In a Black Press Media column posted last month, I touched on a number of factors that continue to support economic growth in B.C., of which the most important is a steadily expanding population.
Now, I turn to developments that are dampening growth and casting something of a cloud over the province’s economic prospects in the next six to 12 months.
The first negative trend is sluggish consumer spending. Retail sales in B.C. were in negative territory through the first seven months of 2019. Adjusted for inflation and population growth, retail sales are even weaker.
Consumer spending is being weighed down by softer housing markets and the steep drop in auto sales. Record high levels of household debt are also causing some consumers to cut back on spending.
Turning to housing and real estate indicators, residential home sales have fallen markedly in the last year or so. Recently, however, lower interest rates and earlier price declines have improved affordability, with home sales moving higher.
Some market watchers believe the housing down-cycle is over. But the Ministry of Finance estimates that residential sales in 2019 will hover near 46,000, down from almost 74,000 two years ago.
At the same time, housing starts, which have been fairly strong so far this year, are poised to slump, in line with reduced demand from non-resident buyers and decisions by many B.C. developers to pull back from planned projects.
The provincial government predicts that housing starts will drop by more than one-fifth in 2020.
Dwindling residential investment will detract from aggregate economic growth. It will also work against the policy objective of enhanced affordability, which – among other things – requires an increased supply of new housing units.
The deteriorating global economy is another major worry. Slower growth in major external markets, including the U.S., China and Germany, is already beginning to pinch B.C.’s exports.
Through July, the value of provincial exports was down by three per cent from 2018 levels. The forest industry has suffered the biggest blow, with wood product exports sagging by around 20 per cent. There is little chance of a meaningful export recovery in 2020.
The rolling economic crisis in the forest sector is another significant negative in B.C.’s economic picture. Mills are closing and jobs are being lost across the province. Forestry provides one-third of B.C.’s merchandise exports.
The number one issue in forestry is the diminished supply of timber, which is pushing up fibre costs for B.C. sawmills even as North American lumber prices remain low. Higher log costs have led to increased stumpage levies, at a time when the industry cannot absorb rising government-imposed charges.
Logging and lumber companies are also struggling with complex First Nations issues and growing environmental and regulatory costs.
The footprint of the forest sector is set to contract as the industry consolidates in the face of a reduced timber supply. Unfortunately, provincial policies and the lack of attention being given to the long-term commercial heath of B.C.’s leading export industry is making the transition harder and more painful than necessary.
Finally, B.C.’s (and Canada’s) waning overall competitiveness is another economic headwind, one that is especially evident in the natural resource and infrastructure industries and in key segments of manufacturing.
Many companies in these sectors are postponing capital investments and/or investing elsewhere. Rising taxes on business are part of the explanation, along with complex and increasingly costly government regulatory regimes that are making Canada and B.C. less attractive places to deploy capital.
Add it all up, and the Business Council has decided to mark down our B.C. economic outlook for 2019-20.
We now expect growth of less than two per cent this year, rising slightly in 2020 as work accelerates on LNG Canada’s huge natural gas liquefaction plant and related marine terminal in Kitimat.
Job creation should continue, but at a noticeably slower pace than in the recent past. Government policy-makers and business decision-makers should get ready for a bumpy economic ride.
Jock Finlayson is executive vice president and chief policy officer of the Business Council of British Columbia