Ontario -- Canada's Saar -- jogs ahead despite slump

Last year Ontario had its first recession since 1954. Rather than saying something about the depressed state of the Ontario economy , it says more about the general strength of it. For when the US economy was flagging badly, the Ontario economy, though slowing its pace, kept on jogging ahead.

Ontario has received its strength from its manufacturing sector. In Canada, Ontario is known as the Industrial Heartland. In many ways it resembles the German Saar Valley or the Detroit-Pittsburgh manufacturing complexes. Autos and steel have been the backbone for the province, providing jobs for hundreds of thousands of workers. Only since the US auto companies floundered has the Ontario economy suffered.

Despite the problems with the auto companies, Ontario has some unique and important strengths to tide it through any recession:

* It is close to the US market. Ontario has borders adjacent to New York State and Michigan, providing easy access to two of the most heavily industrialized regions in the United States. Ontario is one day's trucking from 20 US states which ship 55 percent of US manufactured goods.

* Ontario, with 36 percent of Canada's population, makes up a significant market by itself. In 1979, Ontario's gross domestic product totaled 39 percent of total Canadian GDP.

* Ontario has cheap energy. The province produces 20 percent of its energy needs and receives a significant portion either from the US (coal) or the Western provinces (oil and natural gas). The oil and gas are bought at a significant discount from world prices, giving Canadian companies major savings.

* The province has enormous natural resources. Buried under the province are such commodities as copper, gold, iron ore, nickel, platinum, silver, and uranium. At the same time, the land supports a significant amount of agriculture and forestry. And the low- priced Canadian dollar makes these resources cheaper for US companies.

* There is a modern, efficient transportation system. The highway, rail, and air systems are highly developed and well maintained. Even the harsh Canadian winters don't pose too much of a threat to the transportation system.

* Manufacturing productivity has been good. In 1978, according to the US Department of Labor, Ontario's output per hour increased 4.2 percent, compared with 3.7 percent in Germany, 2.5 percent in the US, 4.9 percent in France, and 8 .3 percent in Japan.

While the US has debated how to go about reindustrialization, the Canadians have been busy doing it. Capital spending rose in 1980 by 44 percent and has been at a high level for the past three years.

"Reindustrialization," says Larry Grossman, minster of industry and tourism, "has been both government-induced and market-induced." The government has helped by giving better tax benefits for new investments than the US -- notably an accelerated depreciation. At the same time, companies may write off 100 percent of current and capital expenditures on research and developed in the year of the outlay.

The government has also earmarked certain industries it is eager to develop. Mr. Grossman, for example, says the government is eager to see the biotechnology industry locate in Canada. And the government has given financial support to the fast-growing electronics industry in the Ottawa Valley.

The government has also been forced to support the auto and farm-equipment industries because of their sagging sales. The federal government in Ottawa gave Chrysler a $200 million (Canadian) loan guarantee and Ontario agreed to help Chrysler build an R&D facility. This aid prompted a local newspaper cartoonist to portray Mr. Grossman and Herb Gray, his equivalent in Ottawa, on the side of a road holding bags loaded with money. Lee Iacocca, the chairman of Chrysler, is sitting in a car, without any wheels, saying, "I don't normally pick up hitchhikers.. . ."

For Massey-Ferguson, the troubled farm-equipment manufacturer, the federal and provincial governments have been negotiating a guarantee of a significant portion of a new convertible preferred debt offering. Massey-Ferguson hoped to have the refinancing package completed by Jan. 31.

The problems of the automakers and Massey-Ferguson are important to the province. Douglas Peters, an economist with Toronto-Dominion Bank, says, "The biggest debate is the future of manufacturing companies in the province."

Around Windsor, which in some ways is a suburb of Detroit, unemployment runs as high as 15 to 20 percent. This auto slump is the main reason for the genuine recession in the province. For 1980, Mr. Peters says, the gross domestic product of the province will have declined by 1 percent. And economist William Empey of Data Resources Canada estimates that the first half of 1981 will be weak, too, closely resembling the first half of 1980.

Last year was also unique in that the province underperformed compared with the rest of Canada -- again in large measure because of weakness in the auto sector.

To a large extent, there is little the provincial government can do to insulate its manufacturing sector from swings in the US. For example, when interest rates rise sharply in the US, they also rise in Canada. If they don't, the Canadian dollar suffers. Since the Canadian assembly lines mainly manufacture large and medium-size autos, the Ontarians are locked into Detroit's structural problems.

Probably the largest problem facing the province is the continued uncertainty over the fate of Canada itself. Ontario, for all its strengths, still depends heavily on other provincial markets. Thus, its future is closely interwoven with the debate over Canada's future. The issue of how much autonomy the provinces will have and how much control the federal government in Ottawa will exert is as important to Ontario as it is to the oil- and gas-rich western provinces.

For exa ple, Mr. Empey notes that a significant amount of trade is transacted between Ontario and Alberta. Already, a significant number of Canadian oil companies have announced plans to shift their capital spending from Canada to the US. This is bound to affect the booming Alberta economy. "Alberta is vulnerable to a slowdown," Mr. Empey says, "and Ontario is tied to that. Ontario has a lot to lose if Alberta slows down."

This same sentiment is echoed by David Allen, the president of Stelco, the largest Canadian steel company and a major employer in the province. "The major projects right now are energy projects, and we're sensitive to anything that shifts the momentum away from that."

Mr. Grossman, the industry and tourism minister, believes, however, that the mega-energy projects will not be derailed and Canadian companies will benefit.

"Alberta needs the tar sands project," he says, "so it will be completed." An additional benefit, he adds, is that "this will not be like the mining boom, where foreign companies took their money out of the country, but will be Canadian companies keeping their money in Canada."

Ontarians also benefit somewhat from the Canadian government's energy proposals, because the price of energy is held below world levels -- giving Canadian industry a competitive advantage for the moment. But even the government's system of keeping Canadian energy below world prices meets some criticism. David Drinkwalter, an economist with Ontario Hydro, believes petroleum prices should be allowed to rise to world levels and natural gas prices should likewise go up. At the same time, he advocates using Canada's plentiful supplies of natural gas for transportation until the hydrogen-fueled car is developed.

"We don't have an energy problem," he explains, "we have a transportation problem." Even some industrialists believe the price of oil should rise to world prices. "Sure, we would be hurt by higher prices," says Charles Baird, the chairman of Inco Ltd., "but it would be better for the country."