Feature

This slump’s for you… and you and you

It's official: the "R" word can be used in the present tense. "There is no denying Canada is in recession," said David Rosenberg, chief economist at Merrill Lynch Canada in an article published in the...


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November 1, 2001 by Canadian Plastics


It’s official: the “R” word can be used in the present tense. “There is no denying Canada is in recession,” said David Rosenberg, chief economist at Merrill Lynch Canada in an article published in the Globe and Mail after the Sept. 11 terrorist attacks. Yet, by many key indicators, (e.g. the industrial production index), the economy was slowing well before the attacks.

It is important to keep this in mind, especially in these times of high emotion and fear. September 11 may deepen and prolong the economic carnage. But slumps, downturns, recessions are as natural a part of the economy as storms and hurricanes are a part of nature. Both are integral to restoring stability — one to the atmosphere and environment; the other to the markets and levels of growth and investment.

Why is there a slump? The answer, in a sense, is simple. Because there was a boom.

Booms are brought on by a number of factors. One is easy money. In the just-deceased boom, this easy money was largely provided by investments in the high-tech sector. Investors poured money into tech companies and the benefits flowed, like honey, into other industrial and service sectors of the economy. The cost of financing fell and companies everywhere went on spending binges. Investment and profits soared, and unemployment, for all intents and purpose, became non-existent.

It is no coincidence that this boom was closely connected with the technological breakthroughs in personal computing and the Internet. Past economic booms have been driven by “new” technologies such as railroads, steelmaking, chemical innovation and the automobile.

But there is fantasy aspect to all booms. Huge stock investments, means more capital spending; and more capital spending means more, not less, competition. More competition implies lower, not higher, profit margins. Eventually, under the pressure of a market saturated with product and capacity, the boom goes bust.

This is not all bad. According to a recent New York Times editorial, the disappearance of easy money forces many cash-poor companies to retrench, re-engineer or close shop: “It is the work of a bear market to reduce the prices of the white elephants until they are cheap enough to interest a new class of buyers.”

Yet, as The Times notes, neither consumers, investors or business managers are as willing to suffer the slings and arrows of the down cycle as they once were. In a sense we’ve been spoiled. Globalism and economic cooperation between nations, governments and the financial markets have made downturns shorter and expansions longer. At this magazine’s annual Resin Outlook Conference, Peter Drake, vice president and chief economist TD Bank Financial Group, said he expects the downturn to be not much worse than the 1995 slump, and far less severe than the 1990 recession. Under the salutatory effects of monetary and fiscal stimuli, Drake says he expects the U.S. economy to grow in the range of 2 to 2.5 percent in the first quarter of next year. Hardly gloom and doom.

For this to happen, say some, consumers must shake off the jitters brought on by the terrorist attacks and begin to spend. If further attacks are prevented and U.S. unemployment stays below 6 percent, this should happen. After all, money is once again cheap.

Michael LeGault, editor

e-mail: mlegault@corporate.southam.ca