Sour Economy Hurts Mulroney

CANADA'S struggling economy is providing a dark backdrop for Prime Minister Brian Mulroney's efforts to revive his Progressive Conservative Party's political fortunes.

Federal elections are less than a year away and Mr. Mulroney's approval ratings remain extraordinarily low.

A wily politician known for coming from behind to win, Mulroney is currently rallying Canada around a national-unity plan that also may boost his image as a leader. Further, it could lift the economy by lessening uncertainty over the nation's fate. He needs the one-two punch of a political and economic victory before federal elections expected in the spring, political observers say.

First Mulroney must win a "yes" vote Oct. 26 on a national referendum on a plan to keep the country united, avoiding a break-off of Quebec. Opposition parties are helping him in this effort, but promise a battle later over a proposed North American free-trade pact and the woeful state of the economy.

Economic growth forecasts forecasts for this year were recently scaled back yet again to reflect weak second-quarter numbers. Although many economists had predicted that Canada's output would rebound strongly in the second half of 1992, few think that any longer. Instead, the economy is stuck with 11 percent unemployment and mediocre growth for the rest of the year, economists say.

"As of last fall we were saying there would be a fairly quick recovery in 1992," says Teresa Chandler, managing economist with Toronto Dominion Bank. "We've now revised that down to 1.2 percent growth for Canada as a whole."

While Ms. Chandler is forecasting a healthy 3.4 percent real growth in gross domestic product next year, she and others concede that a strong rebound depends heavily on the United States economy and whether it will gobble up even more Canadian exports than it has this year.

Rising exports have been a bright spot for Canada's economy. Shipments of goods this year are up 8 percent from last year, giving the government ammunition for its other big election-related battle: gaining public approval for the North American Free Trade Agreement (NAFTA).

To help sell the accord, which would link Canada, the US, and Mexico in one trading bloc, Trade Minister Michael Wilson is trumpeting the rise in exports and citing the 1988 US-Canada Free Trade Agreement (FTA) as the reason. He says NAFTA would help exports grow further.

"Slow wage growth and rising productivity - together they suggest Canada is very quickly becoming a competitive nation," says Michael Gregory, an economist with the Royal Bank of Canada. "That's why most analysts believe exports will be major focus of growth in this country for the next couple of years. Exports are it."

Yet Canadians remain skeptical of free trade. "The coming of of the FTA has coincided with recession," says Philip Resnick, a University of British Columbia political scientist. "There is a feeling that NAFTA will just mean more job losses."

Canadians and their economy are also weighed down, Chandler says, by factors that include:

* Reduced consumer spending tied to job uncertainty and high personal debt levels. Housing starts and existing-home sales are also lower than expected this year.

* Business restructuring. Businesses have cut work forces deeply to meet competition from the US and abroad. Managers are reluctant to hire back workers or expand even if business is good. Spending on capital equipment to boost factory efficiency is up, however.

* High government deficit and debt levels, which have left provincial and federal governments unable to spend in order to stimulate the economy.

The provinces' deficits jumped to $22 billion (Canadian; US$18 billion) last year from $5 billion in fiscal 1989-90. The rising deficits will bring provincial public debt to a projected $171 billion in 1992-93, versus $150 billion last year. The federal debt last year was $420 billion, or 62 percent of GDP. By comparison, US debt is 52 percent of GDP.

Whether Mulroney can parlay the unity vote, free trade, and the rise in exports into a victory at the polls next year is uncertain, Mr. Resnick says. If the unity referendum fails, "we are into a real constitutional crisis and the whole Conservative strategy is out the window."