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The British Columbia Economic Outlook

BC’s economy continued its healthy expansion through 2007, as indicators of domestic demand such as housing starts and retail sales saw strong growth. Healthy income growth and a low unemployment rate contributed to solid increases in consumer spending. However, BC’s merchandise exports were hit by lower demand from the US and falling lumber and natural gas prices. The Ministry of Finance estimates that the BC economy posted growth of 3.0 per cent in 2007, slightly below last year’s February 2007 budget forecast of 3.1 per cent and matching the subsequent first Quarterly Report forecast of 3.0 per cent.

The Ministry of Finance forecasts BC’s economy to grow 2.4 per cent in 2008 and 2.8 per cent in 2009. Growth is expected to slow to some extent in 2008, largely due to weakness in the US economy. Domestic demand, while still the main driver of BC’s economic growth in 2008 and 2009, is expected to slow somewhat due to the US downturn. The province’s export market will likely continue to suffer with continued weakness in the US housing market.

Over the medium-term, the Ministry of Finance forecasts growth of 2.9 per cent in 2010, 2.8 per cent in 2011 and 2.8 per cent in 2012, averaging 2.8 per cent over the 2010 to 2012 period. This outlook is consistent with the Ministry of Finance’s prudent assumptions and is slightly lower than the Economic Forecast Council’s outlook (see Table 4.6 for a comparison of MoF and the EFC economic outlooks).

Table 4.6.

Table 4.7 summarizes the Ministry of Finance’s outlook for key economic indicators, while Tables 4.9.1 to 4.9.4 at the end of Part 4 provide additional detail on the economic forecast.

Table 4.7.

The Labour Market

Employment in British Columbia grew 3.2 per cent in 2007, following growth of 3.1 per cent in 2006 (see Chart 4.7). This translates to average total employment of 2,266,300 persons, an increase of 70,800 jobs. Full-time employment increased by 58,500 jobs, while part-time employment increased by 12,400 jobs.

Chart 4.7.

Employment growth continued to outweigh growth in the labour force in 2007, resulting in British Columbia’s unemployment rate averaging 4.2 per cent during the year. The provincial unemployment rate struck levels that had not been observed in over 30 years, hitting a low of 3.9 per cent in March 2007.

BC’s economy added 12,300 additional jobs in January 2008, an increase of 0.5 per cent over December’s employment levels. The unemployment rate fell slightly to 4.1 per cent in January, as job gains outpaced the monthly expansion in the labour force.

Outlook

The Ministry of Finance outlook calls for employment in British Columbia to increase by 1.7 per cent in 2008, or approximately 37,600 jobs. Employment is forecast to grow by 1.7 per cent in 2009, then 1.9 per cent per year through the 2010 to 2012 period. Labour force growth in BC is expected to exceed employment growth in the near-term, resulting in the unemployment rate rising to 4.8 per cent for the 2009 to 2012 period.

Chart 4.8.

Domestic Demand

Consumer Spending and Housing

Retail sales saw robust growth through the first eleven months of 2007, rising 7.1 per cent compared to the same period the previous year. Sectors that saw solid year-to-date performance were: home centres and hardware stores, home furnishing stores, clothing stores and gasoline stations. High levels of housing activity in 2007 continued to support retailers that sell household goods.

Housing starts in BC totalled 39,195 units in 2007, a 7.6 per cent increase compared to 2006. Seasonally adjusted housing starts peaked in November, hitting an annualized 50,500 units, the fastest pace observed in the province since February 1990. Housing starts subsequently fell back down to an annualized pace of 33,900 units in December. The continued strength in housing starts in 2007 was supported by solid income growth and net migration. It should be noted that while most provinces showed further growth in housing in 2007, some provinces (most notably Ontario) experienced declines.

Leading indicators for non-residential investment remained high in 2007 with the total value of non-residential building permits rising 0.2 per cent compared to the high value observed in 2006. While the value of commercial permits rose during the year, it was offset by declines in both industrial and institutional building permits.

Chart 4.9.

Outlook

The Ministry of Finance estimates that real (inflation-adjusted) consumer spending on goods and services grew by 4.4 per cent in 2007, and is forecasting growth of 3.4 per cent in 2008 (see Table 4.9.1 at the end of Part 4). A robust labour market, continued growth in personal income along with the federal GST cut effective January 1, 2008 are expected to support consumer demand for goods and services this year. Real consumer spending is forecast to grow around 3.0 per cent per year in the medium-term. Retail sales are estimated to have increased 6.7 per cent in 2007, and are forecast to grow 5.3 per cent in 2008, 5.2 per cent in 2009 and around 5.0 per cent per year through the 2010 to 2012 period.

Chart 4.10.

Housing starts in British Columbia are expected to ease from the high levels observed over the past couple of years, and are forecast to total approximately 34,600 units in 2008 and 32,500 units in 2009. Over the medium-term, BC housing starts are expected to level out, averaging around 30,000 units per year from 2010 to 2012.

Business and Government

Real business investment (including residential) is estimated to have increased by 5.4 per cent in 2007, after growing by 9.5 per cent in 2006. The main sources of strength behind business investment growth in 2007 are robust machinery and equipment investment and residential investment.

Real business machinery and equipment investment (adjusted for inflation) continued to benefit from the appreciation of the Canadian dollar in 2007. Following growth of 14.9 per cent in 2006, machinery and equipment investment is estimated to have grown 10.3 per cent in 2007.

Real business non-residential investment (adjusted for inflation) is estimated to have increased by 1.1 per cent in 2007, following a 9.2 per cent gain in 2006. This measure represents inflation-adjusted spending by businesses for construction of industrial, commercial and institutional buildings, highways, bridges, sewage systems and various other projects.

Real residential investment (adjusted for inflation), which includes new housing investment as well as renovations and improvements, is estimated to have grown 4.9 per cent in 2007, following growth of 6.6 per cent in 2006.

Continued strength in both residential and non-residential investment has raised concern that the construction industry may be facing rising labour costs due to a shortage of skilled workers.

Chart 4.11.

The Vancouver non-residential building construction price index, a measure of costs facing the construction industry in Vancouver that includes both labour, building material costs and profits, rose 13.6 per cent through the first nine months of 2007, compared to the same period in 2006. This follows annual growth of 10.3 per cent in 2006.

Real (inflation adjusted) local, provincial and federal government combined spending on goods and services in BC is estimated to have increased 6.4 per cent in 2007, following growth of 2.8 per cent in 2006.

Outlook

Total real (inflation adjusted) investment in British Columbia is forecast to grow by 3.6 per cent in 2008, slowing to 2.7 per cent in 2009. This growth reflects strength in non-residential investment, and investment in machinery and equipment. Over the medium-term, total investment in BC is expected to grow approximately 3.9 per cent per year on average. Growth in both non-residential investment and machinery and equipment investment are expected to continue as significant sources of growth over the medium-term.

On average, real non-residential investment is forecast to grow at 5.4 per cent from 2010 to 2012, while machinery and equipment investment is forecast to rise by an average 8.8 per cent per year. This growth will occur as firms continue to take advantage of the high Canadian dollar to import equipment from the US at a lower cost.

Combined real spending (adjusted for inflation) by the three levels of government (federal, provincial and municipal) on goods and services is expected to grow 2.2 per cent in 2008, rising to 2.5 per cent in 2009. Over the medium-term, real government spending from all three levels of government is forecast to grow 2.9 per cent on average per year.

External Trade and Commodity Markets

The value of BC’s merchandise exports declined throughout 2007, and year-to-date to November were down 5.1 per cent compared to the same period the previous year. The decline in the value of exports was chiefly due to an 8.8 per cent drop in year-to-date forestry exports. Further degradation in the US housing market, the highly valued Canadian dollar and weak lumber prices have taken a toll on BC’s forest industry. Weakness was also observed in exports of energy, agriculture and machinery and equipment.

Western spruce-pine-fir (SPF) prices averaged US$249 per thousand board feet in 2007, a 16.0 per cent decline from the US$296 average in 2006. The lumber price trended downwards through most of 2007 and into 2008. More recently, the western SPF price fell to US$185 on February 1, 2008, the lowest price registered since late 2002. However, the price of hemlock baby squares, a key price for the coastal forest industry, averaged US$609 in 2007, up 4.3 per cent compared to the 2006 average price of US$584. While the vast majority of SPF exported from BC is destined for the US, a sizable portion of BC’s hemlock exports is destined for Japan.

Natural gas prices averaged $5.40/GJ through 2007, down slightly from the $5.53/GJ observed in 2006. BC Plant inlet prices ranged from a high of $6.41/GJ in February to a low of $4.03/GJ in September. Since this low, prices have regained some ground, with preliminary estimates of $5.55/GJ for December 2007.

Metallic mineral prices remained at historically high levels in 2007. Prices for both gold and silver rose by more than 15 per cent for the year, while copper increased a further 5.3 per cent to US$3.24/lb in 2007. Lead prices doubled to average US$1.17/lb for the year, while the prices of both zinc and aluminium showed little change relative to the high levels they both recorded in 2006. High mineral prices were largely driven by tight world supplies and robust global demand, particularly from China.

Outlook

Real exports of goods and services are forecast to increase 1.3 per cent in 2008. The high Canadian dollar and weak demand by the US housing market for BC forest products are among the reasons for the relatively soft performance. Real export growth is forecast to improve over the medium-term as the US and Canadian economies recover, resulting in growth of 3.8 per cent in 2009 and average growth of 3.4 per cent over the 2010 to 2012 period.

Due to continued weakness in the US housing market, Western SPF prices are expected to remain relatively weak through 2008, averaging US$213 per thousand board feet for the year, down from the $275 that was assumed in the first Quarterly Report. As the US housing market recovers, prices are expected to return to US$300 over the medium-term (see Chart 4.12).

Chart 4.12.

Based on private sector forecasts, natural gas prices are expected to strengthen from 2007/08 levels over the forecast period. Between 2007/08 and 2011/2012, prices are expected to rise from $5.39/GJ to $6.39/GJ (see Chart 4.13).

Chart 4.13.

The British Columbia goods and services export price deflator (the average price of BC goods and services exports) is forecast to fall 2.4 per cent in 2008, largely due to weakness in forestry prices and strength in the Canadian dollar. The Ministry of Finance forecasts that the price of BC’s exports will recover in 2009 as the Canadian dollar weakens and lumber prices recover. The average export price growth is expected to be 1.2 per cent over the 2010 to 2012 period, as commodity prices stabilize and the Canadian dollar levels out around 93.3 cents US by 2012.

Chart 4.14.

Inflation

Consumer price inflation (CPI) in British Columbia averaged 1.8 per cent in 2007, as higher consumer inflation in non-durables and services was offset by continued price deflation in durable and semi-durable goods. BC’s CPI inflation was below the Canadian average rate of inflation of 2.2 per cent in 2007. High gasoline, fuel oil and other fuel prices were partly responsible for the strength of non-durable inflation. Food prices rose 2.6 per cent during the year on average, while consumers saw the cost of clothing fall by 2.2 per cent. Excluding food and energy, two of the most volatile components, BC consumer prices rose 1.5 per cent in 2007.

Outlook

Consumer price inflation in BC is forecast to be 1.8 per cent in 2008, as a further reduction in the federal goods and services tax is expected to put downward pressure on some prices. Over the medium-term, CPI inflation is forecast to average 2.1 per cent. The Canadian rate of inflation is expected to average 1.8 per cent in 2008. Over the medium-term, national CPI inflation is expected to be 2.0 per cent, in line with the Bank of Canada’s inflation target.

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