Low interest rates blow in from south; Canadian business climate warms slightly
United States Secretary of State George P. Shultz, who arrived here Sunday for two days of talks, will probably be the first senior American official in a year or more to hear a kind word from Canadians about President Reagan's economic policies.Skip to next paragraph
Subscribe Today to the Monitor
For many months, the US government has fielded constant complaints about its restrictive monetary policy, which is part of the reason Canada is suffering through its worst recession in 40 years. But since August, when American authorities began to ease their grip on their own interest rates, Canadian borrowing rates have fallen dramatically and given this country a long-awaited ray of hope about the economy.
If and when business conditions in the US improve, Canada's economic climate, which is inextricably linked to that of its large neighbor, will also pick up. But the depth of the current business slump dictates a long and hard road back for Canada.
Prime Minister Pierre Trudeau, whose popularity has been devastated by fallout from the recession, said Canadians confront a challenge ''unlike any our generation has faced'' in the task of rebuilding the country's industrial strength.
The past year has brought unrelenting bad economic news. Most grievous of all has been the burgeoning number of unemployed. By September, the unemployment rate reached an unprecedented 12.2 percent; consumer and business demand has tumbled in the unexpectedly severe recession. As a result, economic production the past year fell a whopping 6 percent, the worst performance of any major industrialized nation.
All over Canada, shops and stores have been boarded up as business bankruptcies in the first half of 1982 almost doubled from the previous year. Corporate profits in the April-to-June period dipped by 58 percent compared with 1981. And, with its tax revenues shrinking and payments to the unemployed and welfare recipients mounting, the federal goverment divulged that its deficit for the year was headed above $20 billion (US dollars) compared with a forecast of about $10 billion.
''It appears to us that, instead of dealing with inflation, as was intended, the government has evolved a successful formula for precipitating a major depression in this country,'' a group of 80 economists said in a statement released last week.
Much of the blame was directed at the high interest rate policy pursued by the Trudeau government in conjunction with the Bank of Canada, the equivalent of the US Federal Reserve. The bank has kept Canadian borrowing rates in step with those in the US. Its rationale is that to do otherwise would invite an outflow of investment to the US, putting downward pressure on Canada's dollar in foreign exchange markets.
The high rates have sent a shudder through the banking community by threatening to sink many big debt-heavy companies, most notably Dome Petroleum Ltd., the oil giant that needed promises of more than $1 billion in bank and government support in September to avoid what would have been the country's largest-ever bankruptcy.
The nightmares are beginning to recede now, however, as interest rates have tracked declining American rates downward. The key Bank of Canada rate is now 11 .53 percent, the lowest level in two years. As in the US, this development has been heralded with great relief and speculation about an economic resurgence. Frantic buying sprees, rivaling those in New York, have enlivened Canadian stockmarkets. But much depends on recovery in the US, destination of fully 70 percent of Canada's exports, and the business community remains very cautious.
''I think the Canadian economy is very close to rock bottom, and on that basis, the worst is now behind us,'' observes William Mackness, senior economist at the Bank of Nova Scotia in Toronto. ''But the recovery will be delayed and quite modest by postwar standards.''
Despite a concerted effort to slow the rise of prices, inflation, now at 12.2 percent, has proved largely immune to the Trudeau government's policies. This failure has been a major embarrassment, particularly since the US, using the same policy tools, has managed to bring the consumer price index to 6 percent.
In June, Mr. Trudeau launched a wide-ranging economic recovery strategy, based on voluntary wage and price constraint. Recently, he shuffled his Cabinet to put more business-minded, conservative liberals in portfolios of importance to the economy.
But while business has fallen in behind the restraint plan, Mr. Trudeau is far from forging a new national will in this huge and regionally-diverse country.
Many of Canada's powerful provincial governments, none of which is controlled by the ruling Liberal Party, have been reluctant to throw their weight directly behind Mr. Trudeau's recovery plan. Instead, they have called for modifications in Ottawa's nationalistic policies on energy and foreign investment.