OECD ECONOMIC SURVEYS 1981-1982 D T) 3 J U ) 3 J 7 1 D D } 3 J) I B D ?J D 3 ) B B D = D ? 1 7) J 7 ) D :j K) D 3 I 1 1 i D i> D 1 :j 7 CANADA DJ)3.i3]3i7)D3 3 3 B 3 3 ? i m 7 ) 3 D § 7 3 1 Di711D??13i:j7 J B 3 II 3 3 1 3 D 1 3 JUNE 1982 ®@e® OECD ECONOMIC SURVEYS Archives Référence - doc prêté - iSSSUfLBUREAU 60'- CANADA JUNE 1982 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The Organisation for Economic Co-operation and Development (OECD) was set up under a Convention signed in Paris on 14th December 1960, which provides that the OECD shall promote policies designed: to achieve the highest sustainableeconomicgrowth andemploy¬ ment and a rising standard ofliving in Member countries, while maintainingfinancialstability,andthustocontributetothedeve¬ lopment ofthe world economy; tocontributetosoundeconomicexpansioninMemberaswell as non-member countries in the process ofeconomic development: to contribute to the expansion ofworld trade on a multilateral, non-discriminatory basis in accordance with international obligations. The Members ofOECD are Australia, Austria. Belgium. Canada. Denmark, Finland, France, the Federal Republic ofGermany, Greece. Iceland, Ireland. Italy,Japan, Luxembourg, the Netherlands, NewZea¬ land,Norway,Portugal,Spain,Sweden,Switzerland.Turkey,theUnited Kingdom and the United States. TheSocialist Federal RepublicofYugoslavia is associated in certain work oftheOECD,particularlythatoftheEconomicandDevelopment Review Committee. ©OECD, 1982 Application for permission to reproduce ortranslateall or part ofthis publication should be made to: DirectorofInformation, OECD 2. rue Andre-Pascal, 75775 PARIS CEDEX 16, France. CONTENTS Introduction 7 I. Recent trends and prospects 7 Main features of developments in 1981 7 The stance of policies 21 Short-term prospects 25 II. Medium-term policy issues 28 Policy orientation since first oil shock 29 The role of rigidities 36 III. Some aspects of adjustment problems in manufacturing 38 Characteristics of "sensitive" manufacturing sectors 38 Policy measures 41 IV. Conclusions 42 Annexes I. Energy Pricing Agreement 45 II. Chronology of main economic policy events 47 Statistical annex 54 TABLES Text 1. Demand and output 9 2. Current economic indicators 10 3. Balance of payments 18 4. Federal budget finances 22 5. Short-term prospects 26 6. Some characteristics of "exposed" Canadian manufacturing industries, 1978 39 7. International trade and the "exposed" manufacturing sectors 41 Statistical annex A. Gross national product and expenditure 54 B. Industrial production, employment and other business indicators 56 C. Prices, wages and finance 57 D. Balance of payments 59 DIAGRAMS 1. Business non-residential investment 12 2. Output and employment 13 3. Consumer prices 15 4. Manufacturing costs 16 5. External account indicators 20 6. Inflation and unemployment; Canada and other OECD 29 7. Federal expenditure by major category 31 8. Adjusted budget balances and GNP growth 33 9. Money supply and target growth ranges 34 10. Nominal and real interest rates 35 BASIC STATISTICS OF CANADA THELAND Area(thousandsq.km.) 9976 Populationofmajorcities, Agriculturalarea(%ofthetotal includingtheirmetropolitan area) 1977 6.4 areas Montreal 2828000 Toronto 2999000 THEPEOPLE Population(1-1-1981) 24089000 Civilianlabourforce(1980) 11 522000 Numberofinhabitants Employmentinagriculture persq.km. 2 (1980) 477000 Population,annualnetnatural Immigration(annualaverage increase(average 1976-1980) 194200 1976-1980) 121 000 Naturalincreaserateper Averageannualincrease 1 000inhabitants incivilianlabourforce (average 1976-1980) 8.1 (1976-1980,%) 3.1 PRODUCTION GNPin 1980(millions Origi ofCanadiandollars) 289859 (19 GNPperhead(Canadiandollars) 12 107 JAgriculture,forestryandfishing 3.2 Grossfixedinvestment(private 1Miningandquarrying 3.0 andpublic)perhead 1Manufacturing 21.9 (Canadiandollars) 2862 (Construction 5.7 Grossfixedinvestment(private Publicadministration 6.9 andpublic)as%ofGNP 23.6 <Other 59.3 JftATITKri' Governmentcurrentexpenditureon CompositionofParliament goodsandservices(average (Numberofseats): 1976-1980,%ofGNP) 20.3 House Governmentgrossfixedcapital of Senate formation(average 1976-1980, Commons %ofGNP) 3.1 FederalGovernmentcurrentrevenue Liberals 147 63 (average1976-1980,%ofGNP) 17.0 Progressive Federaldirectandguaranteed Conservatives 100 25 debt%ofcurrentexpenditure Socialcredit _ 2 (average 1976-1980,%) 128.5 Newdemocratic 33 _ Independent Conservative 1 - Indépendant Liberal 1 Independents - 1 Vacant 1 - Lastelection: 18.2.1980 FOREIGNTRADE Exports: Imports: Exportsofgoodsandservicesas% Importsofgoodsandservicesas% ofGNP(average 1976-1980) 27.4 ofGNP(average 1976-1980) 29.4 Mainexports, 1980 Mainimports, 1980 (%ofcommodityexports): (%ofcommodityimports): Wheat 5.1 Industrialmaterials 22.5 Newsprint 4.8 Motorvehiclesandparts 20.3 Lumber 4.3 Producers'equipment 22.4 Woodpulp 5.2 Consumergoods 16.2 Non-ferrousmetalsandalloys 6.1 Mainsuppliers, 1980 Motorvehiclesandparts 14.7 (%ofcommodityimports): Othermanufacturedgoods 19.0 UnitedStates 70.1 Maincustomers, 1980 UnitedKingdom 2.9 (%ofcommodityexports): OtherEEC 5.2 UnitedStates 63.3 UnitedKingdom 4.3 OtherEEC 8.3 THECURRENCY Monetaryunit:Canadiandollar CurrencyunitperUSS, averageofdailyfigures: Year1981 1.1989 April 1982 1.2249 Note: Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable. Theannualreview ofCanada by the OEÇDEconomicandDevelopmentReview Committee tookplace on4th May1982. INTRODUCTION As in the rest of the OECD area, the performance of the Canadian economy has deteriorated markedly since the mid-1970s. The fall in real GNP growth to approximately half the earlier trend rate has gone hand in hand with an exacer¬ bation of inflationary pressures and a significant rise in unemployment. The situation has also been characterised by greater cyclical instability in real and financial markets, induced inter alia by a series of external shocks. Since mid-1981 the economy has been experiencing a pronounced downturn, following develop¬ ments in the United States. Labour markets have weakened substantially, but inflation has not yet abated much. The anti-inflationary strategy applied since 1975 has mainly relied on a gradualistic monetary approach, temporary wage and price controls in the three years to end-1978 and, since the October 1980 budget, a determined tightening of fiscal policy. In the early months of 1982 the stance of demand management remained restrictive, with a 4-8 per cent target growth range for the money supply (Ml), relatively high nominal and real interest rates and a restraining fiscal stance. Prospects for an early resumption of sustained and balanced growth do not appear very promising. Between 1981 and 1982 real GNP should fall noticeably, unemployment is forecast to rise substantially and only limited progress seems likely in the fight against inflation. However, depending on developments in the United States, 1983 may see a modest recovery. Developments in 1981, together with the recent stance of policies and short- term prospects, are examined in the first part of the present Survey. Part II deals with some medium-term policy issues, trying to identify the reasons for the deterioratingtrade-offbetween inflation and unemployment. Aspects of adjustment problems in manufacturing are reviewed in Part III. Finally, some policy con¬ clusions are drawn in Part IV. I. RECENT TRENDS AND PROSPECTS Main features of developments in 1981 Between 1980 and 1981 Canadian real GNP grew by 3 per cent one of the highest rates in the OECD area. The profile of developments in the course of the year proved somewhat different from that envisaged in the last OECD Survey of Canada published in January 1981. At the time, a steady recovery in activity had been forecast in step with the United States and the rest of the OECD area. In the event, the unexpectedly strong, but brief, revival of United States demand in late 1980 was accompanied by an even more pronounced resurgence of Canadian activity as a rise in exports was accompanied by a revival of domestic demand. However, again influenced by US developments, the recovery faltered around mid-year, proving both briefer and weaker than in the 1975-1976 cyclical upswing and the ensuing downturn has so far been more severe than that of 1974-1975. Whereas in the earlier period policy had been expansionary, fiscal stance tightened noticeably last year against a background of already restric¬ tive monetary policy. Contrary to the general trend observed in the OECD area, inflationary pressures seem to have intensified with an acceleration in both the underlying rate of consumer price increase and average earnings. This was accompanied by a severe profit squeeze and some deterioration in the country's international competitiveness. The balance of payments was unfavourably influenced by the terms of trade, the commodity composition of foreign demand and the growing burden of debt servicing. Although the room for manoeuvre for monetary policy has been made somewhat greater by the tightening of fiscal stance, the instability of international financial markets has exacerbated the difficulties faced by the monetary authorities. Despite record high domestic interest rates, the Canadian dollar's exchange rate vis-à-vis the United States dollar came under pressure at times which led to substantial intervention on the part of the authorities. i) Domestic demand, output and employment Although sparked off by the concomitant strengthening of external and domestic demand, the recovery during the first half of 1981 was sustained entirely by the latter as the foreign balance contribution swung sharply negative. Indeed, the volume growth of domestic demand (almost 9 per cent s.a.a.r.) was the fastest witnessed for five years, with final outlays and stockbuilding contributing roughly in equal part. The subsequent decline in private sector demand in the second half was broadly based, with only non-residential construction and stockbuilding contributing to growth. For the year as a whole the volume increase in private consumption (1.7 per cent)1 fell well short of the growth in real disposable income (3.3 per cent), with the personal savings ratio reaching its highest level for at least two decades. Apart from the usual lag between income and outlay developments, other considerations also appear to have influenced consumer behaviour; i.e., persistently strong inflation, shifts in the composition of household income2, a high and (during most of the year) rising level of interest rates as well as from the autumn a marked deterioration in labourmarket conditions. In addition to their impact via wealth effects, movements in nominal interest rates3 possibly influenced outlays on certain durables directly and stimulated savings for mortgage repayment and other purposes. The abrupt weakening in labour market conditions probably reinforced consumers' precau¬ tionary attitudes, with sentiments surveys revealing an unusual degree of pessimism on the part of consumers. Retail sales remained weak in early 1982. 1. Some recovery was evident in the final quarter, in part attributable to a temporary remission ofsales taxon autos in Ontario. 2. Last year saw a pronounced revival in farm incomes and a sharp acceleration in investment income; for differing reasons savings from these two sources of household revenue probably exceeded that from wages. While the impact of accelerating inflation on spending decisions is difficult to determine a priori, changes in relative prices appear to have had a clear influence on the structure of outlays. The (current-weighted) deflator for private con¬ sumption expenditure rose 1.4 percentage points less than the (fix-weighted) consumer price index, compared with an average "gap" of 0.3 percentage points over the preceding 10 years. 3. Part of interest receipts may in fact be regarded as compensation for the erosion in the real value of investors' financial assets due to inflation. Last year's savings ratio adjusted by the actual inflation rate would fall by some 8 percentage points (see Ministry of Finance,EconomicReview, May 1982). Table 1. Demand and output Volume growth rate 1979 1980 1981 $19b8il0l. 1978 1979 1980 1981 II I II I II Seasonally adjusted1 Private consumption 168.1 2.8 2.0 1.0 1.7 0.4 0.5 2.8 2.7 -1.2 Government consumption 57.9 1.6 0.5 -0.5 2.0 -0.9 -1.6 2.1 2.1 2.0 Gross fixed investment 68.5 0.3 5.4 3.8 5.4 12.6 0.5 2.3 11.9 -3.6 Public 8.0 -2.1 -5.6 -0.4 1.8 -5.7 2.7 -1.2 2.0 4.5 Private 60.5 0.7 7.2 4.4 5.9 15.5 0.2 2.8 13.3 -4.7 Residential 13.8 -3.3 -7.3 -10.6 1.4 -4.1 -14.9 -8.2 24.1 -25.9 Non-residential construction 21.9 1.9 13.3 12.4 8.4 28.0 10.0 3.8 10.4 9.1 Machinery and equipment 24.7 2.4 11.2 5.6 5.6 16.7 -0.1 6.9 11.3 -6.2 Final domestic demand 294.6 2.0 2.5 1.4 2.6 2.7 0.1 2.6 4.6 -1.2 Stockbuilding1 -1.2 0.1 1.3 -2.0 1.1 -0.6 -1.8 -4.0 4.0 0.3 Total domestic demand 293.4 2.2 3.7 -0.6 3.7 2.0 -1.6 -1.3 8.7 -1.0 Exports of goods and services 90.3 10.3 2.7 1.0 1.4 4.6 -4.2 8.5 -1.6 0.8 Imports of goods and services 93.4 4.6 6.0 -2.2 3.1 -0.3 -2.0 -4.6 9.8 -1.7 Foreign balance' -3.2 1.1 -1.0 0.9 -0.5 1.2 -0.4 3.3 -3.0 0.7 Error of estimate' -0.3 0.3 0.2 -0.2 -0.3 -0.2 -0.2 -0.4 -0.1 -0.5 GNP 289.9 3.7 3.0 0 3.0 3.1 -2.2 1.5 5.7 -0.8 1. Annual rate of change over preceding half-year. 2. PercentagepointcontributiontoGNPgrowthrate. Source: StatisticsCanada,NationalIncomeandExpenditureAccounts.