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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.


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.

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