JANUARY 7, 1965
The Outlook for 1965
Mr. George S. Moore,
PRESIDENT FIRST NATIONAL CITY BANK OF NEW YORK and
Mr. William M. Currie PRESIDENT,
CANADIAN IMPERIAL BANK OF COMMERCE
Lt. Col. Robert H. Hilborn
I have always found it extremely difficult to be other than solemn in the presence of bankers. This probably goes back to those days when at $16.66 twice a month-not net but before deduction for guaranty and pension funds -I couldn't afford many laughs. I understand that banking has changed since those penurious days and that the facade of austerity has been torn down to a great extent. Judging from some of the ideas propagated about Canada in the New Soviet Encyclopaedia the word has not reached Russia. Under the section "Canada" and the subject "Agriculture" in Volume 19 there appears, and I quote: "Agriculture is, in fact, dominated by the banks. They seize farms under the guise of assistance, via one-sided loans, and then they expropriate the land and all the property of the farmers." This is reported by George Bain in whom it prompted this irreverent poem:
"Montreal, My Bank"-what cynical prattle,
Their man has just been, and gone off with the cattle, From chassis to motor, to last gear and pinion
Our thresher's been seized by Toronto-Dominion; These acres of legumes, of tubers and cereals,
We fear are not ours but are Commerce Imperial's. Now Barclay's is seizing the house, and, alack,
The Royal's foreclosed on the place out the back."
One of our guest speakers, a Westerner whose early days with the Canadian Bank of Commerce were spent in Alberta, will recognize this for the base canard that it is.
Today we are doubly honoured in the presence of two powerful and successful doers in the hard competitive world of high finance who come to us not only as bankers but as prophets, each honoured in his own country and in his own house.
Mr. George S. Moore, President and Director of the First National City Bank of New York was born in Missouri, but we're asking him to show us. Mr. Moore has spent his entire business career since graduating from Yale in 1927 with the First National City Bank of New York. He was appointed Vice President in 1939; Executive Vice President in 1952 and President in 1959.
Mr. William M. Currie, President of the Canadian Imperial Bank of Commerce also joined his bank in 1927. He has held posts in Western Canada, the West Indies and England. He served as a Lieutenant in the Royal Navy during World War II; was appointed Deputy General Manager of his Bank in 1959; Chief General Manager in 1963 and was elected President in 1964. During 1963 and 1964 he was President of the Canadian Bankers Association.
Both of our guests of honour, through their manifold activities in community service and public stewardship, have harmonized the public interest with their private responsibi lities as bankers. The Great Society we hear proclaimed today was described by philosopher Alfred North Whitehead as "a society in which its men of business think greatly of their functions." Emerson said, "Mankind is divided into the party of memory and the party of hope." I am proud to present two businessmen who live up to Professor Whitehead's eloquent image and I ask, first Mr. George Moore and then Mr. William Currie to speak to us of the party of hope here assembled on "The Outlook for 1965."
This is the season for crystal balls. Your chairman didn't limit the word "outlook" to business prospects alone. Therefore I will explore some other "outlooks"
after a few words about my views of the US economy in 1965.
1) We expect 1965 to be another year of economic expansion, although the rate of growth may be slightly slower than in 1964. We expect no downturn. We expect the GNP to reach $660 billion for the full year, up 6% over the $623 billion figure we now estimate for 1964. After allowing for price increases, the real gain should be about 4%. We expect prices to rise a bit faster, perhaps as much as 2 % compared to the recent average of 1.5% during the past six years. We foresee a substantial rise in employment but no further reduction in unemployment in 1965. We expect industrial production to rise 5% vs. the 6% rise in 1964.
2) We realize this will be the fifth year of expansion. Yet there is no reason to assume that economic expansion ages and decays. As long as we do not try to push the economy too hard, and thereby create excesses in credit, inventories and prices, growth could, in fact should, continue without interruption. Therefore, one of the keys in 1965 is US credit and fiscal policy.
The favourable factors in 1965 are:
1) With strong economic growth, 11/2 million more people went to work last year. The high level of employment, rising wages and the tax cut all helped increase consumer incomes and spending. These forces should carry forward into 1965, bringing further expansion in consumer demand. Borrowing by individuals has not been overdone and we believe it safe to foresee another $6 billion increase in instalment credit. Consumer confidence is high.
2) Businessmen are also confident. Spending for plant and equipment was up 14% in 1964. Surveys support a guess of a further increase of perhaps 10% in 1965. Such spending provides jobs, increases productivity and helps hold down prices.
The automotive industry is expected in 1965 to equal its 1964 performance and be a major sustaining influence. Residential construction is an area of possible weakness, with some further reduction in apartment building. This may hold back sales of appliances, furniture and other household durables. The ample supply of mortgage money is a cushion here, as is the increase in family formation as war babies approach the altar.
3) The second stage of the tax cut became effective January 1st. Individual rates are further reduced, although withholding rates will continue at the reduced level set last year. Corporate earnings will benefit from another 2 point cut in the tax rate, to 48 %. These tax cuts are already a proven economic success. Now almost nobody criticizes them. Government spending has been restrained. Budgetary deficits are being held to reasonable leves by the increased revenues the expansion has produced.
Now a word about our problems. Some are also yours.
1) First, I would mention the international payments system. While sterling has been stabilized for the time, massive problems still exist beneath the surface. The determination of all to defend sterling gives the British Government time to develop long range programmes. The solutions are not obvious or easy and will take time to become effective. The strength of the defences developed will be tested in 1965. Our own balance of payments problem is also still with us although improved, with our deficit perhaps $1 billion less than the $3.3 billion in 1963. This continues to exert a strong influence over our monetary and fiscal policies.
2) Inflation is our next problem. The prices of many raw materials, particularly nonferrous metals, have risen. Recent wage settlements have exceeded productivity guide lines. Costs are being pushed upwards. The danger here is constant.
3) The threat of a steel strike is already dislocating production, causing a high rate of inventory accumulation, and will bring an unavoidable slackening during the second half of the year.
4) This year the number of new 18-year-olds will rise from 2.7 million in '64 to 3.7 million, as the postwar baby boom moves across the age span. Since the labour force will grow more rapidly than in 1964, the chances of further reducing the present 5 % unemployment rate seem dim. The development of jobs for newcomers to the labour force will again be a major factor shaping federal policy.
This forecast implies strong credit demands. In the circumstances, it is reasonable to assume that US interest rates will, at the very least, remain firm at the levels of the year end. There is the possibility that short rates will rise further. Monetary policy should lean towards firmness. Upward pressure on prices, and the higher interest rates prevailing abroad, are forces that will need to be recognized.
Adding it all up, as I said at the outset, we come out with an optimistic forecast for the USA business scene in 1965. Underlying our optimism is a new co-operative and understanding attitude in Washington towards the private sector, and the emergence of new economic thinking which favours tax cuts as against increased government spending as a stimulus to growth and employment. The enactment of the Investment Tax Credit and liberalization of depreciation guidelines in 1962 and the tax cuts in 1964 show the awareness in Washington to the need to encourage the private sector. The plan this year is for cuts in excise taxes. There is reason to hope that further cuts in both individual and corporate tax rates may find broad support as a long-range policy.
The US economy has shown resistance to shocks: The May 1962 stock market break, the Cuban missile crisis in October 1962, President Kennedy's assassination in Novem ber 1963. Some are apprehensive that a possible steel strike in 1965 could touch off a recession. To be sure it won't help things. But in any event we don't now see a basis for an important business correction in 1965.
Our economy has demonstrated great strengths. Yet the insistence on government steps to continuously stimulate the economy constitutes a potential danger. It inhibits needed restraint on the part of the monetary authorities and leaves us with the real risk that easy credit will lead us to excesses which will produce the business cycle many consider to be overdue.
I will therefore conclude my business comments by saying that the right mix of fiscal and monetary policy in 1965 can help extend the present economic expansion through 1965 and beyond.
On the international front I will also venture a few forecasts.
1) The Soviet Union is having economic problems. Their wheat reserves are depleted and we know they have been dipping into their gold reserves. Growth has slowed. Defence, space and aid programmes have unquestionably been too heavy for their economy to carry. They need increased trade and closer business relations with Japan and the West to help solve their economic problems. Therefore, I will venture the prediction that the new Soviet government will be easier to live with than Mr. Khrushchev's, that EastWest relations will improve in 1965.
2) Over all, Latin America seems to be turning the corner. Mexico, Venezuela and Peru are expanding. Chile's new government holds promise of success. Brazil seems to be on the road to recovery although Colombia and Argentina are not doing too well. The decisive factor is that Latin American political leaders, and likewise US policy, now seem committed to the concept that stimulation of foreign investment and encouragement to the private sector are the keys to economic expansion and political stability in the area. I, therefore, predict that 1965 will be a year of further progress in Latin America.
3) I expect economic expansion to continue in Europe and economic integration to make further progress, with sterling stabilization and Great Britain's need to rebuild her competitive capabilities constituting the major problem. It is interesting to hear some British leaders call attention again to the thesis that entry into the Common Market is the only way to force Great Britain to take the necessary steps to improve her competitive position.
4) In Asia, the Indonesia-Malaysia conflict and Vietnam crisis will probably continue to brew in 1965. Western support can help Malaysia defend herself. The Vietnam problem is more serious. Without a stronger, broader based, more politically acceptable and competent government, a military victory is probably impossible, regardles3 of the dimensions of US support.
5) In the Far East, I forecast further expansion in Japan, Philippines, Taiwan and Hong Kong.
6) On our own USA-Canada front, I will repeat what I said last November at the National Foreign Trade Convention. The time for a reappraisal of US-Canadian economic relations is overdue. Closer ties can contribute to the growth, well-being, and unity of both our countries. Economic union is probably too big a word. But certainly we should start out by capitalizing upon the enlarged markets a custom union would offer both our peoples. This can be broadened to include like-minded neighbours in Latin America and the Pacific. I know you are properly concerned about the large deficit in your trade with us. However, your labour costs are lower than ours and I feel that you have no need to be fearful about the competitive capability of your industry if it had free access to the enlarged North American markets. Our long range goal should continue to be a liberal trading area embracing the whole free world.
As a confirmation of our own confidence in the outlook, my bank is planning further expansion in the year ahead both at home and abroad. We still expect world trade to double by the mid-seventies and are opening new branches and developing staff and services to meet these enlarged opportunities.
We are especially proud of the close relationship we have had with Canada for many years and with our important participation in the financing of Canadian trade, industry and development.
As I look ahead, I see problems, to be sure, but also growth and change and opportunity. We have always noted a close actuarial relationship between risk and opportunity. We see no problems ahead that can't be met effectively by competence and a big reserve for contingencies. We believe we have both.
We are especially optimistic about your great country. This past year I travelled 150 thousand miles, to all continents, and I assure you that there is no country which in my opinion has greater opportunity for progress and development. You have only scratched the surface in the development of your enormous resources. But most important of all, I place the high character and competence of your people which provide assurance of your future.
Thank you for the opportunity to be with you today.
I am delighted to be here today to share speaking honours with Mr. George Moore. The level of economic activity in the United States exerts a very impor tant influence on the Canadian business situation and it has been useful indeed to hear the views of so distinguished a member of the financial community in the United States regarding the course of business in 1965.
We in Canada like to make our own appraisals of the American situation and occasionally reach conclusions which differ somewhat from those of our neighbours, just as in the United States there are differences in views concerning the Canadian situation. This year, however, there appears to be a good measure of agreement on both sides of the border that business developments in the United States will generally follow along the lines indicated by Mr. Moore. This implies that there will be continuing strength in the flow of Canadian exports to the United States but that the year-over-year increase will not be as large as in 1964 when Canadian exports to the United States increased by 12% in the first ten months of the calendar year.
Economic prospects in most other countries which buy large quantities of Canadian products are not quite so favourable as at this time last year. The wave of prosperity in Europe has brought price pressures and labour shortages and, in the case of the United Kingdom, balance of payments difficulties requiring measures that will tend to dampen the rate of acceleration in economic activity in 1965. Even in Japan, which has experienced extraordinary rates of increase in activity in recent years, there are indications that growth rates will be more modest in 1965, although still very high when judged by North American standards. The general environment for sales of Canadian exports thus appears to be good but not as favourable as in 1964. In addition, it is unlikely that sales of wheat will reach the unusually high level of last year although indications are that wheat exports will again be strong.
My first point then is that our export sales in 1965 are not likely to show increases of the magnitude experienced in 1964 when, in the first ten months of the year, exports rose over 20% in value terms and amounted to $6.8 billion. This remarkable rise in exports was the Canadian economy's strongest source of stimulus in 1964. This year should see further gains in exports but the gains will probably be less general as to products and somewhat different in geographic distribution. Capital investment by the business community was the second major source of stimulus to the economy in 1964. The increase in business capital outlays, excluding housing, is estimated to have approached $1 billion, some 18% higher than in the previous year. You will recall that the last major capital expansion programme in the business sector took place in the mid-fifties when outlays rose very sharply for a couple of years, then dropped abruptly. Following this, the trend in investment was only moderately upward until 1963 when the recent strong advance got under way. In some quarters this new wave of capital expansion has been referred to as a capital boom. One hesitates to use the term because it suggests the pattern of a boom-bust curve similar to some which have developed in earlier periods of high-level activity, but I do not see why this round of capital expansion should necessarily follow such a pattern. This time, there are a number of very large projects under way-including power plants, pulp and paper mills, large commercial building complexes-which by their very nature must be built as units and which, when completed, will provide very large amounts of new capacity all at once. These projects, because of their magnitude, tend to make the capital investment curve move in sharp steps, up or down. But at the same time, in the current surge of capital expansion, there are also hundreds of small-to-medium-sized projects located in many areas across the country. These represent the planning and decision-making of thousands of individual businessmen who, on the basis of their own experience and their own appraisal of future prospects, have decided to go ahead with new capital investments. We may wonder about the effect of some government policies and speculate on the consequences of certain political developments, but the extent and nature of the capital investment programme which is now under way in Canada nevertheless indicate there is a strong base of confidence and enthusiasm in the business community and a firm determination to keep on developing Canadian industry for maximum efficiency. This is an important factor in appraising the short-term business outlook. Business capital outlays in 1965 are expected to be up another 10 to 15%, again providing substantial stimulus to the economy. Housing, which also rose strongly in 1964, may show a slight further increase in 1965 and the upward trend in investment for social capital purposes, chiefly government construction, is expected to continue. The Minister of Trade and Commerce has indicated that total private and public investment may be up about 10%, an increase only moderately less than the year-over-year increase of 16% in 1964. This continuing strength in capital investment is a very encouraging aspect of the outlook.
The situation in the consumer sector also appears to be favourable. Personal income, which is the most important single factor in determining the level of consumer spending, has been running strongly reflecting primarily the increase in employment, particularly in the industrial sector. This has been augmented by a substantial increase in farm cash income, some rise in investment income and a strong growth trend in government transfer payments. In 1965, the flow of personal income should still be rising although probably not as vigorously as in 1964, assuming more modest increases in industrial production and taking into account the smaller wheat crop. On the whole, it seems reasonable to anticipate a balanced increase in the components of personal spending with the percentage year-over-year increase perhaps a little lower than in 1964.
Government spending for goods and services increased less than the other major sectors of demand. Total outlays by all levels of government combined increased about 5 % with expenditures by the provincial and municipal governments rising more sharply than those of the federal government. Although government budgets for this year have not yet been announced, it seems reasonable to anticipate that this trend will continue in 1965. However, there is the prospect of government spending rising more sharply when the national pension plan is introduced.
Another important element of strength in the outlook for 1965 is the extent to which each major region of the country continues to participate in the general prosperity. The chartered banks with their extensive network of branches are in a unique position to appraise business conditions throughout Canada and it has been gratifying to observe the signs of prosperity and hear widespread expressions of confidence ranging from bounding enthusiasm in the west to cautious optimism in the east. At the same time, some notes of caution are being sounded and probably this is a very good thing. In British Columbia, the high level of capital investment is prompting questions about the sustaining qualities of the current level of activity in that part of the country. On the Prairies, questions are being raised about the continuance of free spending by consumers when there is the prospect of some decline in farm income. In Ontario and Quebec, some people are wondering about the duration of the surge in construction. However, in the traditionally reserved Atlantic Provinces a new feeling of confidence and enthusiasm has been developing as recent efforts to improve the business climate in that part of the country have begun to produce encouraging results.
In setting out the favourable elements in the short-term business outlook, it should be borne in mind that difficulties can develop quickly in an atmosphere of over-confidence and, as the upswing continues, we should be on the alert for signs of trouble ahead. The economy still appears to be functioning in good balance but, with further increases in the level of activity, additional pressures will be developing in certain areas.
The present high level of economic activity has been achieved with the assistance of very considerable prodding of one sort and another in the form of various government measures. Some of these are continuing to provide considerable stimulus to business while the effect exerted by others is diminishing as time goes on. Among those factors stimulating business there are the various tax incentives for investment in plant and equipment. The export promotion programmes organized by the various levels of government, in which Canadian business is participating widely have also provided real stimulus to a number of the secondary manufacturing industries. Among those measures whose effect is diminishing is the revaluation of the Canadian dollar which has probably passed its peak of effectiveness in terms of benefiting the export of Canadian goods.
Competition from imports has not, however, been reduced to the extent anticipated in some quarters at the time of revaluation. This is because the strong flow of Canadian personal income and the high level of capital investment have created increased demands for many types of imported consumer goods, regardless of their higher prices, and the investment programmes, particularly those of the business community, continue to have a high import content. Thus, some of the buoyancy in the economy is being drained off to pay for a higher volume of imported goods. This tendency for rising levels of activity to bring more than proportionate increases in imports is one of Canada's most difficult underlying economic problems.
With respect to monetary policy and credit conditions generally, it can be noted that during 1964 there was a very rapid increase in the volume of chartered bank loans. The expansion of the money supply was at a somewhat more moderate rate so that there was some liquidation of the other assets of the banks in order to accommodate the rising loan demand. However, it proved possible for the Bank of Canada to avoid abrupt changes in monetary policy of the sort which on a number of occasions in the past have required very quick and difficult adjustments on the part of the banks, and of their customers.
So far as 1965 is concerned, there would seem to be reasonable grounds to expect that the monetary authorities should be able to continue to operate by means of gradual adjustments to changing conditions. Domestic price increases have been moderate and the business outlook for 1965 is, on the whole, buoyant.
It is, of course, more difficult to assess the possible influences coming from abroad. Monetary policy is a key link in the chain of relationships between the fixed rate of 921/2 ¢ U.S. for the Canadian dollar, the maintenance of the official exchange reserves required to enable the authorities to support this rate, and the availability and inflow of foreign capital adequate to finance whatever deficit may be incurred in the current account of the balance of payments.
Perhaps all that can be said of this is that every effort must be made to reduce our current account deficit, which arises primarily from our transaction with the United States, and maintain, on both sides of the border, an atmosphere favourable to the free movement of capital between the two countries. To the extent that these objectives are achieved the likelihood of abrupt changes in monetary policy, intended to defend the external value of our currency, will be diminished.
To sum up, the prospects for the Canadian economy in 1965 are generally favourable, and we anticipate that there will be another substantial increase in Gross National Product over the level of $46.5 billion estimated for 1964. The sources of stumulus appear to be soundly based although probably not quite as strong as they turned out to be last year. The investment programme is well under way and the flow of personal income is strong. Price pressures have increased slightly and some labour shortages are reported but, on the whole, competition still appears to be sufficiently strong to hold in check most of the inflationary tendencies within the country. In the external economic environment, there are some cross currents which could have unfavourable effects on business conditions in Canada but it is to be hoped that measures such as abrupt changes in monetary and credit policies and trade restrictions can be avoided. With these qualifications in mind, there is good reason to begin the new year with confidence.
Thanks of this meeting were expressed by Mr. Sydney Hermant, a Past President of the Empire Club.