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Finlayson Op-Ed: 2016 year in review: Commodity markets improved but Canada lost competitiveness in 2016 (Business in Vancouver)

It’s been an eventful 12 months, and anyone asked to identify the biggest economic stories of the year faces a cornucopia of choices. To my mind, four stand out – three are “external” to B.C., while the final story unfolded within the province.

When economic historians look back at 2016, they are likely to see it as marking the end of the great four-decade bull market in bonds. After hitting all-time lows in 2016’s first half, the yields on government bonds – in the U.S., Canada and much of Europe – reversed course and began to inch higher. By the time Donald Trump won the U.S. presidential election, bond yields were poised to jump – and they have certainly done so since the start of November. The 10-year U.S. Treasury yield hovered near 1.4% in July; in late October, it had climbed to 1.8%; and by mid-December, it was at 2.4%. Higher yields spell sinking prices for longer-duration fixed-income securities. Government bond yields (along with mortgage rates) have also been edging up in Canada, undercutting the Bank of Canada’s efforts to keep borrowing costs pinned to the floor. While both sovereign bond yields and market-determined interest rates in general remain low in absolute terms, the era of (almost) interest-free money is winding down. 

The past year also saw tangible improvements in many commodity markets, including those for oil, natural gas, metallurgical coal, most base metals and selected agricultural products. The global commodity crash that started with metals in 2012 and extended to oil in 2014-15 exacted a painful toll on Canada’s resource-centric economy, pushing the oil-producing provinces into recession and eviscerating business investment across swaths of the private sector. But the worst of the commodity slump is behind us, as evidenced by rebounding stock prices for Teck and most Canadian energy producers. Scotiabank’s all-commodity price index rose 7.5% in the year to October 31, 2016.

A less positive development for Canada was the ongoing loss of competitiveness in the U.S. market – still the destination for three-quarters of our exports. By 2016’s third quarter, Mexico had displaced Canada as the second-biggest source of American imports, after China. Since 2000, Canada has lost almost six percentage points of market share in the United States, while China, Mexico, Germany and some other foreign suppliers have all registered gains.

It remains to be seen whether the ascension of the protectionist-leaning Donald Trump to the presidency will alter the competitive landscape for exporters focused on the giant U.S. economy.

Closer to home, housing issues dominated the local headlines throughout 2016. After declining to intervene to stem soaring prices early in the year, by June the provincial government shifted gears in the face of mounting worries over dwindling affordability and the destabilizing effects of inflows of foreign money into the Lower Mainland housing market. The result was the decision to levy a 15% tax on foreign purchases of residential real estate in Metro Vancouver. This unprecedented step, in tandem with moves by Ottawa to tighten mortgage insurance rules, has visibly cooled housing demand, with November home sales in the Vancouver area down by more than one-third from year-ago levels and prices softening in many segments of the market.

As the housing sector re-balances, it will be interesting to gauge the consequences for the wider economy. The Business Council of British Columbia estimates that residential investment, real estate sales and related retail spending, added together, accounted for more than one-third of all economic growth in B.C. in 2014-15. Going forward, housing is expected to play a smaller role in powering the province’s economy. 

Published in the December 20th edition of Business in Vancouver.