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Emerging economic pressures bear watching.


With the midpoint of the year approaching, it's as good a time as any to take stock of where our provincial economy is going. Forecasting is always risky, especially given the length of editorial lead time, but as this is being penned it looks as if Manitoba will avoid the dreaded hard landing. Current economic data certainly does not suggest that a full-blown recession is imminent; a soft landing appears the better bet.

TO summarize, we can expect Manitoba's economic performance to approximate the national average in the near term.

The bad news is economic growth, inflation and unemployment are likely to deteriorate relative to 1989. This late in the business cycle, it is the wise business person that keeps a closer eye than usual on emerging economic pressures.

No forecast is complete without numbers, although I suspect that many economists would prefer to skip the numerical specifics. Real growth is arguably the most important single number, it should come in between 1.0 percent and 2.0 percent in 1990; 1991 should see improvement from there. As the economy slows, unemployment can be expected to rise accordingly: the 7.5 percent to 8.5 percent range is a good estimate for both this year and next. Inflation is more a national than a local phenomenon; 1990 and 1991 should show consumer price index increases for Manitoba in the 4.0 to 5.5 percent range.

Manitoba has one of the most diversified provincial economies. As a consequence, we are particularly affected by broad national events and trends. Three aspects of the national economy are particularly worrisome for Manitoba as we proceed through the first year of the 1990s. Each will take a toll on our provincial economy.

First, consumption and manufacturing are major components of the local economy. Both often involve borrowing, meaning that demand is importantly affected by interest rates. The Bank of Canada's tight money, high interest rate attack on inflation is likely, therefore, to dampen Manitoba's economic growth.

It should be noted that Bank of Canada policies are, however, very much in line with Manitoba's long-term economic interests. High interest rates hurt our economy but were monetary policy relaxed and the inflation battle abandoned, interest rates would soar much higher in very short order.

Second, Manitoba is a major exporter to other countries. The strong Canadian dollar does not help export business. The tradition in trade is to pay in the currency of the seller; so, as the Canadian dollar rises, our exports become less competitive, all other things being equal. Because the high Canadian dollar is a direct consequence of the Bank of Canada's anti-inflationary stance, the case is persuasive that the strong dollar is also in our tong-term economic interests.

Third, economies have a natural up and down motion. The national economy has been growing robustly since 1982, making this recovery one of the longest this century. The last three years have been extraordinary: 2.9 percent real growth in 1989; 5.0 percent in 1988; and 4.5 percent in 1987. As diversified as we are, we are unlikely to escape old age catching up with the national economy.

The national picture is clearly not as exciting a time as two years ago. There are, nonetheless, a number of positives at the local level:

* Business investment should be a Manitoba economic bright spot. Machinery and equipment expenditures are likely to outpace residential construction. Factors in the bright business investment outlook include pent-up demand for investment goods and a business/government climate that is appealing to business. Boeing, Repap and Canadian Occidental Petroleum are among a number of firms with major Manitoba investment programs. Business investment spending has a special impact on economic activity. Every dollar of business investment produces many times that dollar in new economic activity through what economists call "the multiplier effect."

Me 1988 drought seriously affected exports of hydro-electric power. If precipitation and water levels are normal this year, the provincial economy will be positively affected;

The Canada/U.S. Free Trade Agreement represents an extraordinary opportunity for Manitoba enterprise. Over the next two years, we should start to see the first major economic benefits of local businesses expand, ing to serve the much larger North American market. The larger scale production that will come from serving a 300-million-person market should reduce costs at many firms.

Manitoba's diversification makes either a boom or bust unlikely. The near-term outlook is slower than desirable but still sufficient to provide business with good profit potential. Manitoba should turn out near economic term numbers similar to the national level. n

The author is a professor in the Faculty of Management at the University of Manitoba.
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Title Annotation:Economics; Manitoba
Author:McCallum, John
Publication:Manitoba Business
Date:Jun 1, 1990
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