(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001001370002-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 5
• Document Creation Date: January 12, 2017
• Document Release Date: August 25, 2010
• Sequence Number: 2
• Publication Date: February 9, 1984
• Content Type: MEMO

Sanitized Copy Approved for Release 2010/08/25: CIA-RDP85T00287RO01001370002-0 25X1
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9 February 1984
MEMORANDUM FOR: Steve Watkins
Canadian Desk
EUR/CAN
Department of State
FROM 25X1
Chief, British Isles, Benelux, Canadian Branch
Attached, as per your request to
branch, is an unclassified estimate of Canada's
prospects.
my 25X1
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 Sanitized Copy Approved for Release 2010/08/25: CIA-RDP85T00287RO01001370002-0
9 February 1984
MEMORANDUM
Canada: Continued Recovery in 1984
Summary
The Canadian economy appears to be headed
toward a second consecutive year of strong growth
with 1984 real GNP expected to be up 4.6
percent. The recovery probably will be more
broadly based than in 1983 with all components of
final demand contributing to economic expansion by
the end of-the year. Despite high unemployment,
the government is likely to stress economic
programs aimed primarily at controlling inflation.
Canada probably will have a near-record trade
surplus, but a rising services deficit will put
the current account near balance.
Canada climbed quickly out of recession in 1983. Third
quarter growth reached 8 percent at an annual rate, and GNP
probably reached 1981 pre-recession'levels by the end of the
year. Robust consumer spending -- influenced by temporary
government incentives and lower interest rates -- and inventory
building contributed to real GNP growth of about 3 percent. The
healthy US economy provided Canada with an expanding export
market -- especially for lumber and automobiles -- and aided the
recovery considerably. Nonetheless, there are still lingering
signs of recession. Despite significant gains in durable goods
and export markets, demand for nondurables and services remains
weak. Moreover, there still has not been much investment in
those industries hampered by idle capacity such as mining and
machinery.
We. expect Canada's recovery will be more broadly based this
year. Consumer spending -- bouyed by growth in personal incomes
-- should continue to be strong throughout most of the year. A
high savings rate, good job growth, and wages that keep pace with
inflation will contribute to higher incomes, although an increase
in the sales tax scheduled for the fourth quarter of this year
will sop up some income growth. Investment in machinery and
equipment is just beginning to pick up, and the present decline
in nonresidential construction probably will be replaced by a
modest upturn by mid-year. The industries likely to exhibit the
strongest growth are forestry and transportation equipment. It
is unlikely that there will be any significant expansion of the
mining, chemicals, food, and energy industries until the latter
part of the year.
-1-
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Canada's unemployment rate has not declined significantly
despite the strong recovery. Although two-thirds of the 600,000
jobs lost in the recession were regained in 1983, growth in the
labor force has nearly matched employment growth. As a result,
unemployment has only dropped marginally, to 11.2 percent in
January. Job creation in 1984 will continue to be hampered by
idle capacity in several industries, and we expect the
unemployment rate to remain well above 10 percent for the rest o
the decade.
On 15 February Ottawa will introduce the budget that is
likely to take the Liberal government into the election expected
sometime in the fall. Finance Minister Lalonde has denied that
the document will be a "goodies package" for the electorate. The
high government deficit -- expected to be US$23 billion this year
-- indeed, leaves virtually no room for any significant changes
in current fiscal policy. Lalonde would be reluctant to
undermine shaky business confidence in the economy with a large
increase in the federal deficit.
Little change is expected in government economic policies.
Despite high unemployment, Ottawa, in our view, will continue to
stress an anti-inflation program. Consumer price inflation was
5.8 percent in 1983 compared with 10.8 percent the previous year
-- a great improvement but still well above that of the United
States. Energy and commodity prices should remain stable in
1984, but we expect food prices to begin to exert mild upward
pressure on the CPI. We expect. consumer prices to rise 5.5
percent in 1984 with only minor improvement the following year.
In a further effort to reduce inflation Ottawa probably will
announce further wage restraint guidelines in the budget. The "6
and 5" public sector wage restraint program introduced in 1982 is
due to expire this June.
Canada's vast trade and financial ties with the United
States force Canada to keep interest rates closely in line with
those of the United States. Ottawa is concerned that a rapid
rise in interest rates resulting from restrictive monetary policy
could cut off an investment recovery in Canada even before it
occurs. In addition to interest rates, the Bank of Canada will
continue to monitor closely the exchange rate and will attempt to
keep the Canadian dollar between US$0.80 and $0.82. Gerald Bouey,
Governor of the Bank of Canada, believes a drop in the exchange
rate would put too much inflationary pressure on the economy.
Canada's trade position improved during the recession
because foreign demand for Canadian raw materials remained steady
while imports dropped sharply. In 1982 Canada registered a
surplus on the current account for the first time in nine
years. The surplus probably fell to around US$1 billion last
*Federal public sector wage increases were held to 6 percent in
1982 and 5 percent in 1983.
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year as imports picked up. We expect imports to continue rising
as investment activity begins to recover. The trade balance,
however, is likely to remain about the same as in 1983 -- US$14
billion surplus -- because of strong export demand from the US
recovery. A growing services deficit probably will put the 1984
current account in approximate balance.
Over two-thirds of Canada's trade is with the United States,
and Ottawa has recently moved to strengthen trade ties. The
Liberal government is studying selected liberalization of trade
with the United States; the industries most often discussed for
elimination of tariffs are petrochemicals and transportation
equipment. In 1983, Canada boosted its trade surplus with the
United States, primarily because the US recovery outpaced that of
Canada, and the bilateral current account was probably also in
surplus. In 1984, Canada is likely to return to the more usual
situation vis-a-vis the United States -- a merchandise trade
surplus but an overall deficit.
-3-
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Orig - Steve Watkins
1 - DDI
1 - ADDI
1 - OD/EURA
2 - Production Staff
4 - IMC/CB
1 - Branch file
1 - Division file
1 - Author
EURA/WE/BBC (9Feb84)
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