Canada has US economic snags -- and pesky inflation

If Americans think their country is in an economic fix, they should look at Canada.

Canada, like the United States, has a tight monetary policy and high interest rates. Ottawa, like Washington, is running a huge budget deficit. Unemployment is above 9 percent in both nations. The two countries are also in recession, with gross national product expected to fall perhaps 0.5 percent in Canada this year and perhaps 1 percent in the US.

There is, however, one important difference. Americans have been reaping a reward of lower inflation for their economic troubles. So far, Canadians have not been. Consumer prices here have been rising at an 11.5 percent rate, way above the roughly 3 percent rate prevailing in the US for the last six months or so.


In an interview, Rowland C. Frazee, chairman of Canada's largest commercial bank, the Royal Bank of Canada, offered a few reasons:

* Energy costs have been rising rapidly, accounting for some 25 percent of the increase in consumer prices in the last year. Canada was much slower in raising the price of domestic oil to world price levels than was the US. ''We did not bite the bullet on energy,'' Mr. Frazee notes.

* Canadian wage and salary settlements have been running at roughly double the average level in the US. ''That works itself into inflation,'' the banker said.

A study released last week by the Conference Board of Canada, a private research institution, took a long-term look at wage increases in 72 leading Canadian industries. It found that unit labor costs increased 110 percent between 1970 and 1980 in Canada, an annual rate of 7.7 percent. US unit labor costs grew 77 percent, an annual rate of 5.9 percent.

* Food prices have climbed, especially for fresh vegetables and fruit, which in the winter are imported mostly from the US.

Another, possibly more significant, reason for inflation is that the Bank of Canada's monetary policy has not been so tough as that of the Federal Reserve System.

The Bank of Canada embarked in 1975 on a gradual reduction in the rate of monetary expansion. It has periodically lowered its targets for growth in the nation's money supply from an initial range of 10 to 15 percent to the present range of 4 to 8 percent.

In the US, the Fed has also for several years had an anti-inflationary policy of monetary gradualism. But it moved its money targets down more rapidly to a lower level and actually did slow the creation of new money dramatically.

Canada was less successful. ''Monetary policy proved to be more gradualist than it was intended to be,'' admits G. K. Bouey, governor of the Bank of Canada , in his latest annual report.

Mr. Frazee comments: ''I think Mr. Bouey himself would agree that, given 20- 20 hindsight, he would have been more severe in his monetary restraint two or three years ago. Monetary gradualism has not worked.''

Mr. Bouey explains that the reason the Bank of Canada did not seek a faster reduction in the growth of money was that it wanted ''to minimize the disruption of the economy in the adjustment to lesser rates of inflation. More time would permit a more orderly change.''

In other words, he was hoping that Canadian business and labor would show greater restraint in raising prices or demanding higher wages. This would lower inflation and permit more real growth in output within the amount of money supplied to the economy.

But so far Canadian labor has proved more resistant to the wage ''give-backs'' management has sought and won in such US industries as autos, steel, and trucking.

At its biennial convention in Winnipeg last week, the Canadian Labor Congress vowed to fight ''to the bitter end'' all employer demands for contract concessions by its member unions.

CLC president Dennis McDermott admitted this policy could result in more layoffs and plant shutdowns. Moreover, the 2 million-member CLC was given a mandate to call a countrywide general strike if the Liberal Party government in Ottawa should impose wage controls.

Donald J. Johnston, president of the Treasury Board of Canada, told a press conference here last week that he doesn't see general wage and price controls as the answer to inflation. But, he added, ''I never rule out anything.''

Mr. Johnston did talk of a search for a ''voluntary consensus'' that would result in lower wage settlements. And, he added, with 1.2 million unemployed in Canada, ''surely the labor market will eventually take over.''

Canada's business cycle usually lags behind that of the US by three to six months. So it could be that the worsening recession in Canada will eventually force labor to back off on high wage increases.

Canadian labor, however, is heavily influenced by the New Democratic Party, with its socialist or social democratic philosophy. It may be tougher for Canada , as Mr. Johnston put it, ''to get wages under control.''

If so, and if the Bank of Canada holds to its tighter monetary policy, economists expect Canada to have even higher unemployment. Canadian costs will get more out of line with American costs and, at some point, the value of the Canadian dollar will drop below its current price of about 80 US cents.

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