Two Cheers for the Eighties: A Review of the ECC Annual Review

Abstract

For several months forecasters have been publishing their outlook for the Canadian economy in the 1980s. Several forecasts of GNP growth have been revised downward, suggesting that it may be well into 1981 before there is any substantial real growth. The medium term prospects found in the Economic Council's Sixteenth Annual Review (hereafter referred to as the Review) strike a more optimistic note suggesting an annual average real growth rate of 4.2 per cent over the 1979-82 period and 3.3 per cent for the 1982 to 1985 period. To some extent these forecasts probably gave rise to the title of this year's Review, 'Two Cheers for the Eighties' but, I submit, they must be viewed with caution. Looking back four years to the Thirteenth Annual Review (1976) of the Council, one is struck with the optimism that existed for the 1975-1979 outlook. Real GNP would average 5.7 per cent annually, unemployment would be 4.8 per cent by 1979 and real disposable income would average 3.1 per cent growth per year. The Council did warn that this outlook would depend upon 'developments abroad' and 'economic policies in Canada.' The forecast errors are enormous and one wonders why. Part of the answer can be found in Chapter One of this year's Review. 'It is worth looking back over our experience of the past decade to gain a perspective on our present position and attempt to discern the principal lessons for policy' (p.1). On the question of inflation, the Review concludes that unexpected external factors (the depreciation of the dollar) and our over-estimate of what constituted full employment, leading to excessive monetary and fiscal stimulation, led to the higher than expected inflation rates. The latter is undoubtedly true for the 1973-74 period but does not really apply to the 1975-79 period when, for the most part, the economy was subjected to wage and profit controls. The section discussing the balance of payments and exchange rate is brief and merely points up the well-known reasons underlying the deterioration in the current account and reduction in the surplus on the capital account to offset this in the 1977-79 period. What is lacking in this section is any analysis of the policy lessons to be learned from this experience. One obvious lesson is the danger in allowing what appears to be unco-ordinated foreign borrowing by provincial governments and their agencies to cushion the current account deficit. The incredible variation in this borrowing over the 1973 76 period was surely a signal to the policy makers to seek ways of smoothing this pattern rather than relying on other random events to provide the stabilizing element. Furthermore, there appears to have been no recognition of the impact that such borrowing would have in the longer run on the service sector of the current account. Given the rather dismal outlooks that have been proferred for the balance of payments over the next five years, this topic warranted considerably more discussion. Real per capita disposable income did not, in the 1975-79 period meet the expectations hoped for in 1975. The Review discusses several factors which contributed to the slower growth in real incomes;namely, slower overall output growth, a reversal in the very favourable terms of trade of 1973-75, and changes in the relative growth of the labour force compared to population growth. Pointing a finger at slower growth as a reason for smaller gains in real income begs a subsequent question as to why the growth rate slowed. That issue is addressed in the subsequent section of the Review's first chapter.