Recession prospects increase for 1990.

Recession Prospects Increase for 1990

Canada's economy seems poised to turn in another good performance in 1989, following very strong growth of 4.5 per cent in 1988. The annual growth rate is expected to slow to 2.9 percent, mainly due to the Bank of Canada's anti-inflation policy. However, business planners should take note that the lion's share of this growth will occur in the first half of the year with most forecasters expecting a very soft second half. In addition, the April federal budget will have an adverse impact on the last half of 1989.

The big issues in 1989 are how much both the Canadian and U.S. economies will slow during the latter half of the year, and whether this slowdown will bring a mild recession. The consensus remains that a recession will not occur in 1989, but the risk is certainly rising, especially in light of the budget and continued interest rate increases. One forecaster is still calling for a severe recession in 1990.

The federal government, which most forecasters thought faced a "now or never" decision on reducing the deficit, actually came in with a slightly increased deficit of $30.5 billion in 1989-90 compared with $28.9 billion in 1988-89. Because the budget cut $5 billion from the deficit that would have existed, fiscal policy will be a drag on the economy in late 1989 and in 1990. The general sense is that growth will be cut by about 0.5 percentage points next year but the forecasts for 1989 in this survey remain only slightly optimistic.

The table on the next page presents the government's forecasts for 1989 and 1990.

These forecasts reveal the thinking behind the government's fiscal strategy in the budget. Overall growth in 1989 and 1990 is virtually the same as the averages in the survey; however, there are significant differences in composition. The most obvious is the much stronger export growth for 1990 in the budget forecast (4.4 per cent versus 2.8 per cent). This large difference is partly attributable to the stronger U.S. outlook for 1990 in the budget (1.9 per cent versus 1.6 per cent).

The budget's forecast for growth in final domestic demand of 0.7 per cent in 1990 is also very revealing. A slow annual rate such as this suggests that there may be one or two quarters of negative growth in the government's economic outlook. If this is the case, it may explain why the deficit was not actually cut in the budget.

In the budget's forecast, interest rates fall by 1.9 percentage points between 1989 and 1990. In the survey they fall by 1.8 percentage points. The inflation rate declines from 4.8 to 4.4 per cent in the government's forecast, compared with an unchanged inflation rate of 4.7 per cent in the survey. Slowing inflation of this magnitude, in the face of the indirect tax rate increases in the budget and falling interest rates, lends credence to the idea that the federal government is expecting a serious slowdown.

Turning to the survey's results, several trends for the 1989 outlook show …