he Canadian economy is sinking.

Wave after wave of grim developments--layoffs and plant closings, aborted energy projects and sinking corporate profits--have battered not only the economy, but also public confidence, leaving this nation of 24 million people afraid for their future.

On every street corner, it seems, from struggling industrial areas like this one to thriving Ottawa, the federal capital city, the conversation of Canadians is dominated by talk of economic difficulties. This phenomenon has caused leaders of government, business and labor to question the nation's very course.

"Everywhere the talk is about whether my job will be next to go," said a Montreal utility company staff member. "The bad news has piled up and piled up and piled up," said a Toronto economist. "Unemployment looks so bad to Canadians that no one feels immune," said Irene Ip, an economist with Wood Gundy Ltd., a Toronto brokerage house.

* Economists expect the nation's economy to show a sharp decline for the year. Some, such as Laurent Thibault of the Canadian Manufacturers Association, predict a record 3.5 percent drop in the nation's production of goods and services. The deep wounds inflicted on Canadian companies by this recession, and the growing uneasiness of investors about pumping new money into Canada, lead some experts to fear that a full recovery could be two to three years away.

* Unemployment is likely to move as high as 11.5 to 12 percent, another Canadian record. Unemployment in the forestry industry is nearing 50 percent, while in the steel industry it is more than 20 percent. An additional 300,000 jobs are expected to be lost by the end of the year. On top of that, Canadian government funds for unemployment assistance are running low, and demands for such aid joined with other recession-related needs threaten the solvency of the federal government and the provincial governments in eastern Canada, experts say.

* Dome Petroleum Co., a leader in Canada's campaign for energy self-sufficiency, has borrowed more than $4 billion--an amount equal to one-fourth of the federal deficit--from Canadian banks. (This figure is in Canadian dollars, one of which is worth just under 80 cents in U.S. currency, as are all dollar figures that follow.) If Dome fails--and company executives are now pleading for a federally funded bailout--Canada's highly centralized banking system will face tremendous pressures.

* Inflation stands at about 11 percent, almost double the projected U.S. rate for this year. Consumer loans begin with interest charges of 20 percent or more. Many Canadian homeowners have seen their housing payments double as mortgage interest rates jumped from 10 percent three years ago to record highs of 21 percent or more, thanks to variable-rate mortgages, which have become common in the past decade. Unlike Americans, Canadian homeowners are not permitted tax deductions for interest payments.

* Volume on the Toronto stock exchange, trading at a robust $110 million a day less than two years ago, is down to $55 million a day. The financial position of Canadian companies is universally regarded as weaker than that of U.S. companies. Businesses are failing at a rate triple that in the United States, and corporate profits have fallen by 64 percent over the past year.

"Many companies are fighting for survival," said David Slater, chairman of the Economic Council of Canada, a highly regarded nonpartisan research group. If Canadian companies' deterioration, based largely on surging interest payments, were to continue for another two years it would bring about "massive bankruptcies," according to a study last month by the Bank of Montreal.

Confronted with that stark evidence, many government, labor and business leaders talk about the possibility of an economic catastrophe. "We are getting close to the edge," warned Michael Wilson, a Conservative member of the House of Commons and the opposition party's chief spokesman on economic matters. A Depression-like collapse still seems unlikely, but even careful observers like Slater, one of the nation's most respected economists, have examined the possibility.

"There is no question that there are risks of this thing unraveling in this country," Slater said. "The risks are sometimes exaggerated, but they are there. You can build a doomsday scenario much more easily than you could a year ago."

According to Slater, the elements in such a scenario could include a failure of the government's new anti-inflation program announced in June, several large corporate bankruptcies, a growth of the federal deficit above $22 billion, a run against the sagging Canadian dollar, the failure of a major bank, and a rise in unemployment by a point or two.

The scenario also includes major labor unrest. Canada's unit of the United Auto Workers has begun bargaining on behalf of 55,000 auto workers, with both sides predicting a strike soon after the current contract ends in September. The UAW, more militant than its U.S. counterpart, pledges not to consider concessions. One in seven jobs in Ontario, the most heavily populated of the seven provinces, is linked to the auto business.

Canada's sullen summer has seemed to affect the nation's emotional well-being as well as its economic health. "This economic situation has as much an element of psychology as economics," said Carl Beigie, president of a leading Canadian think tank, the C.D. Howe Institute. It will take cooperation among many factions and interest groups to avoid some of the worst hazards ahead, and the current climate doesn't favor consensus. "The psychology is very bad here and things could become very messy if everyone simply digs in their heels," Beigie said.

Slater and most observers believe, however, that Canada will not fall over the edge despite the increased risks. The nation is blessed with abundant resources, ranging from petroleum to timber.

Some forecasters are predicting that the nation will have a healthy $12 billion trade surplus, including a manufacturing surplus of $8 billion, this year. In addition, Canadians are saving money at a rate forecast to hit 13.5 percent this year, triple the U.S. savings rate. The government contends this trend will help the nation fund its deficit and indicates a pent-up reserve that might also spur consumer spending when the overall picture looks brighter.

But the economic woes are compounded by the erosion of confidence, particularly in the federal government. The popularity of Prime Minister Pierre Trudeau has plummeted to its lowest point since he was first elevated to the office 14 years ago. According to the Gallup Poll, only 28 percent of the people approve of Trudeau's performance, placing him third in the June survey behind the leaders of the other two major parties. Moreover, this poll was conducted before the government issued its widely criticized new budget plans on June 28.

Making a Canadian recovery even more difficult are increasing policy strains between the Canadian and U.S. governments on a variety of economic issues that share one basic theme: the view that the Reagan administration is improperly interfering in the Trudeau government's efforts to institutionalize Canadian control over its economy.

In the last few weeks, the Trudeau government has been scrambling to redirect its course, submitting a new federal budget to Parliament just seven months after an earlier version that underestimated the government's deficit by 50 percent. "All their assumptions were wrong," economist Ip said. The new projected 1983 deficit is a record $20 billion, which as a percentage of gross national product is higher than the U.S. deficit. Toronto's prestigious Globe and Mail newspaper called the budget "frightening."

Finance Minister Allan MacEachen defends the error, blaming it on the unforeseen severity of the worldwide economic slowdown. The deficit, he said, is "large but manageable."

In a recent interview, MacEachen called the deficit "cyclical" and said it differs in kind from the U.S. deficit. "It's not because we went on a spending spree as a country," he said. "It will decline as the economic recovery takes place."

The Canadian government is counting on a recovery in the U.S. economy, so closely tied to Canada's by trade, and on the Trudeau plan that would limit government wage increases to 6 percent this year and 5 percent next. The wage guidelines are meant to restrain all wage increases, but they are voluntary for the private sector and almost no one outside Ottawa's small leadership circle expects the program to work miracles.

The redirection also means a slowdown in the government's "Canadianization" efforts, a program designed to ensure that Canadian companies control 50 percent of its domestic oil business by the end of the decade.

The government presence in the economy is extensive, as the government runs the major airline, railroad, and telephone services and provides all Canadians with virtually free medical care. It would be far easier here than in the United States, both politically and logistically, for the government to institute a massive program of wage and price restraints.

Although some Canadians consider big government the problem, there is little evidence of a breakdown in the national consensus about the enormous role of government in Canadian life--even if the nation faces an end to the steady growth it experienced in the past decade.

"Canadians expect government to work, and when it doesn't they don't want it dismantled--they want it to work better," a top-level government official said.