Rising dollar shows Canada's economy is strong; but so is deficit
Canada's finance minister, Michael Wilson, has mixed feelings about the strong Canadian dollar. On one hand, he sees it as possibly slowing Canadian exports by making them more expensive. That, however, has not been the case so far, he said in an interview here. ``I don't see it as having a dampening effect on economic performance yet.''
On the other hand, Mr. Wilson figures the strong Canadian dollar - worth 81.39 American cents Wednesday, up from as low as 69 cents in 1986 - reflects the strong performance of the Canadian economy.
Canada's economy grew at an inflation-adjusted 3.9 percent rate in 1987, and Mr. Wilson expects the first quarter to be ``a good one'' also.
In fact, Canada's economy in 1987 bested United States economic growth for the fourth consecutive year. The Canadian economy has grown faster than all other major industrial economies since 1983.
Business investment in plant and equipment was up 17 percent last year, and Wilson expects 1988 to be another strong year for investment. Unemployment has dropped to 7.8 percent.
Inflation is of some concern, Statistics Canada reported last week. Consumer prices in March were up 0.5 percent, leaving prices 4.1 percent higher than a year earlier. Wilson approves of the somewhat more restrained monetary policy imposed in recent weeks by the Bank of Canada ``to nip inflation in the bud.''
Critics say the Progressive Conservative government of Prime Minister Brian Mulroney has not done enough to stem the huge budget deficit it inherited from the Liberal administration in 1984.
A Toronto economist, Martin Murenbeeld, calls the government's performance on the budget ``mediocre,'' especially considering its huge majority in the House of Commons. A study by the International Monetary Fund notes that Canada's deficit is proportionately larger than those of any of the major industrial countries except Italy. Wilson, though, forecasts that the deficit this year will be equivalent to 3.7 percent of Canada's gross domestic product, down from 7.5 percent in the year his government took office.
``We have made a good deal of progress,'' he says.
The national debt, which had been growing at a 26 percent annual rate, is now increasing 10 percent a year. Wilson hopes to have that rate below the increase in national output by 1990-91. Spending, he adds, will grow only 4 percent this year.
Wilfred J. Hahn, a Prudential-Bache Securities analyst in Toronto, terms the growth in the debt level ``clearly untenable.'' He worries about what will happen to the deficit if the Canadian economy should enter a recession.
In Wilson's newest budget, the deficit is forecast to decline to $28.9 billion (Canadian; $US23.45 billion) in the fiscal year that started April 1 and to $28.6 billion in 1989-90, from about $29.3 billion in the year just ended.
Mr. Hahn calls it improvement at ``a snail's pace.''
``There is more work to be done,'' concedes Wilson.
Unlike the US, the Canadian government has raised taxes to bring some reduction in the deficit. Since 1984, federal revenues as a percentage of national income have risen 1.1 percent. Wilson would like to reduce that tax burden if the government is successful in elections it must call later this year or next.
The strength of the Canadian dollar is controversial in Canada. Two provincial premiers, Donald Getty of Alberta and Robert Bourassa of Quebec, said last week that the dollar shouldn't be allowed to stay above 80 US cents. Some businessmen, particularly exporters of commodities, such as minerals, metals, lumber, and newsprint, are concerned about their products' profitability.
The Canadian Manufacturers' Association says 60 percent of its surveyed members said they would be at a competitive disadvantage with a Canadian dollar valued at more than 80 US cents. But Wilson notes that the strong Canadian dollar reduces the cost of imported foods and oil and thus restrains inflation.
Looking to the future, the finance minister pointed out that withholding rates for personal income taxes will fall July 1. And next Jan. 1, presuming both Parliament and Congress approve, tariff barriers between Canada and the US will start to fall under a free-trade agreement signed Jan. 2. Wilson says both measures should stimulate the Canadian economy.
Canada's balance of payments has deteriorated sharply since mid-1987, with the current account (a broad measure) in deficit at an annual rate of more than $10 billion (US$8.1 billion). Bank of Nova Scotia economists note that Canada's foreign debts of $200 billion require annual service payments of $20 billion.
So far, however, the inflow of foreign investment, sometimes as a refuge from the US dollar, and a trade surplus of about $10 billion have provided funds for those service payments. Canadian economists debate how long that situation can continue and thus whether their dollar will remain strong against the US dollar.