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Finlayson & Peacock: Five key economic predictions for 2016 (Business in Vancouver)

It’s the time of the year when business and government decision-makers are tempted to throw caution to the wind and ask economic soothsayers to forecast what lies ahead.  Below we take up the challenge, knowing that we may miss the mark in one or two areas but confident that our overall assessment will stand up to scrutiny.

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Finlayson: Canadian economy will remain sluggish in 2016 (Troy Media)

As the clock ticks down on 2015, it is time to ponder what may lie ahead for Canada’s economy. The near-term picture isn’t particularly heartening.  After a disappointing 2015 that included a minor “technical” recession in the first half of the year, Canada looks poised for a somewhat better, but still generally lackluster, performance. 

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Finlayson Op-Ed: B.C.’ s industrial economy is fading (Vancouver Sun)

Statistics Canada recently reported that B.C.’s economy grew by 3.2 per cent after inflation in 2014, putting B.C. second among the provinces. Gains in residential and commercial construction and a solid advance in consumer spending were the key contributing factors. The job market, however, was surprisingly subdued, with employment rising by less than 1 per cent on a year-over-year basis.

As the clock winds down on 2015, it appears that B.C.’s macro-economy continues to perform fairly well, at least by Canadian standards. Economic growth should end up exceeding 2.5 per cent this year, with strength in retail sales, housing-related activity, tourism, film production, and parts of the advanced technology sector. At a time when Canada’s economy is being pummeled by a deep slump in global oil and metals prices, B.C. is holding its own.

Yet if we look below the surface, the economic picture in the province is less favourable. In particular, what might be described as the “industrial economy” is clearly struggling, with negative implications for business investment and exports.

The “industrial economy” consists of primary resource extraction and related downstream processing in the forestry, mining, and agricultural sectors; the production, transmission and exporting of energy; oil and gas refining, chemical production, and cement/concrete manufacturing; food processing; plastics; non-metallic minerals; metal fabrication; primary metal manufacturing; and beverage manufacturing industries.

Taken together, the industries carry significant weight in our economy. Collectively, they employ almost 200,000 British Columbians, most of whom enjoy wages and benefits that surpass the average. These industries also represent an important source of demand for the outputs of many B.C. service sectors, including transportation, engineering, scientific and technical services, other professional services, environmental consulting, and financial services. Perhaps most strikingly, the enterprises that comprise the industrial economy dominate B.C.’s export base, accounting for around four-fifths of the province’s international exports, year after year.

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Peacock Op-Ed: Canada’s Participation in the Trans-Pacific Partnership is Good for BC (Business in Surrey)

Canada was at the table when negotiations recently concluded for the Trans-Pacific Partnership (TPP) agreement, the largest, most ambitious free trade initiative in history. This is good news for ourprovince. The TPP is a comprehensive trade deal that will help expand and secure access to much of the markets of key Asia-Pacific nations. Although growth in emerging markets has slowed of late, Asia is still projected to comprise two-thirds of the world’s middle class by 2030-35, and will grow to account for upwards of one-half of world GDP within three decades. There will be early benefits from participating in the TPP, but most of the upside will emerge over the medium term.

The TPP currently has 12 participating countries:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Over time the expectation is that other countries, perhaps including China and South Korea, will also join. Last year, BC exported nearly $23 billion to the other 11 TPP member countries, which accounted for more than 60% of our total merchandise exports.

One reason the TPP is good for BC is it will enhance and deepen these existing trading relationships. Once in force, the agreement will eliminate tariffs on almost all of BC’s key exports and provide secure access to growing economies in the Asia-Pacific. BC will have an advantage over non-TPP countries (notably Europe and Russia) by having duty free access for most of our major merchandise exports, including: wood and other forest products; aluminum, iron and steel products; seafood; agricultural products, and chemicals and plastics. Although global trade has been liberalized and barriers have been steadily lowered over the past few decades, BC’s exports still face sizable tariffs in some TPP markets, ranging from 5% to as much as 40% in a few countries. Japan, BC’s third largest export market, levies tariffs of 6% on some lumber products, 5% on many seafood items and 15% on ice wine. Malaysia has stiff tariffs of 40% on some plywood and panel products. Vietnam also has many punitive tariffs in place.

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Finlayson Op-Ed: Memo to Finance Minister Bill Morneau (Troy Media)

Congratulations on your election to the House of Commons as the MP for Toronto Centre and your appointment as Minister of Finance.  Business leaders across Canada wish you well as you come to grips with the economic challenges that lie ahead.

One challenge is that Canada appears to have entered a period of sub-par growth.  Our economy lost ground over the first half of 2015, largely due to the impact of sharply lower oil prices together with weakness in the markets for many other commodities that form a large part of Canada’s export basket.  More recent data signal a pick-up in activity over the summer and into the fall.  However, for 2015 as a whole, inflation-adjusted gross domestic product (real GDP) is likely to increase by perhaps 1 per cent, down from an average of 2.2 per cent over 2013-14.

The economy should gain a bit of momentum through 2016, in response to the ongoing expansion in the United States, the low Canadian dollar, and continued accommodative monetary policy.  Real GDP is expected to climb by 1.5-2.0 per cent next year.  But looking further ahead, Canada also faces stiff economic headwinds from lower-for-longer commodity prices, record high levels of household indebtedness, and weak overall business investment. A slow growth macro-economic environment lends support to your government’s plan to expand infrastructure spending over the next few years.   But while spending more on infrastructure is a sound idea, the most convincing reason for doing so is not to boost short-term aggregate demand, but instead to make Canada’s economy more productive and competitive.  This includes ensuring that critical infrastructure is in place to enable our resource, manufacturing and tourism industries to connect with and efficiently sell into global markets.

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Finlayson, Ragan Op-Ed: We need a serious discussion about congestion pricing (Vancouver Sun)

In the past year, public debate in Metro Vancouver has focused heavily on how to pay for new transportation capacity. But there is a critical missing piece in this mobility puzzle. Improved transit services and more investment in roads are needed but they aren’t enough. Experience shows that we can’t just build our way out of gridlock. We won’t solve the problem of traffic congestion without also changing the underlying incentives. That’s why we need a serious discussion about congestion pricing.

This summer’s transit referendum was about how to pay for new transit investments. Its failure doesn’t signal that people are happy being stuck in traffic; nor does it signal that we are using our current infrastructure efficiently. There are several things that pretty much everyone agrees with regarding transportation in Metro Vancouver. First, traffic congestion is extremely costly: time lost in traffic costs people and businesses in the region at least $1.4 billion per year. Second, more and expanded public-transit options are necessary, as are maintenance, repairs and upgrading of existing roads and bridges. Third, those transportation investments somehow will have to be made, for neither businesses nor residents can afford to live without them indefinitely.

Another point of agreement is that traffic congestion is getting worse. Given that Metro Vancouver’s population is projected to grow by about million people over the next 25 years, one can easily imagine how bad things could get. As population and port activities increase, container truck traffic will also grow. Who pays for the time that trucks spend idling on backed-up highways and arterial roads? These time delays raise costs for businesses and increase prices for consumers. We all pay for traffic congestion.

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Finlayson Op-Ed: Canada Counting on U.S. Consumer for Economic Growth (Troy Media)

As Justin Trudeau and his euphoric Liberal colleagues get ready to form a new government in Ottawa, they have reason to worry about the macroeconomic picture. But good news south of the border could have a ripple effect in Canada.

In recent weeks, several forecasters, including the Bank of Canada, have (again) downgraded their growth projections for the Canadian economy. This comes amid a deterioration in the international economic outlook, which also continues to disappoint.

It is clear that the world oil price collapse, in tandem with the downturn in many other commodity markets, has hammered Canada’s resource-centric economy. That has triggered a sharp fall in the nation’s terms of trade, and brought on job and capital spending cuts in the energy and mining industries and many of the service sectors that supply them. For most commodity producers, it is hard to see much light at the end of today’s dark tunnel. For Canada as a whole, mustering an annual economic growth rate of even 2 per cent (after inflation) may prove to be a formidable challenge, particularly given that apart from low commodity prices our economy will also be held back by record levels of household indebtedness and stretched housing valuations.

How Canada fares in 2016-17 will hinge, in large part, on developments in the United States. While America has also lost a step at a time of choppy world growth, there is an underlying momentum that should keep its economy on a solid, if unspectacular, expansion trajectory.

Armed with a more competitive exchange rate and a host of domestic industries hungrily looking beyond our own somnolent market for new business, Canada stands to benefit as the giant $18-trillion U.S. economy chugs along.

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Finlayson Op-Ed: Get ready for the next big boom in U.S. housing (Financial Post)

One of the most striking economic developments in the United States since 2008 has been a pattern of generally depressed household formation. Households are created when young people leave the family nest, when new migrants arrive in a country (or a region), and when couples or roommates split (resulting in two households where one existed before). Deaths, the movement of the elderly into institutional care, population out-migration, and marriage are among the factors that cause the number of households to decline.

Household formation plays a central role in driving the demand for housing and other goods and services tied to the emergence of households – everything from furniture, carpets and cable and internet subscriptions to mortgage appraisals, home renovations, and cleaning and landscaping services.

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RELEASE: Business Council Budget Recommendations Designed to Strengthen BC’s Competitiveness and Attract Investment
Global economic uncertainty places pressure on BC exports

Business Council of British Columbia has shared its views on the economy and some initial recommendations on Budget 2016 with the Standing Legislative Committee on Finance and Government Services (the Committee). The Council encourages the Committee to take note of the current uncertain global economy and to recognize the need to bolster the province’s competitiveness – particularly in the traded industry clusters that are central to BC’s prosperity.

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Release: Business Council welcomes the conclusion of the Trans Pacific Partnership Negotiations
New opportunities for Canada's Gateway to the Asia Pacific

Vancouver, BC - British Columbia business leaders welcome the successful conclusion of the negotiations to establish the Trans-Pacific Partnership (TPP).  Canada and 11 other Asia-Pacific nations have been working toward a TPP agreement for more than two years.  

“Given British Columbia’s position as the country’s gateway to the Asia-Pacific,  we recognize the importance of ensuring that Canada is part of this landmark trade and investment agreement with countries that collectively are home to more than 800 million people and generate $28 trillion in annual economic activity,” said Greg D’Avignon, President and Chief Executive Officer of the Business Council of British Columbia.  “The Business Council believes the TPP will help the Canadian and the BC economies grow by removing tariffs and other barriers, enabling more of our export industries to build new business, and strengthening the position of Canadian companies in global supply chains encompassing commodities, manufactured goods, and tradable services.” 

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Finlayson Op-Ed: 3 Reasons we don't need to worry about inflation (Troy Media & Business in Vancouver)

Across most of the advanced economies, inflation is running well below the rates targeted by central banks.  In the United States, the principal inflation measure tracked by the Federal Reserve sits at barely 1 per cent, despite an expanding economy and a tightening labour market.  In Japan and Eurozone, central banks have set policy interest rates at zero and are aggressively pumping money into the economy to avoid deflation – defined as a generalized fall in prices.  In both the UK and Canada, the short-term policy interest rates directly controlled by central banks remain near all-time lows.  Almost everywhere, financial markets seem to be discounting the prospect of higher inflation.  As Bank of England Governor Mark Carney recently observed, even today, some six years after the bottom of the 2008-09 slump, “there are profound secular and cyclical disinflationary forces at work in the global economy.”

Looking ahead, an argument can be made that we should worry less about the prospect of escalating costs and prices across multiple markets for goods, services, labour, and raw materials – i.e., about inflation. There are several reasons why.

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Peacock Op-Ed: A Diverse Manufacturing Sector Helps Underpin BC’s Resilient Economy (Business in Surrey)

In British Columbia, manufacturing is a substantial part of the provincial economy. The processing of resources is highly visible so manufacturing in BC is sometimes perceived as being dominated by resources. But the reality is non-resource manufacturing, measured in terms of both output (GDP) and employment, is actually larger than resource-based manufacturing.

 In 2014, real GDP in the non-resource manufacturing sector amounted to $8.9 billion (4.4% of BC’s total GDP), and for resource-based manufacturing the comparable figure was $5.7 billion (2.8% of GDP). The simple delineation is made to help highlight the fact that BC’s manufacturing sector is diversified. Comparisons of this sort are not especially meaningful because they depend on what industry segments are lumped together. Resource-based manufacturing captures a handful of industries (wood products, pulp and paper, petroleum and coal product manufacturing, and primary metal manufacturing), whereas the non- resource grouping contains 14 different industries. 

The export story is arguably the biggest economic benefit of manufacturing. In 2014, BC’s non-resource manufacturing exports amounted to approximately $9 billion, equal to one-quarter of all international merchandise exports. Since 2000, BC’s non-resource manufacturing export shipments have climbed by 30%, whereas the value of all other exports is basically unchanged from the early 2000s. Although non-resource manufacturing was hit by the 2008-09 recession, the data suggests that the sector is not subject to the same gyrations as most resource-based industries. 

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Finlayson Op-Ed: Renewables, fossil fuels will share energy landscape (Business in Vancouver)

Is the world in the midst of an accelerating migration away from fossil fuels toward much greater reliance on carbon-free energy? If one takes seriously the speeches of many politicians or the content found on the web sites of environmental advocacy organizations, the temptation is to answer “yes.” The reality, however, is more complex.

Important shifts in energy production and use are under way, but the magnitude and timing of any overall global “energy transition” are apt to be less dramatic than many believe.  Growing energy demand, the vast scale of the world’s existing energy system, and the tens of trillions of dollars of embedded capital that underpin it all stand in the way of rapid change.  

That said, there is evidence of an incremental move away from fossil fuels as a primary energy source, in favour of low/no-carbon forms of energy.  Over time, natural gas and renewables will comprise rising proportions of the world’s energy supply, while the shares of oil and coal will decline.  However, because energy demand will be increasing and natural gas use is expected to double by 2040, this does not necessarily equate to an absolute reduction in the quantity of fossil fuels in the global energy system in the short- to medium-term.   

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Finlayson & Peacock Report: BC holding its own in economic headwinds (Business in Vancouver)

Against the backdrop of a choppy and risk-prone global economy and slowing growth in Canada, B.C. is poised to be atop the provincial growth rankings this year.

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Finlayson Op-Ed: Adding up empty economic victories in a land of cheap money (Troy Media, Business in Vancouver, and Plant)

The Bank of Canada’s recent decision to trim its short-term policy interest rate by another 25 basis points – taking it to a near record low level of 0.5% – acknowledges that the energy-related downturn in capital spending and exports in Canada has been greater than it was expecting at the beginning of the year – and the pain is likely to persist.

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Finlayson Op-Ed: Planning Ahead for Ongoing Change? (PeopleTalk Magazine)

Most people are aware that the population in Canada and other western countries is aging, that longevity is increasing, and that the front-end of the large baby boom generation has started to retire.  Fertility rates have also fallen, which means the future supply of workers will be under additional downward pressure even as the ranks of seniors swell.  But how quickly will our population grow, and age, in the next 20 years? Will employers soon face a dramatic shortfall of working-age British Columbians?

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Finlayson Op-Ed: BC economy will soon hit $250 billion (Troy Media and Business in Vancouver)

A steadily expanding population and ongoing modest economic growth are combining to propel the value of both spending and production in British Columbia to ever higher levels. As a result, we are on the cusp of a significant milestone: by the end of this year or early in 2016, the value of all measured spending and production in B.C. will reach one-quarter of a trillion dollars ($250 billion).

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D'Avignon Op-Ed: Great News for British Columbia

Remember June 11and 12, 2015. We will look back on this 24 hour period years from now as a point in which B.C. started to see a material change to its economy. Specifically, it was when some $44 billion worth of investment decisions were made in two separate projects that will strengthen B.C. as a significant player in two global sectors: energy and shipbuilding.

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Finlayson Op-Ed: Canada flirting with recession (Troy Media, Business in Vancouver)

The latest economic growth report from Statistics Canada casts a cloud over the country’s economic outlook for 2015.  Real gross domestic product (GDP) fell at a 0.6 per cent annualized rate in the first three months of the year, considerably worse than even forecasters of a pessimistic bent were expecting.  Digging into the details, it is clear that the slump in global oil prices is taking a measurable toll on Canada’s energy-centric economy. 

Non-residential investment plunged by 15 per cent in Q1, led by sharp cuts in capital-spending by the oil and gas industry.  In recent years, the energy sector has accounted for more than one-third of all non-residential investment, as well as for roughly one quarter of Canada’s merchandise exports.  So the epic downturn in oil and natural gas markets is dampening overall private sector capital outlays and weighing heavily on Canada’s export receipts.  

Harsh winter weather also played a role in the gloomy Q1 report -- consumer spending came in below consensus, as many Canadians apparently decided to stay indoors.

Economists define a “recession” as two consecutive quarters of declining real GDP.  We are half way there, and some recent economic data signal further softness into the second quarter. 

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Finlayson Op-Ed: Tax policies discourage small business from getting bigger (Troy Media)

The latest federal budget confirms and reinforces what seems to be an enduring belief among many Canadian policy-makers that it is better for enterprises to stay small than to build up their top lines, bottom lines and employee head counts.  According to Budget 2015, the Conservative government plans to lower the federal small business income tax rate from 11 per cent to 9 per cent by 2019.  The rate reductions will come in four half-point steps, starting in January 2016.  There is to be no change in the general federal corporate tax rate on income above the small business threshold level ($500,000) – that rate remains at 15 per cent.

All of the provinces follow the same general approach as Ottawa, by setting their small business tax rates below the rates charged to medium-sized and larger firms.  British Columbia, to take one example, presently levies a 2.5 per cent small business tax, while imposing an 11.0 per cent tax on earned income above the threshold amount.  The net result is summarized in the accompanying table: the combined federal/B.C. tax rate on small business income is currently about half of the rate on other income, with the gap set to widen over the next few years. 

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