B.C.'s economic growth will continue at 3.1% this year before hitting real estate speed bumps and slowing to 1.7% in 2019, according to the Conference Board of Canada’s Western Business Outlook.
Countrywide, Canada’s economy is enjoying strong job growth and is well positioned to benefit from U.S. economic growth, although there are concerns over low business investment in Canada, the North American Free Trade Agreement (NAFTA) unravelling, federal and provincial government deficit spending and the risk of an American trade war with China driving inflation.
“These are the two biggest consumer economies in the world,” Pedro Antunes, the conference board’s deputy chief economist, told local business leaders last week. “If you start affecting prices … what they do is affect prices in the rest of the economies. They start to reduce purchasing power.”
Globally, economic and labour market growth is now in its eighth year. Typically, that would mean a contraction is imminent. But that growth has been so synchronized and so gradual that it may still have some steam left in it, Antunes said.
Overall, Canada has had strong economic growth, with 575,000 jobs added to the Canadian economy since February 2016, pushing the unemployment rate down to 5.8%
British Columbia has led the pack with record job creation in 2016 and 2017, when 150,000 new jobs were added, said Marie-Christine Bernard, the conference board’s provincial forecast director.
The conference board expects 40,000 jobs to be created in B.C. in 2018 and 20,000 in 2019.
Housing has been a major driver of B.C.’s economic growth in recent years, and new policies at both the federal and provincial levels – from tighter mortgage eligibility requirements to an expanded foreign-buyer tax – are all expected to cool B.C.’s real estate sector in 2019.
“A lot of the job creation in the province was related to the housing boom,” Bernard said. “But we also saw jobs pick up considerably in the manufacturing sector and in professional, scientific and technical services.”
Investment in B.C. is expected to increase dramatically in the next two or three years, driven by megaprojects like the Site C dam and the Trans Mountain pipeline expansion, the latter of which “is now up in the air.”
Bernard said the development of a multibillion-dollar liquefied natural gas industry also remains a big question mark.
B.C.’s manufacturing sector is doing well, thanks to federal shipbuilding contracts and the transportation equipment and machinery sector.
“There’s over 1,000 trades workers working at the [Seaspan Marine] shipyard right now,” Bernard said.
B.C.’s forestry sector is doing well, despite American tariffs on softwood lumber and growing constraints on timber supply. More than half of B.C.’s timber supply has been wiped out over the past decade by the mountain pine beetle infestation and forest fires.
A booming housing sector in the U.S. has kept prices high, however. Despite projections that American new home construction starts will reach between 1.6 million and 1.7 million and stay there for some time, B.C. forestry exports are expected to remain relatively flat between 2017 and 2022, thanks largely to the shrinking timber supply.
“The demand from the housing sector in the U.S. [is] pushing prices up,” Bernard said. “So it might be difficult on one side, but on the profitability, the industry’s doing very well.”
Recovering commodity prices have resulted in exploration and mining activity picking up, but Bernard said B.C.’s natural gas sector suffers from the same problem as Alberta’s oil sector: a lack of ability to get the product to international markets has kept prices and profitability low.
For Canada, the most significant part of the global economic machine is the U.S., and the U.S. has an economy that is firing on all cylinders. Its real estate markets are doing well, household spending is robust, wages are increasing and unemployment is at “rock bottom” at 4.1%.
“The U.S. economy is essentially a consumer-led economy,” Antunes said. “If the consumer’s doing well, if employment’s doing well, if income is starting to pick up a little more above inflation, then these are all positive signs that should continue to drive consumer spending.”
Recent tax reforms in the U.S. can be expected to accelerate growth, at least temporarily, although Antunes said U.S. President Donald Trump’s expectations of 4% growth are unlikely.
The biggest threat now to both the Canadian and global economy is protectionism. An escalating trade war between the U.S. and China will drive inflation.
While there are now positive signals that a new NAFTA deal will be reached, the conference board did some what-if modelling in the event that attempts to renegotiate the free-trade agreement fail.
Should the U.S. withdraw from NAFTA, it is assumed tariffs would go back to favoured-nation levels as per the World Trade Organization.
“They’re not as high as people might think,” Antunes said, adding that, under that scenario, tariffs would average about 2.5%.
But because the North American supply chain is so integrated, the tariffs would create havoc. An example of that is the steel and aluminum tariffs announced by Trump at the beginning of March. Canada and Mexico have been given temporary exemptions on those tariffs.
“I would guess what happened was that the industry in the U.S. went very quickly to the administration to say, ‘Seventy-five per cent of our exports go to Canada and Mexico,’” Antunes said. “It just shows how integrated the supply chain is within North America.”
Some Canadian businesses worry that U.S. tax reforms will put them at a disadvantage.
Those reforms will put American consumers and businesses on a more even footing with Canadians, who Antunes said have enjoyed an advantage for years. But it’s an advantage that failed to result in the kind of business investments one should have expected in Canada.
“We haven’t seen the investment … grow our traditional sectors like manufacturing and others.”
Antunes added that anemic business investments might have resulted of business reticence to invest in the face of NAFTA uncertainties.
While tax cuts are good for business, they don’t pay for themselves, despite assertions by politicians to the contrary, so the U.S. is on track to rack up a $1 trillion deficit.
Canada’s provincial and federal governments are also on the deficit-spending bandwagon at a time when they don’t need to be.
“We would like to see governments act counter-cyclically,” Antunes said, “so that when the private-sector economy is doing well, the government would be putting a little bit away for those times when the next business cycle does hit.”
