Canadians Fear Economy Is Experiencing a Second Dip Into Recession : Commerce: Like the U.S., Canada appears to be sinking back into the downturn. The jobless rate is likely to stay in double digits until the end of 1992.


After rebounding weakly in the summer and fall, the Canadian economy appears to be sinking back into recession, extending what some say is the worst slump here since the Great Depression.

Even before the current slowdown began, Canada had gone through a grueling recession--far longer and deeper than the one in the United States--and had already lost hundreds of thousands of jobs.

“We’ve almost put the economy in a pine box,” said Douglas Peters, senior vice president and chief economist for Toronto Dominion Bank.

Last week, Statistics Canada, the government agency that collects economic data, reported the gross domestic product, the total value of the country’s output of goods and services, rose a scant 0.1% in October from September.


At the end of the third quarter of this year, 1.4 million people in this country of 27 million were out of work. Economists say the unemployment rate here is likely to stay above 10% until the end of 1992.

And the government reports that there are now more than a million Canadian children living in official poverty. The figure marks an increase of 150,000 in two years.

No sector of the economy has been immune to the slump. In retailing, Canada saw several high-profile chain-store closings just before Christmas--normally the most profitable time of year. More closings are expected at the end of the holiday season.

On Canada’s breadbasket prairies, the inflation-adjusted price of wheat today is lower than it was in the depths of the Great Depression of the 1930s. Farmers “are bleeding all over the place,” said Robert Fairholm, managing economist at DRI/McGraw-Hill’s Toronto office.


In manufacturing, reports of new plant closings and layoffs seem to come almost daily. Corporate profits, as a percentage of gross national output, are at their lowest level since the Depression.

And in real estate, the office-space market is in the doldrums and looks as if it will remain so indefinitely. Housing starts and resales spurted earlier this year but then lagged again in November, dashing hopes that residential construction might kindle a lasting recovery.

Against this backdrop, public pressure has been mounting for the government to take sweeping, stimulatory actions. Earlier this month, Prime Minister Brian Mulroney reluctantly called together the country’s 10 provincial premiers and two territorial governors to discuss what could be done to rouse the economy.

After the meeting, the first ministers returned to their provinces empty-handed. Economic philosophies among the federal and provincial political leaders vary widely, and the only thing everyone could agree on was to hold yet another meeting in February.


“My friends were saying this was an opportunity grossly missed,” said Peters of Toronto Dominion Bank.

Nationwide, Canada lost 305,000 jobs between March, 1990, and March, 1991. Of these, 74% were jobs in the industrial heartland of Ontario, particularly the so-called “Golden Horseshoe,” a U-shaped belt of prosperity following the curve of the Lake Ontario shore.

Unemployment in stylish Toronto, the hub of the Golden Horseshoe, has more than doubled since 1990, and the city’s welfare rolls have bulged. Last month, (Nov.) the toll of welfare recipients was 283,804--more than the population of seven Canadian provincial capitals.

An estimated 125,000 Torontonians are now relying on food banks, making a mockery of a 1989 City Council resolution to eliminate the need for such banks in one year.


The homeless population has also spiraled in Toronto, a city where down-and-out street people used to be a rare sight. Advocates say there may now be 30,000 homeless.

The city’s Toronto Star newspaper recently printed a photo of one of them, sprawling on the sidewalk while two elegant, fur-clad women strode past. “Critics say downtown Toronto is taking on a U.S. big city look,” the caption warned.

Canadians pride themselves on having avoided American-style urban blight, and the thought that American squalor might develop here is anathema.

Farther east, Quebec’s economic problems dwarf those of industrial Ontario and could play a key role in Canada’s ongoing national unity debate.


In the past, Quebec’s federalist government has boasted that it can offer sounder economic management than the separatist opposition; it has told French-speaking citizens that they will be better off economically if they maintain the political status quo and stick with Canada.

But now, nearly one Quebecer in 10 is on welfare, and the argument may be losing its persuasiveness. The proud Francophone province has seen some shocking business setbacks: Its famed Lavalin engineering group collapsed under the weight of a $756-million debt over the summer; two mills in its all-important pulp-and-paper industry ceased operations in the fall, and the provincial government’s multibillion-dollar Great Whale hydro-electric dam project has been put on hold.

Quebec is due to vote by October on whether to remain a part of Canada, and separatists are smelling blood. The separatist Parti Quebecois, under the leadership of Jacques Parizeau--himself an economist of London School training--has suddenly found itself in the unusual position of being able to attack the provincial government on the basis of orthodox economic principles.

Nationwide, much of Canada’s economic woes stem from the simple fact of this country’s close association with the U.S. economy. About 25% to 30% of Canadian output is exported--about double the level in the United States--and three-fourths of those Canadian exports go to its southern neighbor.


Thus, whenever the U.S. economy slows down, as it is doing this winter, Canada’s economy slows down with it.

Compounding Canada’s problems this time, though, has been the government’s insistence on keeping the Canadian dollar strong. A strong dollar and high interest rates have made up the controversial, zero-inflation strategy of John Crow, governor of the Canadian central bank.

The Canadian dollar has appreciated by 21% since 1986, making it extremely difficult for Canadian exporters to compete. For a few weeks this fall, notes Toronto Dominion Bank’s Peters, the Canadian currency was appreciating at the rate of 1% a week.

“That just knocks the feet out from underneath the economy,” he said. “I can’t see any point in it.”


Canadian interest rates, meanwhile, have been much higher than their U.S. equivalents. The peak came in the second quarter of 1990, when there was a gaping spread of 5.85% between Canadian and U.S. treasury bill rates.

The situation has improved, from a borrower’s perspective, but there is still a differential of 2.83% between Canadian and U.S. treasury bills.

And Canadian economists who hoped that their government might take a cue from the Fed, which lowered its discount rate one percentage point last week, were soon disappointed. On the very next business day, the Canadian central bank raised its equivalent rate, by a tenth of a percentage point.

Many Canadian economists believe that the government must inevitably relax monetary policy, if only because Prime Minister Mulroney has to call an election by sometime in 1993 and won’t want to do so in the midst of a recession. Thus, economists here are predicting a recovery in the second half of 1992.


Some Canadians worry, though, that the economy is not just mired in a passing recession, but beset by deep structural problems that must be addressed before prosperity can be expected to last.

One argument has it that Canadian business is chronically over-staffed, overpaid and under-productive.

This fall, a study by Harvard Business School economist Michael Porter reached just that conclusion and warned that in a changing world, Canada is falling behind.

Porter, who conducted his research for the government and a Canadian business group, wrote that Canada’s productivity is low, that Canada depends far too heavily on exporting unprocessed natural resources, that the government is dangerously indebted, that Canadian businesses don’t do enough research and development and that young Canadians don’t get enough schooling in science and technology.


He also said Canadians are too “nice,” accepting second-rate goods and services, instead of pushing rudely for the very best at the lowest prices.

But others in Canada say the problems stem not from Canadian manners but from the sheer fact that Canada is a middle-sized economy next door to a larger one.

Under this scenario, Canada did itself serious harm by getting into a bilateral free-trade accord with the United States in 1989. The accord set a 10-year timetable for eliminating all tariffs and trade barriers between the two countries. Critics say that as Canadian markets have opened up, Canadian businesses have inevitably lost out to bigger American companies, with their economies of scale.

The Council of Canadians, a nationalist coalition, has said that of more than 300,000 Canadian jobs that have disappeared since the free-trade accord was signed, 55% were in plants that closed because of pressures brought about by the accord.


By comparison, the council said, only 25% of job losses were due to plant closures in 1982, the worst year of the last recession.

The council predicts that the jobs lost to free trade won’t be recreated once the economy picks up.