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LISTENING TO ECONOMISTS deliver figures and forecasts likely rates among the least-favorite pastimes for most people, but that was precisely what about 200 paper executives did at Thursday afternoon's...


March 1, 2000
By Pulp & Paper Canada

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LISTENING TO ECONOMISTS deliver figures and forecasts likely rates among the least-favorite pastimes for most people, but that was precisely what about 200 paper executives did at Thursday afternoon’s Investor Relations Open Forum. Fiona Cook, vice-president (international and government relations) for the CPPA, was the moderator.

One of the reasons for their attentive ears centres on the growing importance of global economics in marketing decisions. The economists discussed three major geographical regions: Europe, Asia and North America.

When economists speak of North America, it’s essentially the United States that’s their focus. Thus, it wasn’t surprising that Gabriel de Kock, vice-president and chief economist at Salomon Smith Barney, directed his analysis to the US, which has undergone a productivity-driven expansion of marathon proportions.

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The leading indicators tell the tale. In 1999 the GDP rose 4.2%, inflation was held in check at 2.6% and the unemployment rate was at 4.0%. Despite a low employment rate, take-home pay has risen only marginally. Such market conditions make for a very appealing scenario for employers.

But economists see other fundamental problems: a tight labor market, a historically low private savings rates of 2% and record external debt (the current account balance) of over $336 billion (all figures in US dollars).

But will it continue? Not exactly, said de Kock, who foresees what economists call a soft landing, driven by the feds increasing interest rates to 61/2% so as to slow growth and contain inflation risks. “It’s not a fearful situation, but one that is cautiously optimistic,” he said. Thus, the forecast for 2000 is slower GDP growth, at 3.4%, and inflation and unemployment levels similar to 1999.

He said that American consumers — who represent two-thirds of the economy — will bear the brunt of the US slowdown. Yet Canadian forest products companies, especially those producing oriented strandboard (OSB) might feel the affects of lowered housing starts, resulting from rising interest rates. “We expect housing starts to fall by 8% this year as a result of high mortgage rates,” he said. “Where housing goes, the broader economy follows.”

Like other economists, de Kock predicts that the loonie will rise incrementally against the American greenback – to 70 cents in 2000 and 72 cents in 2001.

The news for Asia, in general, is not so cheery. The linchpin of Asia is still Japan, which is currently undergoing a major and fundamental restructuring of its economy after the Asian Crisis of 1997. “The outlook for Japan is mixed, because in the last five years the government has attempted to spend its way to recovery,” said Paul Summerville, chief economist at RBC Dominion Securities in Toronto.

Summerville, who worked in Japan for 11 years, said that the Japan Model of state-controlled banking has been its undoing. Although Asia is not a monolith – it comprises 29 countries — most of them relied to some degree on a centralized banking system, which Summerville said had little financial accountability built into it. “What is happening in Asia is not only the death of the Japan Model, but a move toward a rules-based market,” he said.

Still, change is taking place in Japan, however slowly. “Japan faces deep cultural barriers and people with vested interests,” he noted. Thus, he told the audience to not expect double-digit growth in the region, but rather a controlled and sustained growth.

Among the countries doing their homework are South Korea, Hong Kong and Singapore, with India and Malaysia positioned in the middle of the pack. The economic laggards, as he put it, are Indonesia and Japan. As for China, it is a big unknown for now. “Joining the WTO would be an important step,” Summerville said.

Given such economic forecasts, one company to watch is Montreal-based Abitibi-Consolidated Inc., the world’s largest newsprint producer. In 1998, it entered into a three-way alliance with Scandinavian-based Norske Skog and South Korean-based Hansol Paper Company as a means to gain a foothold in the Asian market.

Europe’s economy is valued at $8 trillion, which is comparable in size to the US. “Europe doesn’t have the productivity miracle that has marked the US recently, but its economy falls somewhere between the US and Japan,” said George Samu, international economist at the Royal Bank in Toronto, about predictions for the region.

Among the countries of the 11-nation Eurozone forecasted to generate real GDP growth in 2000 are Ireland at a powerful 8%, Finland and Spain at about 4% and Germany and Austria at 3%. Britain, which has not signed on to the Euro currency, can expect about 3% real GDP growth.

Samu said that rising oil prices would likely contribute to higher average inflation levels in the Eurozone. “Inflation will rise in the first six months, but come down in the second half of 2000,” he noted.l