Pea acetic a ANA Far ye Oe IRL Ani

sarang ea ate

ee ane ea nt Peete ree Bla preening ALS TENE oa ED

Stock market decline
colors economic future

THE DRAMATIC events of recent
weeks on the stock markets of the
world will have a significant im-
pact on economic developments
for the year to come.

In its 1988 economic outlook
Bank of Montreal forecasts that
reduced consumer and_ business
confidence in the wake of the stock
market decline will result in slower
economic growth in both North
America and overseas.

However, because of the
slowdown, fears of renewed infla-
tion will subside, providing central
bankers with room to allow inter-
est rates to drop.

The bank economists do not
believe the stock market decline
will lead to global recession. For
one, they discount comparisons
between the crash of °87 and the
crash of °29. Unlike 1929, there is
ample liquidity in the system today
provided by central bankers, and
there exists today a range of
“automatic stabilizers’’.

Still, one potentially negative
parallel with the 1930s remains,
with the threat of restrictive trade
legislation from the U.S. Congress.

October’s stock market deciine,
according to the bank, was the
consequence of world leaders fail-
ing to adopt policies to ease the
strains that have been mounting in
the world economy for some time.

Among the strains are:

° huge trade imbalances among
the major industrial nations of the
world;

© the large U.S. budget deficit;

e tightening monetary policy in
the U.S. and abroad.

The stock -market deline -may

end the call for a tighter monetary
policy, but the U.S. budget deficit
and the trade imbalances remain.

The turbulence in financial
markets worldwide since mid-
October is a reflection of the
pressures emanating from the fun-
damental imbalances which exist in
the world today, the bank said. No
improvement can be expected in
the world economy’s performance
until these imbalances are cor-
rected.

The bank forecast also touches
on the Canada-U.S. trade pact.
Bank economists conclude that, on
balance, the trade deal is a
significantly positive force for the
future of Canada. The economists
also address Canada’s fiscal deficit
problem, emphasizing that it is still

an area in need of attention, all the
more so in light of prospective new
demands for increased spending.

GCiarion

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