B.C. Economic Forecast 2013 – 2017: Economic Analysis of British Columbia

Highlights

• Another year of moderate growth in 2013, higher growth prospects in 2014 and through 2017
• U.S. economy poised to break out of its subpar recovery lifting B.C. exports
• Business investment spending will kick into higher gear after 2014
• Declining government spending pulls down growth
• Housing slowdown in 2013 will reduce residential investment
• Consumer spending receives lift from switch to PST but adds costs to businesses
• Export-oriented industries to lead growth upturn
• Construction industry tops growth ladder among domestic industries
• Low population growth until later in forecast
• Labour market tightens, unemployment rate below 4% in 2017

Forecast summary

Slow growth conditions in 2012 will extend into 2013 but will transition to firmer growth later in 2013 and beyond. A growth up-shit in the U.S. economy during 2014 to 2017 will help lift B.C.’s economy to higher growth rates later in 2013. Other key players in the global economy will also perform better during that time and provide a boost to the province’s exports and investment spending.

Domestic developments will also shape the province’s economy and in particular, the reversion to the PST tax system from the HST will lift consumer spending and provide some price inflation relief though this will add business costs. The upcoming provincial election
this year is expected to bring some policy changes. During the next five years, government decisions on large energy, pipeline, and mining projects will be made and impact the economy.

Real GDP growth is forecast to inch ahead to 2.2% in 2013 following 2012’s slowdown to 1.9%, before accelerating to 2.8% in 2014 and averaging 3.7% in 2015 to 2017. Without the presumed upturn in U.S. growth during this period, B.C.’s growth would languish around 2.0% annually. There is a risk that the U.S. or other major economies may not perform as expected or an unforeseen shock event or developments may unfold causing sluggish growth or a recession. For example, the U.S. government deficit and debt issue may prove a stumbling block.

Economic conditions in the U.S. are improving and after four years of subpar economic recovery, pent-up consumer and business spending is set to unleash during the next five years. Several key consumer spending sectors have risen on a sustained basis during 2012 and that momentum looks to continue. Business investment spending will expand with rising consumer demand and exports.

While B.C. exports benefi t from improving external demand sending positive spinoffs throughout the domestic economy, some sectors will under perform. Government spending on goods and services and on capital spending will slow and in some instances decline. Another sector with near term weakness is residential investment spending as the housing market correction on plays out into 2013.

Business investment spending will post higher growth rates in the second half of this five-year forecast on natural resource and related infrastructure developments. Investment spending also picks up to meet rising domestic demand for commercial real estate
and for machinery and equipment to realize productivity gains.

The downshift in population on growth to 1% annually since the recession will continue to restrain growth in the domestic economy for another two to three years. Net interprovincial out-migration is not predicted to end until 2015 when B.C.’s unemployment rate is well
below 6% and faster wage gains materialize. There is a risk this turnaround may occur later.

Lower forecast job growth this year is an extension of the flat monthly trend that played out for most of 2012. While the 1.3% growth forecast is lower than 2012 average annual growth, the monthly trend will turn positive in the second half of 2013. Net employment growth above 2% annually after 2014 will pull down the unemployment rate to below 5% in 2016.

The tighter labour market will spawn faster wage gains lifting labour income growth during the forecast. Labour income per employed person will consistently outpace inflation. Personal income will follow labour income higher and receives a boost from investment income when interest rates and bond yields rise, closing in on normal levels in 2017.

The Consumer Price Index (CPI) increased only 1.1% in 2012 due to lower energy prices. Consumer price inflation will remain low in 2013 in part to subdued energy prices but also to the tax shift to the PST when a number of services are no longer subject to tax. However, during when higher energy and commodity prices prevail and the labour market tightens the CPI inflation rate will rise well above 2%.

Corporate profits flat-lined in 2011 and 2012 following a large gain in the fi rst recovery year. Profits will increase 11% in 2013 and post larger percentage gains in subsequent years when stronger domestic and export growth materializes.

Industries that are forecast to grow faster than the economy’s overall rate are mining, forestry and wood-products manufacturing, primary metal manufacturing, and construction. Growth laggards will be public administration, pulp and paper manufacturing, education, and accommodation-food services.

Labour market

The unemployment rate will decline fairly steadily and fall below 5% in 2016 averaging 4.0% in 2017. The rather large decline in 2012 to 6.7% from 7.5% in 2011 is somewhat misleading since the labour force expanded at a low pace and employment growth slowed during the year. Since mid-2012, no net employment growth has occurred. This period extends into 2013 but is expected to end by mid-2013 with a
positive trend into 2014.

Another trend in the labour market is an increase in hours worked, which emerged tentatively in 2012. Average actual weekly hours worked rose to 32.0 in 2012 from 31.6 in 2011 will edge steadily higher to 32.4 hours in 2017. This refl ects an ongoing shift to full-time employment from part-time employment.

Employment growth will increasingly become constrained by lower labour force growth with aging demographics. This longer-term trend will be partially offset by the upcoming cyclical growth upturn inducing more labour force growth in response to more employment opportunities later in the forecast period. The labour force participation rate is expected to rise to 66.7% in 2017 from 65.0% in
2012. Should this not transpire, the unemployment rate could fall below 4% and result in more upward pressure on wages and salaries.

Population

Total population growth will slide below 1% this year and remain this low into 2014. Negative net interprovincial migration emerged in 2011 and will continue until the job market becomes more attractive. Relatively faster economic growth in Alberta and Saskatchewan is attracting workers from B.C., contributing to weaker labour force growth. Fewer net nonpermanent residents as well as lower net natural increase contribute to the slowdown.

Higher economic growth in the province after 2014 will lead to a reversal in the interprovincial migration flow. Population growth is predicted to rise to 1.4% in 2017 aided by immigration gains.

Housing market

The mild correction phase in the housing market will pull down economic growth in 2013 and 2014. Fewer housing starts in 2013 are a near certainty in an environment of declining housing sales and prices. Residential investment spending in 2013 will decline as a result and underperform in 2014. It is possible this housing correction could qualify as a mild recession when all the data is in.

Housing sales began a gentle decline in the first half of 2012 in response to the slower economy,but downshifted about 10% when tighter federal mortgage insurance rules came into effect in July. Housing prices peaked in May 2012 and are down roughly 3% since.

Less housing supply is coming onto the existing home market as some potential sellers choose to wait for better market conditions. Fewer listings on the market are a critical part of the adjustment process under declining prices and necessary to stabilize prices. Reducing the supply of new housing takes longer but is already evident in the most recent monthly housing starts data.

Housing starts are forecast to fall about 10% in 2013 to around 25,000 units from 27,465 units in 2012. Most of this adjustment will occur in Metro Vancouver multi-unit starts. Housing sales are expected to turn higher in the second half of 2013 and higher prices will follow.

The housing cycle is poised for another up-leg when the economy grows at a faster pace. Since interest rates will be rising from a period of record lows, a more muted than normal cyclical increase in sales and starts is expected. In past cycle upturns, declining interest rates were a signifi cant catalyst. Nonetheless, a cyclical upturn in demand is predicted to pull housing starts above 30,000 units annually in 2015 and to continue rising through 2017.

Renovation spending steadily declined during 2012 and will end the year down 2% in current dollars and 4% after construction cost infl ation. The economic and housing slowdown played a role in this decline and possibly the looming switch to the PST could postpone some spending, particularly as the switchover date approaches. Renovation spending will bump up during 2013 and into 2014 before gaining
significant strength in 2016 and 2017.

Inflation

Consumer price infl ation receded more quickly than expected closing 2012 with a 1.1% increase. Similar to other main economic indicators, the CPI index leveled out during the course of the year under lower gasoline and natural gas prices. Under the assumption that energy prices are at their lows, no relief will come from this sector in 2013. However, the switch back to the PST will provide some downward pressure on the CPI in 2013 of a one-time drop around 0.3%.

Inflation will gain momentum after 2013 rising to 1.8% in 2014 and 2.8% in 2017. Higher energy, commodity, food, and shelter prices are expected when the provincial and global economies are growing faster and operating with less excess capacity.

Incomes

Personal income growth will remain moderate until labour market conditions generate faster wage growth and higher interest rates lift investment income. Personal income is forecast to increase 3.2% in 2013 following estimated gains of 3.5% in 2012 and 4.6% in 2011. Only late in the five-year forecast does income growth rise to 6% annually.

While labour income increased in 2012, investment and interest income declined due to record low interest rates since the recession. Another decline is expected in 2013 and possibly in 2014 since interest rates will begin to climb in late 2013 and early 2014. It takes considerable time for interest investment products such as GICs to reset at higher rates.

Real personal income growth, personal income deflated by the CPI, received a minor lift in 2012 when the infl ation rate eased. Growth is estimated at 2.4% in 2012 up from 2.2% in 2011. However, excluding the investment and income decline and focusing on labour income, real labour income growth rose a heftier 3.2% in 2012 compared to 2.6% in 2011. In 2013, real labour income growth will fall back to 2.8%.

Personal disposable income growth, personal income less taxes and fees, slowed to 3.4% in 2012 and is expected to slow to 2.7% in 2013. Thereafter though, the growth rate will rise to 3.0% in 2014 and in subsequent years to reach 6.5% in 2017.

Corporate profits before taxes eked out a small gain in 2011 and likely another in 2012. These estimates are close to zero and a small revision could put them into negative territory. Profi t growth is forecast to climb in 2014 and beyond when economic growth and commodity prices improve. The shift to the PST raises costs and cuts into profits.

Expenditures

Total spending in the economy will increase 4.0% in current dollars and 2.2% infl ation-adjusted in 2013, respectively, roughly the same as in 2012. The economy is forecast to expand at a faster pace in 2014 to 2017, averaging 3.4% in real terms and 6.8% in current dollars. Domestic spending will remain the primary source of growth with the trade sector stuck in a large defi cit since imports will keep pace with exports.

Consumer spending will undergo a mild resurgence in the next five years though in the near term growth in 2013 and 2014 will remain modest. The return to the PST will likely prompt a pickup in spending on some consumer services such as restaurant meals, entertainment, and travel during 2013.

Retail sales declined during 2012 and will enter 2013 at a lower level than one year ago. The weakening trend in 2012 was due to a number of factors including the broad economic slowdown, a slowing housing market, and still fragile consumer confi dence in addition to the tax system shift. Retail sale growth pops up to 4.2% in 2013 from 2.5% in 2012.

Slower spending on residential investment is another sector, in addition to government, contributing to below-normal overall economic growth in 2013 and 2014. Spending in 2013, adjusted for construction prices, is forecast slightly lower than in 2012, which grew an estimated 4.0%. The main source of this weaker performance in 2013 is the expected decline in new construction, which spills over into lower spending on apartment buildings in 2014. After 2014, housing will commence another expansion phase and residential spending becomes a significant contributor to provincial growth.

Business spending on plant and equipment slowed in 2012 and is expected to remain subdued in 2013 owing to weak corporate profi t growth. A significant upturn in spending is slated to occur in 2015. Some major projects such as a LNG plant in Kitimat and associated pipeline along with new mining projects are likely to commence construction. B.C. has a large number of proposed major projects in energy, mining, transportation, and other major non-residential projects that could boost future investment spending. However, various factors such as favourable market conditions, environmental assessments, and government approval are needed.

Government fi scal policy will remain in a deficit reduction mode in the near term. Less capital spending and restrained spending on current goods and services will cut into the province’s overall growth. Capital spending in 2002 dollars will decline through 2014 while spending on goods and services will be largely unchanged until 2015. Spending on a real per capita basis will contract for a period comparable to the early 1990s.

Whether B.C.’s economy grows at a low or high pace is usually dependent on exports. In 2012, real exports are estimated to have expanded only 1.6% compared to 6.0% in 2010 and 5.1% in 2011. Looking ahead, prospects are slightly better in 2013 with a projected increase of nearly 3% rising to nearly 5% in 2015. The faster growing U.S. economy after 2014 will give a considerable boost to B.C. exports of wood products and the strengthening global economy lifting mining and energy exports. Service exports, notably tourism and transportation, will also benefit from this external demand expansion.

Despite an expected export upturn, the trade deficit will rise since imports expand more than exports. The last year the province ran a trade surplus was 1989. Weaker international export growth and faster import growth in the last decade contributed to the rapid drop in the trade deficit. The rise in the Canadian dollar played a major role in these trade developments along with globalization.

Industries

Industry GDP growth in 2013 is forecast at 2.1%, up slightly from an estimated 2.0% in 2012. Growth will improve to 2.6% in 2014 and reach 3.9% in 2017.

The fastest growing industries in the five years ending 2017 will be forestry, wood products manufacturing, mining, primary metals manufacturing, and professional-technical-business-support. Domesticoriented industries will grow at a slower pace but
led by construction, retail-wholesale trade, and other services (largely personal). The slowest growing industries will be government services, oil-gas, education, and utilities. Industries in the middle of the growth pack will be most manufacturing sectors, accommodation-food, agriculture, transportationwarehousing, health, and fi nance-insurance.

Forestry and wood products manufacturing output is forecast to grow more than 20% between 2012 and 2017 driven by a recovery in U.S. housing starts. Expansion into China will resume after its construction slowdown in 2012. The accelerated harvest of pine beetle trees is a contributing factor but this will begin to wane as supply constraints materialize. Annual growth in wood products manufacturing output will slow in 2017 and beyond.

Pulp and paper manufacturing will fare poorly. GDP output is predicted to contract in 2013 and through 2015 following declines in 2011 and 2012. The outlook for the pulp sector is for ongoing weak pricing conditions and low production. The decade long decline in newsprint production fell to a new low in 2011, down more than 70% from 2001, but that appears to have ended in 2012.

The mining industry has a positive five-year outlook tied to the faster growing global economy after 2013 and development of new mines. Mount Milligan currently under construction and B.C.’s first new mine in many years, is slated for full commercial production in 2014. The Northwest Transmission Line is scheduled to be completed in 2013 and will facilitate the development of new mines such as Red Chris, Schaft Creek, and others in the longer term. In other regions of the province, several mine projects are in various stages of development although some need to address environmental issues and obtain various approvals.

Natural gas production was slightly lower in 2012 following record high output in 2011. Prices remained low and exports declined in 2012 B.C. along with sales of natural gas land rights. Pricing is expected to improve in 2013 according to both industry forecasts
and to the futures market. However, supply in the U.S. is rapidly expanding due to plentiful shale gas reserves. This could keep prices down especially if demand does not increase.

Oil and gas extraction GDP will hold near recent levels this year and expands at a slightly faster pace in 2015 and beyond when exports grow on higher U.S. demand. The large run up in output seen during the last two decades is subsiding. Liquefied natural gas (LNG) exports to Asia offer longer term growth potential as evidenced by the likely construction of an LNG plant in the near future to take advantage of higher prices in Asia.

Primary metals manufacturing will receive a significant boost in 2015 when the Rio Tinto Alcan modernization and expansion of the aluminum smelter in Kitimat is completed. Real GDP in this industry will jump about 25% in 2015. The $3.3 billion investment will increase the smelter’s capacity by 48%, generate several hundred construction jobs, and boost spending on machinery and equipment as well as non-residential industrial building construction.

Port capacity expansions are planned in the Vancouver and Prince Rupert areas to handle future traffic. Oil pipelines from Alberta to the north coast are too uncertain to include in the investment forecast. However, the KSL natural gas pipeline looks likely to proceed in conjunction with the Kitimat LNG plant. On the domestic side, construction of the Evergreen Transit Line has begun and will continue through 2016.

Transportation and warehousing industry GDP is forecast to grow 2.2% in 2013 following a slowdown to 1.3% in 2012. Annual growth is forecast to approach 4% in 2017.

Tourism, which encompasses several industries, will see modest growth continue into 2013 and gain momentum each year. Broad measures of activity such as traveler entries, hotel occupancy rates, and air traffic data were slightly positive in 2012. Meaningful growth depends on a better U.S. economy. Tourism from Asia offers considerable long term potential while European traffi c will remain constrained by its recession and its weak recovery. Domestic tourism will experience more growth from the Prairies.

Professional-technical-business-support services are a growing export sector with most services sold to the rest of Canada followed by international markets. This industry will benefit from the predicted upturn in Canada and the global economy; growth will exceed 4% in 2015.

Construction will expand at the fastest rate among the domestic-oriented industries. While GDP is forecast to expand a modest 1% this year and next, it will jump to nearly 6% annually in 2015 to 2017. New project investments will boost engineering and industrial building construction while housing and government construction slips in the near term. Non-residential construction will be the main growth driver in this industry with moderate uplift from the residential sector in the later part of the five-year forecast.

Among the slowest growing industries, government services or public administration will be constrained by fiscal austerity measures aimed to eliminate federal and provincial budget defi cits. Another two years of slight contraction is predicted.

Education is forecast to grow about 2% annually, mainly due to slow growth in the student population, particularly among the prime post-secondary age group.

The remaining main industries, notably health, finance-insurance-real estate, transportation-warehousing, other services, and utilities will grow at roughly the same pace as the overall economy. These industries mainly serve domestic markets and benefit indirectly from external economic growth.

External economic forecast

B.C.’s forecast performance is dependent upon external economic conditions. The expected upshift in U.S. economic growth in 2014 and beyond will be necessary to propel B.C.’s growth rate to above 3% annually. Notwithstanding faster growth coming in the emerging economies, the global economy will remain in a moderate growth mode until the world’s largest economy breaks out of its subpar recovery. An end to Europe’s recession will help global growth but its weak recovery will not.

After four years of a subpar economic recovery, the U.S. is poised to grow at a faster pace led initially by housing and consumers and later increasingly by business investment. Exports will also be a growth contributor. A release of domestic pent-up demand during the next five years will drive the current business cycle into a long duration cycle – the third consecutive long cycle since 1990.

The more robust global economy will propel commodity prices higher especially later in the forecast period. Commodity prices have been firmer in the past three months in tandem with better economic prospects. Supply issues in some cases will keep prices diverging from the global macro growth trend.

Canada’s economy will largely follow the U.S. growth profile and commodity prices. Real GDP in 2013 is forecast at 2.0% rising to 2.8% in 2014. When the U.S. economy grows with more vigor after 2014, Canada’s economic growth rises above 3% annually.

Interest rates will remain low and rise moderately later in the five-year forecast. The first Bank of Canada rate increase is expected later in 2013 or early 2014, though the futures market is not pricing in an increase until mid-2014. It hinges on the path of the overall economy and infl ation as well as any possible disruptions in fi nancial markets.

The Canadian dollar will likely hover around parity with the USD with an upward bias later in the forecast when domestic interest rates rise and commodity prices fi rm up. Under these circumstances, CAD will trend higher against the euro and Japanese yen as well.

This macroeconomic forecast scenario is considered the most likely and used as a basis for the B.C. forecast. Other scenarios are possible since a policy misstep or unexpected event could derail it. A scenario with a weaker U.S. economy and longer period of sub-par global growth with less robust commodity prices and lower domestic interest rates is the next most likely outcome. A macro recession scenario is another possibility but diffi cult to accurately predict.

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