Canada's Fate Is In U.S. Hands

After growing a spectacular 5.6% in 1994, the Canadian economy is slowing sharply and runs the risk of posting nearly zero growth in the current quarter, reports economist Ian Amstad of Bankers Trust Co. Soaring exports have recently succumbed to the slowdown in U.S. demand, he notes. And draconian monetary tightening by the Bank of Canada around the turn of the year, to support the collapsing Canadian dollar, has pulled the rug out from under interest-rate-sensitive sectors.

Housing starts, for example, have collapsed below their 1991-recession troughs, and auto sales are off 20% in the past six months. Employment gains have also stalled abruptly in the past six months, after posting nearly a 4% growth rate through most of last year.

With federal and provincial budgets tighter than anticipated, the U.S. Federal Reserve's monetary policy on hold, and the risks of Quebec going it alone apparently receding, Canada may well weather current economic storms. But Amstad notes that its economic fate is precariously tied to a successful soft landing by the U.S. A worsening U.S. slowdown, for example, could undermine Canada's economy and fiscal plans. Conversely, Amstad warns that "a U.S. reacceleration could prompt the Fed to tighten, condemning Canada to an era of high interest rates and/or renewed currency weakness."

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