $498 million was the result of lower sales to the United States.

In addition to the severity of the recession, many Canadian analysts worry about the type of recession this is turning out to be. So far, it is hitting hardest at the manufacturing sector--the part of the economy that long-range thinkers say needs beefing up the most.

The majority of the jobs that disappeared from the Canadian economy last year were in manufacturing. And out of last year’s export decline, the biggest losers were likewise manufactured goods: automotive parts and intermediate industrial goods and materials.

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Canada has long taken a free ride on its vast, unpopulated spaces and seemingly boundless natural resources. Its rich farms, mines, forests and fisheries have given Canadians one of the highest standards of living in the world--even as its manufacturing productivity has languished in last place among the Group of Seven industrialized countries.

Economists know that those natural resources won’t last forever and that excessive reliance on raw-material exports dooms a country to rising and falling with each new international commodity cycle. They have long goaded Canada to improve manufacturing productivity and add value to its abundant raw materials by finding new ways of processing them.

But instead of producing those structural changes, the recession seems to be bringing about the opposite effect: Rather than investing in new equipment or research and development, Canadian manufacturers are closing down or moving to the United States, Mexico or the Caribbean.

“Obviously, Canada cannot hope to be competitive in the longer run if we lose our industrial base today--yet that is what is happening,” said Bank of Nova Scotia Chairman Cedric Ritchie. “Manufacturing jobs are disappearing fast--at least 150,000 in the past year. Many of these jobs are ending up south of the border and will not return with the cyclical recovery.”

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With so much at stake, Canadians are putting the blame for their plight on Mulroney. His Progressive Conservative government, serious about wringing systemic inflation out of the economy, last year cranked up interest rates until they were as much as 5 percentage points above comparable rates in the United States.

“I consider it the world’s tightest monetary policy,” said Peter Morici, a professor of economics and Canadian studies at the University of Maine.

Inflation hasn’t abated, thanks to a lingering effect of last fall’s oil price increase and to a new tax on consumer purchases. Meanwhile, the high interest rates have crushed Canada’s real estate markets, building industry and consumer confidence.

Compounding things, Mulroney has begun to liberalize trade with the United States, promising that a new bilateral trade relationship would open up opportunities for Canadian business and create needed jobs.

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Mainstream economists agree that the trade pact, signed in 1989, was necessary, even overdue, as a means of helping Canada increase its international competitiveness. (Canada has agreed to join U.S.-Mexico talks on a similar free trade agreement.) But at the same time, they say, Mulroney seriously erred in selling the trade pact as a job-creation scheme. His promises now look cruel and flippant given what has happened.

No one can prove exactly how many jobs have been lost as a direct result of the free trade pact, but the Canadian Labor Congress contends that the number is at least 226,000 and rising. Part of the problem has been the pact’s reduction in protective tariffs: Unproductive industries, such as textiles and furniture making, have taken a beating as they have become exposed to foreign competition.

But even worse, the government has kept the Canadian dollar--now trading at about 86 cents U.S.--overvalued while opening up to foreign trade. This has made Canadian exports costly and uncompetitive in international markets, no matter how efficient the companies producing them may be.

“To put it bluntly, much of Canadian industry cannot compete on the basis of an 86-cent dollar,” said the Bank of Nova Scotia’s Ritchie. “We need lower interest rates and a lower dollar now.”

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There are objective economic reasons, such as the need to finance the budget deficit, for keeping the Canadian dollar overvalued--but not all Canadians accept them. As the recession has worsened, rumors have begun to circulate in nationalist circles here that the Mulroney government is keeping the Canadian dollar strong because the United States has secretly ordered it to do so.

Mulroney government officials say the theory is ridiculous and that Canadian monetary policy is made in Ottawa, not Washington.

Nevertheless, U.S. merchants have flourished as the Canadian dollar has stayed strong. Canadian consumers are flocking over the border to snap up everything from blue jeans and microwave ovens to Canadian hockey star Wayne Gretzky’s autobiography--all cheaper for Canadians who travel to the United States to spend their powerful currency. Studies suggest that Toronto residents alone dropped $206 million in New York state shopping malls last year.

And this year, even more are expected to travel south because the Mulroney government imposed a new 7% tax on most consumer purchases in January. The government says the tax will simplify Canadian fiscal affairs and help with its budget deficit, but private-sector economists worry that it will fuel inflation and further dampen consumption in Canada.

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A survey by consulting firm John Winter Associates Ltd. found that Canadians plan to increase their U.S. shopping trips by 30% this year as a direct result of the hated new tax. In the border city of Cornwall, Ontario, merchants are so alarmed by consumers’ flight south that they plan to start offering interest-free loans to Canadians who stay in Canada to make purchases.


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