Canada: our northern neighbor is still receptive to U.S. exports; regional differences continue to characterize economy

Business America, Feb 4, 1985

CANADA

Our Northern Neighbor Is Still Receptive To U.S. Exports; Regional Differences Continue to Characterize Economy

Canadian exports--especially of automobiles to the United States--have been a major factor in the growth of industrial output and in improvement of Canada's merchandise trade surplus. Despite rising imports and foreign debt service, an export increase of nearly 11 percent in 1984 should contribute to a record merchandise trade surplus of perhaps C$19 billion and assure a small current account surplus.

The Progressive Conservative government, elected in September 1984, is expected to seek a stable Canadian dollar relative to the U.S. dollar, to support arrangements for increased sales of Canadian energy (oil, natural gas, and electricity) to the United States, and to pursue negotiations aimed at assuring access to the U.S. market. Nevertheless, continued expansion of Canadian imports and moderation in demand for Canada's manufactured exports may contribute to some narrowing in the trade balance and possible elimination of the surplus in the current account this year. Slack foreign demand and low prices for key Canadian exports such as forestry products, fish, and minerals are expected to continue throughout this year.

Foreign investment is widely expected to continue to pick up this year, for at least two reasons. First, recovery of the economy and a more receptive government attitude in the past 18 months have already increased the overall attractiveness of Canada for foreign investors. Second, the new Progressive Conservative government has moved quickly to emphasize its desire to attract foreign capital.

Real spending on business investment picked up slowly in 1984 and should accelerate this year. Undercapitalization in Canadian industry has resulted in deferment of capital spending as firms earmark increasing profits toward reduction of debt. This process of improving balance sheets is widely seen as winding down, at least in some sectors such as autos, thus permitting major investment projects to move forward this year (i.e., General Motors of Canada's new C$1 billion Oshawa plant and American Motors of Canada's new C$800 million project in Brampton, Ontario). A strike at the existing GM plant in Canada in October 1984 was resolved fairly rapidly and the settlement is not viewed as an impediment to the new planned investments. U.S. resistance to protectionist pressures and the new Canadian government's attitudes toward private business are expected to reduce uncertainties previously perceived by business. Sound fiscal measures are expected to be particularly important in restoring business confidence and encouraging new investment spending.

Reducing the size and role of government in the economy and trimming the federal budget deficit are priority medium-term objectives of Canada's new government. At some C$32 billion, or 7.8 percent of GNP in the Canadian fiscal year ended March 31, 1984, Canada's budget deficit was proportionally larger than that of the United States. Prime Minister Mulroney has stated that he intends to pursue these objectives without impairing the extensive safety net of government social welfare protection that Canadians now enjoy.

A detailed blueprint of the government's fiscal strategy will probably be revealed sometime soon, when the government will present its first comprehensive budget. In his initial major policy statement in early November 1984, Finance Minister Wilson announced immediate budget expenditure cuts as the first step to "restore fiscal responsibility.' Evidence of the government's genuine concern over the budget deficit was provided even earlier by a decision to proceed, as previously proposed by the predecessor Liberal government, with a 1 percent-age point increase in the federal sales tax. The increase, which will be in effect from Oct. 1, 1984 until yearend 1988, raises the federal general sales tax rate to 10 percent, the rate on construction materials to 6 percent, and the rate on alcohol and tobacco products to 13 percent. (The federal sales tax is levied at the manufacturers' level in the case of domestically produced goods, and on the duty-paid landed cost of foreign-produced goods.)

Regional outlook

In 1984, the economy of the Atlantic region made fairly respectable gains, and the outlook for further improvement is generally promising. The economy of Nova Scotia, in fact, has performed well above the national average, with real growth forecast by some analysts to have exceeded 5 percent in 1984. The key to this rapid expansion is increased activity in drilling for gas offshore. Also, the Port of Halifax is expected to record an overall 35 percent increase in traffic, and the Cape Breton coal mines and the Reo Algom tim mine near Yarmouth are engaged in major new investment projects that will extend beyond 1985.

Offshore exploration also continues to be the driving force behind the economy of Newfoundland. Drilling activity is expected to expand further if the province can reach an agreement with the Mulroney government on the federal regime applying to offshore oil fields. Stronger U.S. markets prompted a resurgence in pulp and paper production in Newfoundland (and also in New Brunswick). Planned modernization of the Abitibi-Price paper mill in Grand Falls and possibly the Bowater paper mill in Corner Brook are expected to contribute to revival of construction in Newfoundland.