Economic Officials on Thin Ice

CANADA

WITH the Canadian economy sagging under pressure from high interest rates, speculation is growing that the nation's top economic officials, Finance Minister Michael Wilson and Bank of Canada Governor John Crow, may soon be in new jobs. The government's anti-inflation policy has kept interest rates high, attracting investors and pushing up the Canadian dollar. But interest rates of 14 percent and higher have not helped businesses and homeowners. Exporters are hurt by the high dollar, now worth more than 86 cents US. Meanwhile, 62 percent of Canadian families own houses, and half of these homeowners have mortgages. When they renew their mortgages, costs soar.

The politically disastrous interest-rate policy could mean a new cabinet job for Mr. Wilson and the ousting of Mr. Crow.

``What can be done to shift policy short of a Crow exit?'' asks Hyman Solomon, Ottawa bureau chief of the Financial Post.

Toronto bankers also suggest that Wilson and Crow's days are numbered. Wilson once worked on Bay Street - Canada's version of Wall Street - as a senior executive at Dominion Securities. But his fiscal policies are unpopular, and Crow is an outsider, an Englishman, and the man who brought the five point spread between the Canadian and United States interest rates.

``Crow has got to go. We hear [Prime Minister Brian] Mulroney will jettison him this fall, but perhaps that's wishful thinking,'' said a senior Toronto banker who asked not to be identified.

The policy of Wilson and Crow is to fight inflation. But there is debate over whether zero inflation is a realistic goal, especially in a growth oriented economy such as Canada's.

``Can the Bank of Canada persuade the market that once inflation is at zero it really can keep it there?'' asks Robert York, an economist at the C.D. Howe Institute in Toronto. ``The markets currently have little faith in this outcome, as the activities of wage bargainers and wage settlements prove.''

The best laid plans of the Bank of Canada have been laid low by the Iraqi crisis and by recent economic numbers. The Iraqi oil crisis spiked the Canadian dollar to more than 88.5 cents US because Canada is a net exporter of oil with further reserves that become economic at higher oil prices.

But the dollar slumped by 2 cents on good news from the Gulf and bad news recently on the Canadian economy: a 0.4 percent decline in inflation-adjusted gross domestic product for the second quarter of 1990. The fall from the first quarter was the first such drop in seven years.

For Wilson and Crow, the drop in economic activity is no surprise; indeed, it is part of the plan. ``The slowdown in the economy is normal,'' Wilson said, describing the economy as catching its breath after a period of strong growth.

``It's too soon to tell,'' the finance minister said, whether the economy will enter a technical recession, which is often defined as two consecutive quarters of negative growth.

But economic theory does not mix well with high interest rates and high unemployment. Joblessness, now around 7 percent, is expected to rise to 8 percent when the August numbers are in.

``Whether the situation is serious depends on whether you're a bureaucrat with job security or a manufacturer whose competitiveness and future is on the line,'' says Todd Rutley, an economist with the Canadian Manufacturer's Association. He notes 150,000 manufacturing jobs disappeared in Canada over the last year.

``That's considered a soft landing by bankers, but a severe crash landing by manufacturers,'' Mr. Rutley says.

Interest rates have been coming off slowly in Canada. The prime rate - the one banks charge their best customers - is at 14 percent, down from a peak of 14-3/4 percent in mid August. Both bankers and economists are saying they will have to fall a lot faster if Wilson and Crow hope to keep their jobs.

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