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A Chill Wind Blows From The South


Business Outlook: CANADA

A CHILL WIND BLOWS FROM THE SOUTH

The U.S. economy has sneezed, and Canada has caught a cold. Slower U.S. growth has hit Canadian exports at a time when its domestic economy is already laboring under high interest rates, the result of rapidly growing government debt, a weak currency, and Quebec's plans for an independence referendum this fall.

The slowdown has come suddenly. The economy barreled along at a 6% clip most of last year, led by exports, only to see growth plunge to 0.7% in the first quarter, and second-quarter growth looks to be negative. Real retail sales and exports in April began the quarter far below their first-quarter levels, and May housing starts were the lowest in 15 years. Inventories have backed up, requiring production cuts that will extend the softness into the third quarter.

Canada's top policymakers believe the country will avoid a recession, however, and most private analysts agree. Of course, the second half depends on how fast U.S. growth recovers. Also, the Bank of Canada has cut interest rates three times in the past six weeks, and BoC Governor Gordon G. Thiessen indicated on June 20 that more cuts are coming. Steering the needed policy-easing around the weak Canadian dollar, however, could be tricky.

The slowdown is reviving fears about Canada's public debt, which totals about 100% of gross domestic product. However, a slowdown short of recession will not balloon the deficit, and it will take pressure off inflation, which ticked up to 2.9% in May. That will allow lower interest rates. And since interest is 25% of Ottawa's budget, the deficit is more sensitive to a 1% change in interest rates than to a 1% change in GDP.

Finance Minister Paul Martin is making cuts aimed at trimming federal red ink to 3% of GDP by 1997, from 5.1% now. The provinces are also making progress: Ontario's new premier, Mike Harris, who was elected on a balanced-budget platform, is expected to act quickly to repair the largest province's finances, as long as Canada's cold doesn't get worse.BY JAMES C. COOPER & KATHLEEN MADIGAN


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