BC Business Matters:
Jock Finlayson >>
Five Important Stories Affecting the BC Business Community in 2016
A list of five important stories affecting the BC Business Community in 2016 from the Real Estate boom to the opening of the Microsoft Vancouver development centre.
1) Real estate and housing boom – ending with the 15% foreign buyers' tax announced in late July, along with various new federal measures to tighten the regulation of mortgages.
We estimate the “housing complex” drove up to 35% of all GDP growth in the province from 2014 through Q2 of 2016. This includes homebuilding and renovation, real estate sales, and the spin-off spending on goods and services associated with residential investment and transactions. Anything that changes the landscape for housing in BC has implications for the wider economy.
Housing construction remains fairly strong, with annual starts running close to 40,000 province-wide and a busy renovation market. But home sales have dropped off in Metro Vancouver in recent months, and the BC Real Estate Association forecasts falling average home prices in the region in 2017.
Our judgement is that the lower mainland’s multi-year housing boom has run out of gas. Sales had slowed in advance of the tax on foreign purchases, but the latter has further dampened demand. No collapse is likely, but the “housing complex” will be contributing less to overall economic growth in the next few years.
With respect to new construction, builders may be moderating expectations about market conditions to some degree, with housing starts trending down slightly in the past couple of months. Note, however, that starts jumped to an unusually high level in early 2016, so some tempering in building activity was to be expected.
2) A hot BC job market - employment growth has been purring along at 3% y/y, rising to almost 5% in Metro Vancouver.
Annual job growth in BC is a very healthy 3% (there were approximately 70,000 more people working in the province in 2016 compared to 2015). In Metro Vancouver employment in 2016 was 4.9% higher than last year, on average. In the Victoria area, employment has risen 2.6% over the past year. Outside of these two urban regions, however, the job market has been much softer, with employment declining in some parts of the province. The most pronounced job losses have been recorded in the Kootenay region (down 3.8% year-to-date) and the Northeast (down 2.7%).
In urban BC, many employers are facing mounting competition for talent, increased employee turnover, and pressure to boost wages/benefits. We expect this to continue into 2017.
More people from other parts of the country are being attracted to BC thanks to the province’s relatively buoyant job market. Only BC, Ontario and Quebec have seen employment gains so far this year, but job growth has been roughly three times faster in BC than in the two central Canadian provinces. Employment has fallen in several other provinces, with Alberta recording the steepest drop (-1.6%).
Labour markets are adjusting to differing economic conditions across the country, with more people moving to BC. Net interprovincial in-migration jumped to +13,000 over the first half of 2016, mainly due to slumping economies in Alberta and Saskatchewan. For BC, this represents the largest net inflow of people from other provinces over the first six months of the year since the early 1990s.
3) BC’s trade re-orients toward the US as exports to China and other offshore markets struggle
BC recorded only modest gains in international merchandise exports in 2016, but to the extent that exports did rise, we can thank the recovering American economy. This signals a little remarked but important realignment for BC’s merchandise trade back towards the United States after several years during which cross-border business with Asia was growing faster than with the US.
BC’s exports to the US are on track to rise by an impressive 11% this year. On the other hand, exports to China, our second largest market, will decline by 2-3%, on the heels of a 7% slide in 2015. Similarly, our exports to Japan have also edged lower this year. As a result, the US now accounts for more than 55% of BC’s total merchandise exports, up from 53.2% last year and less than half during the 2010-2013 period. The re-orientation towards the US is being driven both by rising shipments stateside and dwindling exports to many other foreign markets. US-bound exports have also received a lift from the weaker loonie, which has made BC goods (and services) exports more competitive in the US market.
Of interest, BC’s exports to the US will reach $20.8 billion this year, the highest level in a decade. Back in 2005 (when commodity prices were stronger), our exports to the US hit a cyclical high of $22.1 billion. In the same year, exports to China were only $1.3 billion, compared to almost $6 billion today. Because the value of our exports to China was so much smaller, the US absorbed 65% of all BC exports in 2005.
4) Donald Trump’s election as US President, coupled with continued Republican control of both chambers of Congress
Donald Trump’s surprise election victory, together with continued Republican control of Congress, likely portends significant changes in US trade, tax, environmental and energy policies, with important implications for Canada and BC once Mr. Trump has assumed office.
Among the things to watch for in the coming year: uncertainty about the future of NAFTA; the death of the Trans-Pacific Partnership – raising the question of what will Canada do in the wake of its demise; the risk of rising US protectionism and aggressive efforts by the Trump administration to re-patriate manufacturing investment and jobs to the US; heightened tax competition for Canada as US business and personal taxes are reduced; a further acceleration of American oil and gas production and a paring of regulatory burdens on energy companies, at a time of rising carbon and regulatory costs for the energy industry in Canada; and the imminent reversal of President Obama’s decision to kill the Keystone Pipeline.
In this environment of US political and policy change, the bilateral softwood lumber negotiations are apt to be especially challenging for Canada. Under a Trump administration, the US lumber coalition’s protectionist impulses will receive added fortification. BC lumber producers could face punitive penalty duties as high as 30-35% by mid-2017. In the 2001-2006 softwood lumber dispute, countervailing duties and antidumping duties were imposed at a combined rate of 27.2% on lumber imported from Canada, and the US ended up collecting $5.3 billion in duties, most of which was subsequently refunded to Canadian lumber producers as Canada eventually prevailed in legal cases filed with NAFTA and the World Trade Organization.
5) Microsoft Vancouver development centre opens in the heart of downtown Vancouver.
The new Microsoft Vancouver development centre gives Microsoft the capacity to continue expanding its presence in the region. It brings $90 million in annual direct investment into the region, with an estimated impact of $180 million in benefits to the BC economy, along with hundreds of high-paying jobs. Microsoft Vancouver is an engine for technological innovation that will draw some of the smartest engineers, entrepreneurs and innovators to Vancouver — broadening the array of IT development work done here on platforms like Xbox One and HoloLens to products like Skype, OneNote, etc.
The Business Council and Microsoft collaborated to host a major conference in Vancouver in the fall of 2016 to explore strengthening the linkages between Vancouver and Seattle (the “Cascadia Corridor”) and spur further development of the technology industry in both cities. In alignment with that event, Microsoft’s board of directors met in Vancouver, its first-ever gathering in Canada. Microsoft’s growing footprint in BC testifies to the attractiveness of “hosting conditions” in the province for IT and other advanced technology industries.