Canada's Economy Bolstered By Trade Boom, Fall in Deficits

The Canadian economy still seems pathetically weak to many, but Floyd Drager is pretty sure - based on what he sees in his home town of Red Lake, Ontario - that it is building on hidden strength.

Red Lake is one of Ontario's mining centers, a town of 2,300 people sitting out on the western edge of the Canadian shield, a 10,000-foot-thick granite sheet on which most of eastern Canada rests.

Powered by rising global demand for commodities like lumber and gold, Red Lake's unemployment rate has dropped from 5 percent to 3 percent in just a year, says Mayor Drager in a telephone interview. By comparison, Canada's national unemployment rate remains stubbornly high at 9.4 percent.

"Right now it's going real good," he says of the local economy. "One of our mining companies is sinking a new shaft, another is building a new mill, and the tourists are coming in good. Things are looking up."

Like other places with economies hinging on commodity exports, Red Lake is enjoying the fruits of North American free trade and a booming United States economy that soaks up Canadian exports.

But most of the Canadian picture seems the opposite, with low domestic consumer demand and even lower consumer confidence linked to high unemployment. Canada's second quarter gross domestic product (GDP) grew at an annual rate of just 1.3 percent in the second quarter of the year. That flaccid number, which follows three quarters in which growth was 1.2 percent or less, is hardly inspiring. Especially so, when compared with the 4.8 percent second-quarter rate in the US.

So how could Red Lake's boom translate to the rest of Canada?

While not denying Canada's lackluster performance so far, economists like Michael Gregory of Lehman Brothers, a Toronto brokerage house, say there are hints Canada is about to emerge from the economic doldrums.

He points to strong August job creation in manufacturing, a continuing strong boom in exports, lower government deficits, a stronger Canadian dollar, very low inflation (1.5 percent), falling interest rates, and a stronger housing market.

"We're beginning to see things jell," Mr. Gregory says. "Even if the US economy slows, there is a sense that the Canadian economy is finally beginning to grow on its own."

Canada also for the first time in 11 years saw in the second quarter a current-account surplus - earning $1.1 billion (Canadian; US$803 million) more than it spent on goods, services, investment income, and transfers from overseas. A big trade surplus, in essence, has made Canada a net lender to the rest of the world instead of a net borrower.

"We've gone from very big current-account deficit to small surplus," says John McCallum, an economist at Royal Bank of Canada, Toronto. "For a change we're foreign lenders, meaning our foreign debt will decline, which is good, and this will make us less dependent on foreign markets."

ECONOMIC growth has been hurt in part because Canada's federal and provincial governments have been vigorously attacking their huge yearly budget deficits. Seven of the 10 provincial governments - with the exceptions of Ontario, Quebec, and Newfoundland, plan to balance their budgets this year. Now that discipline is beginning to pay off.

While Canada staggers under a combined federal and provincial debt that has grown from 87 percent to 108 percent of GDP in five years, that percentage should start to decline in the 1997-98 fiscal year. Foreign investors are starting to snap up Canadian bonds with confidence again.

Meanwhile, the Canadian housing market, a bellwether of consumer confidence, began to rebound about a year ago.

"Our business has been steady since a big upswing last year," says Danny Shearer, manager of Citywide Locksmith, one of Toronto's larger retailers of door hardware to the local home-building industry.