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The 'R-word': recessionary red flags for B.C. businesses

B.C. facing headwinds from uncertainty abroad, rising cost burdens within
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Skorzewiak/Shutterstock

While key economic indicators such as GDP growth and unemployment rates remain generally stable in B.C. and the rest of Canada, there is increasing chatter from analysts about the possibility of the dreaded “R-word” – recession – especially when the conversation turns global.

And with signals such as the U.S. Federal Reserve cutting interest rates by a quarter of a percentage point on September 18 – as well as the appearance of “yield curve inversion” in certain bond markets highlighting investors’ anxiety over the economy in the short term – it appears that more business observers are bracing for the possibility of a fall from the current peak economic cycle.

The key driver of this concern, undoubtedly, is the uncertainty over the future of international trade. And the No. 1 culprit in destabilizing business confidence on the global stage is the tariff war between the United States and China – the world’s two largest economies.

When combined with uncertainty facing Europe as Great Britain pushes forward towards a possibility of a “crash-out” Brexit, tensions in the Middle East putting a squeeze on energy markets and the rise of protectionism in several countries, it makes for a worrisome overall picture, observers say.

“Compared to a few years ago, there are just a lot of things that seem to be going sideways in international relations and trade,” said Vancouver Airport Authority president and CEO Craig Richmond, who speaks with many global-trade players in the local market. “Hopefully, that can get settled because international trade is the business we are in. We want to see it come back, and nobody benefits from this unsettledness. The worst thing that could happen now is if we slip into a recession, because it really doesn’t need to happen.”

Central 1 Credit Union deputy chief economist Bryan Yu said the international trade situation remains the top wild card that could throw off the B.C. economy in the near term.

Yu noted that people are still moving to B.C., the unemployment rate is among the lowest in Canada and wage levels are strong in general with certain sectors like technology seeing robust growth. That means a lot of the fundamental numbers locally still look promising – but all bets are off if the international situation deteriorates.

“We are in a slow period, but it’s nothing that I would call a period of weak economic activity unless something really turns sour with the global economy,” he said. “We are a small economy that’s going to be dependent on trade, no matter what we do…. And when we are talking about international trade, we are not just talking about the flow of goods and services moving across borders. We are also talking about decision-making from the firms, about whether they are confident enough to invest in their businesses knowing that there are uncertainties in the demand environment.”

The danger, Richmond said, is that recessionary fears might  snowball, creating a self-fulfilling prophecy. He added that one development would likely have an outsized dramatic effect in reducing the risk of recession.

“If something like a U.S.-China trade deal happens, that would stave it right off,” Richmond said. “One of the problems is, recessions are oftentimes caused by people’s perceptions…. It’s a tipping point, and we can slip into a recession simply because we are afraid of it. So hopefully that doesn’t happen.”

Also included in the risks facing Canada in foreign trade are both the United States’ ongoing tariff barriers for a number of Canadian products such as steel, aluminum and lumber, and the diplomatic chill with Beijing stemming from the Meng Wanzhou affair, which has prompted China to ban imports of Canadian canola and red meat.

Statistics Canada reported that exports fell 0.9% in July to $49.8 billion, after the number fell 5% in June. Exports to the United States fell 1.1% in July, while exports to China also dropped during that time.

But the red flags in B.C.’s economic environment aren’t entirely external, especially when it comes to smaller independent businesses that dominate large swaths of the Canadian economy. According to the Canadian Federation of Independent Business (CFIB), its members in B.C. feel increasingly squeezed by internal, policy-driven financial burdens such as the employer health tax – especially when combined with higher wages, lack of qualified labour, exorbitant real estate prices and other rising operating costs.

Those factors combined to put B.C.’s small and medium-sized enterprises (SMEs) at the lowest level of optimism in the country, according to CFIB’s August business outlook survey. B.C. SMEs reported an index mark of 55.3, well below the level of optimism found in Quebec (67.7) and Nova Scotia (67.2).

“The key economic indicators, while not at strong levels, are not massive red flags by any means,” said CFIB B.C. policy analyst Muriel Protzer. “That being said, we are hearing a lot of concern from our members that jobs are becoming significantly more costly in terms of hiring and maintaining employees … and finding good, qualified workers is difficult. A lot of mom-and-pop shops have a hard time finding someone they can hire.

“Just like the workers, because of the high cost of living, businesses are looking at moving out of Metro Vancouver. In some severe cases, you are seeing storefronts empty.… The sad truth is, when you walk down some of the main streets in Vancouver, you will see those empty storefronts. Things like rent and property taxes definitely play a role in that.”

That is why, Protzer said, the CFIB included in its recently released platform in anticipation of the federal election this fall a focus on asking candidates and future government officials to place extra care on reducing the cost of jobs. That means initiatives such as changes to the newly introduced Canadian tax system – which CFIB says adds significant paperwork burden for SMEs.

The CFIB also said red tape, including barriers to interprovincial trade, presents another major hurdle in an already challenging business environment for Canadian SMEs.

But Protzer also noted that property taxes should be addressed, adding that about 40% of the revenue generated goes to the provincial government.

“The B.C. economy is growing, and we are seeing a balanced budget,” Protzer said. “The surplus isn’t where we expected it to be, so ensuring that we aren’t placing state debt on future taxpayers, we are going to need to see more initiative from the provincial government to support small businesses and make sure we are not introducing any more new taxes that hurt our economy.”

Outside of domestic business taxes and regulations, and worries over international relations, there are also more sector-specific red flags.

One such sector is forestry, which saw a number of mill closures and shift reductions this year as the province’s fibre supply fluctuates while key export markets all present distinct and daunting challenges. Statistics Canada put the sector as the single hardest-hit industry in the province so far in 2019, with solid-wood product exports falling 17.1% this year versus last (while pulp and paper fell 13%).

The trend does not appear to be relenting in other wood-product subsectors. Softwood lumber shipments this year fell 22.7% up to July, and declines in logs (9.8%), value-added products (11.1%) and softwood plywood/veneer (17.9%) were all significant.

Canfor Corp. (TSX:CFP) president and CEO Don Kayne said the industry has been challenged by three different circumstances in its three largest markets. The United States currently has a 20.23% duty on Canadian wood products, while housing starts (and wood product prices) have not been as robust as projected. Meanwhile, Japan is subsidizing domestic producers while China has an increasing plethora of export countries like Russia to choose from.

“One of the things that has really evolved for all of us in the industry in British Columbia is when we talk about competition, it’s not just within B.C. but from around the world,” Kayne said. “No one is sitting still on that. While the markets are evolving and progressing – particularly around big timbers and green buildings – I think what is really evident … is all around the world, everybody in the forestry business and even some of our competitors in concrete and steel are all looking at the same things that we are.

“If we cannot be a reliable supplier on a long-term basis, we are putting ourselves at risk,” he added.

Central 1’s Yu said the retail sector is another area worth monitoring as spending in B.C. has “eroded sharply” in the last few months to an annualized pace of almost 5%, led by weakness in the automotive market.

Also on the horizon, he said, is the expected slowdown in new-home construction next year as pre-sale-driven housing starts begin to dry up. And while industries like tourism and film are benefiting from a low Canadian dollar, another key to whether B.C.’s economy faces any more headwinds in the coming year will depend on the progress of major infrastructure projects like LNG Canada’s commitment to B.C., the Trans Mountain pipeline expansion and more local items like St. Paul’s Hospital and the new SkyTrain extension on Broadway. •