DEFICIT MAY BRAKE ECONOMIC RECOVERY

DEFICIT MAY BRAKE ECONOMIC RECOVERY

Canada is expected to post the strongest economic growth among the leading industrialized states in 1994, though there are dark clouds on the horizon.

Following a final after-inflation growth rate of about 2.5 percent in 1993, predictions range between 3 percent and 3.5 percent growth for 1994.But such forecasts are fraught with risks - and only look good in comparison with the anticipated weaker expansions in other industrial nations.

The major risk, analysts agree, comes from the high budget deficits plaguing the federal and provincial governments.

The new Liberal government has revealed that last year's federal deficit was a record US$32 billion (C$40.5 billion).

This is $5 billion more than estimated just six months ago.

And the news looks even worse for the current fiscal year, with finance department officials conceding the shortfall could rise well above C$40 billion.

Provincial governments, for their part, are enjoying little success in reducing what amounted to a combined record C$25 billion deficit last year.Ruth Getter, economist with the Toronto Dominion Bank, has warned that failure to contain the deficits will weaken the Canadian dollar on foreign exchange markets.

In turn, she said, this would provoke a rise in interest rates that smother a still-fragile recovery.

"The major challenge facing the new government is to reassure financial markets that they are not going to go off the deep end," Ms. Getter stressed.

She said that if the Liberal government, through public works and other projects, wants to direct additional spending to job creation, it also must reallocate spending.

While some analysts are concerned over the mounting debt threat, others fear that government attempts to shave their deficits could be equally damaging.

If governments cut spending too sharply, or raise taxes, that also could dampen economic activity, they caution.

"Government restraint is going to be a big drag on the economy," said Ernie Stokes, economist with the Toronto-based WEFA Group.

In a view echoed by other economists, Mr. Stokes considers that exports will constitute Canada's main engine of growth this year and in 1994.A major factor here, of course, is rising demand in the U.S. economy - the market for three quarters of all Canadian merchandise exports.

Mr. Stokes also pointed out that business investment should remain strong.

However, the household demand sector will remain weak, due to lack of job security.

Canada's unemployment rate, currently just above 11 percent, is not expected to decline much in the near future.While corporate balance sheets are looking healthier, thanks to severe cost-cutting during the recession, companies are being very cautious about hiring new employees. This is particularly evident in the manufacturing sector.

Thus, many economists define the turnaround as "a jobless recovery."

Mr. Stokes pointed out that Canada's jobless rate would actually be closer to 15 percent if it weren't for the fact that tens of thousands of workers had dropped out of the labor force because they cannot find jobs.

According to the Conference Board of Canada, "the lack of jobs and high unemployment rates are major obstacles to a rebound in consumer spending."

Consumer spending accounts for an estimated 60 percent of all expenditures in the economy. It is a key ingredient missing from the recovery, notes the Conference Board, an Ottawa think-tank.

From province to province, growth in 1994 will vary.

The Toronto Dominion Bank sees the growth of Ontario, Canada's biggest industrial and financial center, attaining 3.7 percent in 1994, exceeding the national average. Ontario, which accounts for 40 percent of total production of goods and services in the country, suffered the steepest decline in output during the 1991-92 recession.

With its growth also spurred by exports, British Columbia's resource-based economy is expected to expand by 3.4 percent in 1994, followed by Alberta (3.3 percent), whose oil sector is showing strength.

Among the other provinces, the Toronto Dominion Bank sees Quebec emerging quite slowly from the recession, with growth in the province reaching 3 percent in 1994 after 2.1 percent growth in 1993.

In the Atlantic provinces, New Brunswick is headed for continued strong growth, in the 3.3 percent range in 1994.

Newfoundland remains Canada's most troubled region, despite some impetus provided by the Hibernia oil project. Its 1994 growth may not surpass 1 percent.

The multibillion-dollar Hibernia undertaking is virtually the only bright spot for Newfoundland, where the unemployment rate is hovering around 20 percent - by far the highest in Canada.

Work on the concrete platform is under way, offering jobs to some 3,000 Newfoundlanders. Employment on the Hibernia project is expected to peak at about 4,000 by 1995.

Prince Edward Island's economy is expected by the Toronto Dominion Bank to progress 2 percent this year and 3.1 percent in 1994.

This tiny province has remained relatively unscathed by the closures in the Atlantic fishery, and exports of agricultural and food products - dominated by potatoes - are moving well.

The outlook for the island province's construction sector is especially bright with work scheduled to begin soon on the four-year, C$850 million fixed-link project with New Brunswick.

In Nova Scotia, the recovery remains hesitant, and growth is not expected to surpass 2.2 percent in 1994 after advancing by 1.4 percent in 1993. Recent closures and quota cuts in the province's groundfishery have impacted adversely on the short-term outlook.

Meanwhile, in western Canada, in tandem with the rebound under way in Ontario, Manitoba's economy has strengthened this year and its growth could top 3 percent in 1994.

Some of Manitoba's main industries, including transportation equipment and chemical products, are showing double-digit increases in shipments. The province's important farm sector fared well this year, though current estimates of production in the 1993/94 crop year point to lower output of most

grains and oilseeds.

The outlook for the Saskatchewan economy is for gradual improvement over the next few years, with 1994 growth reaching 2.4 percent following a moderate growth of 1.9 percent this year. The mining and manufacturing sectors are brightening somewhat. Preliminary estimates show lower wheat output in the 1993-94 crop year - but barley and canola production will increase sharply.