Canada's Weak Economy Gets Boost From Exports

Paper companies are enjoying higher prices and booming shipments

THE United States economy may indeed be swooping in for a ''soft landing.'' But the sound many Canadians expect from their economy in 1995 is a hard thud rather than a soft squeak of the tires. Last year Canada's economic engine was practically on fire with real gross domestic product (GDP) growing a real 4.7 percent, faster than most industrialized countries. Then the bottom fell out. Canada's economy grew at just a 0.7 percent annual rate in the first three months of the year. Second quarter numbers are expected soon and many economists expect a slide of around 1.5 percent at an annual rate, putting the entire first half of the year firmly in negative territory. ''To say it was a dip in expectations would be putting it mildly,'' says John McCallum, chief economist of the Royal Bank of Canada. ''The Canadian economy fell out of bed in first half of the year.'' Still, he and other Canadian economists have recently stopped using the ''R'' word (recession) so much. Their growing hope is that the US economy will continue to rebound, rolling out Canadian auto, lumber, paper and other exports through the end of the year. Under that scenario, Canada could end the year with 2 percent real growth compared to about 2.7 percent for the US, according to the Toronto Dominion Bank. A heavy thump, perhaps. But not a crunch. At about one-tenth the size of the US economy, Canada's economy has always been influenced by US growth. But these days the economic swings seem more severe. If the US juggernaut hits an economic bump in the road, its neighbor to the North bangs into the roof. Adding severity is a two-fold problem: Canada's economy is increasingly dependent on exports to sustain economic growth - and on the US for the lion's share of export growth. Fully 82 percent of all Canadian exports are US bound. When US demand stalls, the Canadian economy goes in the deep freeze - as it did in the first quarter. Unlike the US, there is no strong consumer demand in Canada to buffer the economy when exports stall. Canada's domestic economy is contributing little or nothing to GDP growth. ''It's almost like a Jekyll-and-Hyde economy,'' says Jayson Myers, chief economist for the Canadian Manufacturers' Association. ''Manufacturing is really running on the American business cycle. But our domestic economy has never really turned around since the last recession began.'' Partly that's because the real per capita incomes of Canadians have been declining since 1989, while unemployment rates have remained stubbornly high, currently around 9.5 percent, he says. Both government and families have been spending less, trying to trim deficits. Almost 100 percent of Canadians' personal disposable income is being used to pay off consumer debt and home mortgages, he says. In 1989, those two debt loads only ate up 65 percent of the Canadian disposable income. ''There's a really good reason why, in surveys, consumers say they don't have any more money to spend - they really don't have any more,'' Myers says. As a result, Canadian consumers have made major cutbacks, even on household essentials like children's shoes. Ralph Mannsbach has owned Panda Shoes, a children's shoe store in the Yorkdale Mall in Toronto for 12 years and he says that he's never seen anything like the current grim mood of Canadians shoppers. Higher priced kids shoes (US$50 to $70) are out. And the middle range, where most buy, has dropped about $20, to the $20 to $40 range from $40 to $60. ''People are scared and are spending less just in case they lose their jobs,'' Mr. Mannsbach says. ''They also may feel their income is lower, so they're spending less on their families.'' That leaves the export sector of the Canadian economy with a big load to shoulder - job growth plus wealth generation. But Jean-Luc Pellerin is untroubled. The Stone-Consolidated Inc. paper mill he manages in Trois Rivieres, Quebec makes 165,000 tons of white and yellow paper used in phone books. About 50 percent is US-bound, 20 percent will go overseas, and 30 percent goes to the Canadian market. The modern mill survived severe industry red ink in the early 1990s when paper prices bottomed. ''Things have turned positive,'' says Mr. Pellerin, the plant's manager. ''We're running at capacity. It's been that way for 24 months - and as far as I can see it's going to be that way for another 24 months.''

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