Forestry companies challenged to match the restructuring of the mining industry.

The year 1991 was not good for business.

The effects of the recession were aggravated by the introduction of the goods and services tax (GST) and by the restructuring brought about by the Canada/U.S. Free Trade Agreement.

What was expected to be merely a re-alignment of Canada's industrial sector turned out to be a full-fledged downsizing and exodus.

However, Laurentian University economics professor Dimitri Sakellariou believes the cloud has a silver lining.

Sakellariou says the lessons taught by the recession will make business leaner and better able to compete in the global arena as Canada moves into a period of limited economic growth.

The downsizing of operations and improvements in efficiency which helped firms stay afloat will continue to reap benefits during the upswing if the rationalization is maintained.

John DeDiana, a mining analyst with Richardson Greenshields of Canada in Sudbury, points out that the mining sector was better prepared for the recent recession than it was for the one of 1981/82.

DeDiana uses Inco Ltd. to support his point.

"They (Inco) made a lot of cost-effective decisions during the past five years. They reduced labor costs and made smart capital investment," he says.

"They were much more prepared going into this recession."

Maureen Farrow, a partner with Coopers & Lybrand Consulting Group in Toronto, agrees.

"Mining companies streamlined their management and got their costs under control, so while it was not the best year, it could have been worse," she says.

However, Farrow says the manufacturing and forestry sectors must now go through the same tough restructuring process.

A CURSE

Northern Ontario's reliance on such natural resources as lumber, pulp and paper and metals proved to be a curse during the recession.

The downturn in newspaper advertising created a surplus of pulp and paper, and the slump in construction hurt both the lumber and mining sectors.

However, the same natural resources could be a blessing during the initial phase of the recovery.

Rick Lymer, the Northern Ontario district economist for Employment and Immigration Canada, believes the performance of the downsized forestry sector will buy the region time to establish new industries and find new market opportunities.

Lymer does not foresee a renaissance of the forest industry, but he does believe that most of the required rationalization has been accomplished.

Meanwhile, DeDiana expects to see the mining sector's troubles continue for the next six months before the sector recovers. Mining was hit hard by high interest rates and the over-valuation of the Canadian dollar.

DeDiana believes that interest rates will play a major role in triggering a recovery.

"We'll need to see the prime (rate) drop another percentage point (it was at eight per cent at the time of the interview) and the longer term rates, like the five-year term, go below nine per cent for mining to pick up," he says.

The lower rate will encourage mining companies to make investments in equipment and properties, and it could improve long-term gold prices, as well.

"Gold could be the leader if the prices hits $380," DeDiana says. The price was in the $360-to-$370 range at press time.

Sakellariou and Lymer warn that the economic recovery is fragile because, unlike 1983, Canada is recovering faster from the recession than the U.S.

Neither Sakellariou or Lymer believe this condition can continue.

"Between 70 and 75 per cent of our goods go there (the U.S.). Because their economy is in a downturn they cannot absorb the goods, so we have to accommodate the surplus," says Sakellariou.

He believes this over-reliance on the U.S. market illustrates Canada's need to expand its presence in the world marketplace with improved products and more efficient manufacturing techniques.

"The faster we get ready to compete internationally, the better off we will be," he says. "We are facing the world right now, and we need the world more than we used to."

Sakellariou believes the companies least affected by the recession were the ones which had traded in global markets prior to 1991.

The professor is critical of the federal government for introducing the GST during a recession and while the impact of the free trade agreement was still working its way through the economy.

"Free trade is not a bad idea, but it was a bad coincidence that the GST was introduced at the same time," says Sakellariou.

He says the GST helped to deepen the recession, while the recession increased the impact of the tax - especially on the retail sector.

"The result was that consumers went across the border to purchase goods and small business suffered, and that had an impact on the economy," he adds.

Sakellariou identifies the "coincidence" as one of the two mistakes made by the federal government which tripped the economy into a recession.

The other, more serious, mistake was the decision to keep interest rates at a high level in order to control inflation and cool down the over-heated economy of southern Ontario.

"The policy strangled the businesses that needed money to keep going during the recession," Sakellariou says.

Allan Yarrish, the Royal Bank of Canada's assistant chief economist, disagrees.

Yarrish believes the government "did exactly what it had to do" by hiking interest rates to put the brakes on the economy.

"What started the recession was governments' inability to control their deficits," he says.

Yarrish believes free trade lessened the impact of the recession by encouraging foreign investment in Canada.

Stating that foreign investment is at one of its highest levels since the Second World War, Yarrish says, "The investments are being made even though corporate profits are at a very low level."

Sakellariou dismisses the claims of opposition politicians and special interest groups that the recession was made in Canada.