The Canadian Economy Chugs Full Steam Ahead

Momentum expected to continue only if US economy stays strong

FOR Jim Fleck and other Canadian manufacturers, 1994 was a boom year, and 1995 looks like more of the same, though some economists warn of storm clouds on the horizon.

Powered by exports, Canada's economy is starting the year with a real annual growth rate of about 4.5 percent, leading the Group of Seven major industrialized countries.

That's dandy for Mr. Fleck, chairman of Fleck Manufacturing. His Toronto-based company has two Ontario factories with 500 workers cranking out harnesses (customized bundles of wires and connectors) for the big automakers. It also employs about 2,000 Mexicans in three maquiladora border factories that make wiring harnesses for cars and appliances.

``As long as the US economy keeps on pumping, we'll do fine,'' he says. ``We're a 40-year-old company, and we went to Mexico 10 years ago. So we've adapted to free trade, and now we're growing a lot because of it.''

Exports have been the big story. In 1994, total Canadian exports rose 12.6 percent, up from a 10 percent rise in 1993 and a 7 percent rise in '92. Without exports, Canada's economic growth would have been flat. Much depends on continued United States demand for Canadian-made cars, lumber, and other manufactured goods.

Whether the US economy will continue churning is not clear. Some Canadian economists believe that as the Federal Reserve raises interest rates, the US economy will slow or stall in the second half of the year. That slowdown, combined with political uncertainty caused by a vote on Quebec independence expected in June, could throw a monkey wrench into Canada's economy.

``Canada's economy is rolling along at a good clip,'' says Robert Fairholm, chief Canadian economist in the Toronto office of DRI/McGraw-Hill, a consulting firm. ``There will be strong growth through the spring. Unfortunately, at that time, the US economy will begin to slow and rising uncertainty over Quebec will cause turmoil in the financial markets.''

Canada's economy will cool quickly as short-term interest rates rise fast to appease foreign bondholders, Mr. Fairholm predicts. And he says the Canadian dollar will plunge in value from its current level of about 71 US cents to below 70 cents. In combination with an expected slowdown in the US economy, he predicts growth of Canada's gross domestic product to be under 3 percent in the second half of the year - with the yearly average ending at about 4.3 percent.

``We are reasonably positive about the prospects for 1995,'' says Carlos Leitao, an economist with the Toronto-based Royal Bank of Canada. ``We expect more strength from the consumer side, which has been the weak part of the recovery. Export strength will continue.''

All that export energy finally translated last year into tangible benefits for out-of-work Canadians frustrated by a previous ``jobless recovery.''

Canada's work force grew by 3 percent last year, adding 362,000 mostly full-time new jobs. That brought the unemployment rate down from nearly 11 percent to 9.6 percent nationally. But from Ontario west to British Columbia, the unemployment rate is actually closer to 8 percent.

``We haven't seen this kind of job growth since 1987,'' Mr. Leitao says. The problem, he says, is that unemployment in Quebec and the Atlantic provinces of Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland is mired at a rate of 12.5 percent.

Leitao says he agrees with Fairholm that political uncertainty over Quebec, as well as growing concern over the government's deficit and ballooning debt, could torpedo growth if investors lose confidence, the Canadian dollar falls, and interest rates rise rapidly. Much hangs on the perceived toughness of the new government budget presented to Parliament in February.

Despite such uncertainties, it is hard to mute the enthusiasm of John Sereny, chairman of Green Forest Lumber Corporation, Canada's largest lumber wholesaler based in Toronto. Green Forest Lumber's customers include Home Depot Inc., 84 Lumber, and other big US chains.

``We are quite bullish for the year,'' he says. ``Our industry is up and down like a yo-yo. But the low points are getting progressively higher. Our whole industry is geared to the US. Without the US market, we'd be dead.''