Hey all you Canadians. You're always complaining about how bad things are
up there in the Great White North. Today's Wall Street Journal sets the
record straight - Canada is the envy of the G-7, a true austerity success
story!
Doug
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The Wall Street Journal Interactive Edition - December 26, 1997
Canada Endured Tough Choices
To End a Damaging Recession
By LARRY M. GREENBERG, ROGER RICKLEFS and MARK HEINZL
Staff Reporters of THE WALL STREET JOURNAL
TORONTO -- Fluke Transportation Group Ltd., a trucking
company once owned by three brothers named Fluke, could
always get a lift from its pithy slogan: "If it's on
time, it's a Fluke."
No slogan, however, could protect the Hamilton, Ontario,
concern from Canada's devastating recession and
austerity program of the early and mid-1990s. "I was
really worried," says Ron Foxcroft, president and chief
executive. "Employees came in every week saying a
different neighbor got laid off. We had to cut costs to
the bone."
Spurred by its trials, the company refocused its
operations and took advantage of free trade with the
U.S. to push export business. Today, Mr. Foxcroft says,
"we are just booming." The company, which had all of
three trucks 15 years ago, now has 200 trucks and 500
trailers.
Like Mr. Foxcroft and his company, Canada is back. The
nation's recession was nearly twice as severe as its
U.S. counterpart, but by some measures, its recovery has
been even more successful.
Though the recession technically ended in early 1991,
its effects hindered Canada for years. Corporate
restructuring was so severe that the unemployment rate
rose for two years after the recession was over and
reached 11.5% in 1993. Then the country had to endure a
brutal program of government spending cuts to curb
soaring budget deficits. The economy had a negative
quarter as recently as 1995.
Yet Canada today is growing more rapidly than any Group
of Seven country and has an even lower inflation rate
than the U.S. Economists expect Canada to achieve a
balanced budget in the current fiscal year, ending March
31 -- well ahead of the U.S. "We have the strongest
economy in the G7 this year, and I think there is a good
chance we'll have the strongest next year," says Sherry
S. Cooper, chief economist of Nesbitt Burns Inc.,
Toronto, the Bank of Montreal's securities arm.
Some economists fear that Canada won't maintain the
momentum, predicting the economy will slow next year
because of Asia's financial problems, which have reduced
the prices Canada gets for its huge exports of mining
and forest products. Even Dr. Cooper has lowered her
forecast for economic growth next year to 3.6% from 4%,
and other economists are predicting growth of as low as
2.8%.
Still, for now, signs abound that the Canadian economy
is improving. The nation's central bank, the Bank of
Canada, predicted in November that the economy would
grow 4% this year. Job growth remains strong, as do
retail sales. Meanwhile, the consumer price index has
risen just 0.9% in a year.
Sidelined for Years
To get to their current state, Canadians had to struggle
through a recession followed by an austerity program far
tougher than anything Americans have suffered in the
postwar era. People thrown out of work were often
sidelined for years. Steelworker Shane Thomson lost his
job at Dofasco Inc. in 1992 when the Hamilton steel
producer laid off 2,000 employees. He didn't find steady
work again until 1994. Even then, his new employer laid
him off and rehired him twice in two years as its orders
ebbed and flowed. "There were no luxuries, that's for
sure," the father of three says of those lean years.
Businesses also took a beating. According to industry
figures, about 25% of Canada's manufacturers and about a
third of its retailers closed their doors between 1989
and 1992. A decade ago, 22 companies made carpeting in
Canada. But between the recession and increased
competition from the U.S., only five are left, says W.
Leslie Single, chairman and chief executive of Crossley
Carpet Mills Ltd., in Truro, Nova Scotia.
'You Lose Sleep'
"In 1993, there was some question whether or not our
company would survive," Mr. Single recalls. The company
was losing money, its employment had plunged to 300 from
525 five years earlier, and it had to ask employees to
swallow a 10% rollback in wages. "When you have so many
lives depending on you, you lose sleep," Mr. Single
adds.
The government struggled in the tough years as its
enemies lambasted the national cost-cutting program.
Critics charged that the Liberal government and Finance
Minister Paul Martin had betrayed the party's long
commitment to social justice in order to impress Wall
Street bond buyers. Many were outraged as the government
laid off 45,000 federal employees -- 14% of the total.
Syndicated newspaper columnist Dalton Camp wrote:
"Ancient tribes, to please the gods, often offered human
sacrifices; Martin, to please New York, offered 45,000
public servants."
But the government concluded that it had no choice. Soon
after the Liberals took office in November 1993, they
faced a record deficit, equal to 6% of gross domestic
product, the worst showing of any G7 country except
Italy. Total government debt nearly equaled GDP.
Throughout 1994, the problem only worsened. For
instance, the Mexican currency crisis that began in
December 1994 slashed 36% of the peso's value in just a
few days. When speculators targeted other weak
currencies, the Canadian dollar dropped to a nine-year
low of 70.1 U.S. cents. As Mr. Martin put the final
touches on his watershed budget in early 1995, Canada
had raised short-term interest rates more than four
percentage points in 12 months in order to protect the
national currency.
Backed by Prime Minister Jean Chretien, Mr. Martin
decided to do what no Canadian government had dared try
before: cut deeply into the country's cherished social
programs, from health care to subsidized college
education. He decided that government spending would
shrink 13% over three years and insisted on cutting the
"untouchable" Old Age Security program, which guarantees
a pension to every Canadian, a plan Mr. Chretien at
first resisted.
Last-minute bad news helped Mr. Martin sell his
controversial program. As the finance minister was about
to stand to address a cabinet meeting where he expected
opposition to the proposals, he was handed a note saying
the Bank of Canada had boosted short-term interest rates
a full percentage point in response to the peso crisis.
Opposition to the budget package immediately wilted.
"The peso crisis created a real sense of what could
happen if you get on the wrong end of global markets,"
says Peter Nicholson, an economics adviser to Mr. Martin
at the time. Before long, the government was cutting
farm and business subsidies, raising gasoline taxes and
making it harder for people to qualify for unemployment
insurance.
Downgraded Debt
Only six weeks after Mr. Martin presented the budget in
February 1995, Moody's downgraded Canada's triple-A debt
rating by one notch, noting that the country's debt was
still growing.
But the budget cuts themselves gained more public
acceptance than some people expected. Indeed,
public-opinion polls showed that two-thirds of Canadians
believed the government was "on the right track." And
people were scared. "Canadians were extremely disturbed
by the indebtedness they saw," says Catherine Swift,
president of the Canadian Federation of Independent
Business, which represents small companies.
Some Canadians actually welcomed the cuts as long
overdue. Alberta wheat farmer Eugene Dextrase says lower
subsidies encouraged him to grow more value-added
products, such as canola. "In the long run, it's been an
advantage," he says.
Nonetheless, many businesses suddenly had to cope with
reduced subsidies and increased taxes at a time when
rising interest rates already were pinching the economy.
The country's growth rate declined to 2.3% in 1995 from
4.1% in 1994 and slid to 1.5% in 1996.
But business was already discovering one way out of its
problems: exports. Canada's free-trade agreement with
the U.S., a forerunner of the North American Free Trade
Agreement, started to reduce tariffs between the two
countries in 1989. Meanwhile, the decline of the
Canadian dollar to 70 U.S. cents from a recent peak of
about 89 cents in 1991 has given Canadian exporters a
big advantage. (The U.S. takes about 83% of Canada's
exports.)
Since 1989, exports have grown 90% in real terms, says
Jayson Myers, chief economist of Canada's Alliance of
Manufacturers & Exporters. With the domestic economy
weak for several years, real imports rose only 70% in
the period, yielding a trade surplus of 41 billion
Canadian dollars (US$29 billion) last year, compared
with C$11 billion in 1989.
'Too Much Red Tape'
"What free trade did was create an awareness" of
opportunity, says Mr. Foxcroft of Fluke Transportation,
the Hamilton trucker. For instance, he adds, "we are 33
miles from the American border, but we didn't handle one
single dollar worth of exports until 1990. It was just
too much red tape." With bureaucracy slashed by the
free-trade agreement, exports and imports now account
for 50% of volume at Fluke's trucking business and 90%
at its affiliated warehouse operation, Mr. Foxcroft
says.
Many companies, especially in hard-hit industries,
completely refocused their businesses to survive. When
free trade started whittling away the 22% tariff that
protected Canadian carpet makers, U.S. mills
aggressively targeted the Canadian market, says Mr.
Single of Crossley Carpet Mills. Crossley improved
productivity and re-examined its whole operation.
"We figured the Americans would focus on the residential
market. So we shifted from 30% commercial and 70%
residential to just the opposite," Mr. Single says.
Since 1993, the company has increased its sales 75%,
added another 100 employees and turned profitable, he
adds.
Such turnarounds helped the government solve its
problems, too. In the year ended last March 31, the
government reported a deficit of only C$8.9 billion, or
about 1% of GDP. And now, the government's improved
financial health has bolstered consumer confidence and
helped push short-term interest rates almost five
percentage points below their peak in March 1995.
Economists say this particularly packed a wallop in
Canada because mortgage rates are adjusted far more
frequently here than in the U.S. Money not sunk into
mortgage interest payments was suddenly freed for
washing machines and new skis.
Asian Effects
Despite the current boom, many economists see problems
ahead. Although natural resources aren't as important to
the Canadian economy as they once were, concerns about
lower demand in Asia for metals and forestry products
have prompted selling of the Canadian dollar. As a
result, the Bank of Canada has been forced to raise
interest rates a full percentage point in the past three
months. Some economists fear even more rate increases
will be needed to protect the currency.
The Asian turmoil also exacerbates other problems.
Canada's exports fell 0.6% in October from the previous
month, mainly because of lower commodity prices. At the
same time, increased domestic demand is boosting
imports. Jeffrey Rubin, managing director of the
economics department at CIBC Wood Gundy Securities Inc.,
a Canadian Imperial Bank of Commerce unit, expects
Canada's trade surplus to decline to C$22 billion this
year and C$20 billion next year, which would be less
than half the 1996 figure.
Moreover, household debt has soared to 97% of disposable
personal income from 65% in 1991, Mr. Myers notes. The
personal savings rate has plunged to less than 1% from
8.5% two years ago. This makes some economists think the
consumption spree can't last. Mr. Myers predicts that
consumer spending will grow only 1.5% next year, a sharp
decline from 4% this year.
In addition, the unemployment rate has remained at 9%
nationally despite the economic boom. While the boom
creates jobs, restructuring eliminates them. And total
government debt still equals about 100% of GDP, compared
with 64% in the U.S., the Organization for Economic
Cooperation and Development reports.
Yet many economists think the good times can keep on
rolling. Indeed, sales by Canadian wholesalers jumped
13.5% in October from a year earlier, led by cars and
household goods. Says Dr. Cooper, "There's still a lot
of pent-up demand, and business confidence is at a
record level."
