Last December, we compiled a list of ten things to watch for in 2015, with a focus on those expected to impact the provincial economy. This year we are again compiling a list of trends and developments we believe will shape the BC economy in 2016.
1. More losses for the Loonie.
Although our list is not ranked, we put the sickly Canadian dollar as our first item because of its overall macro-economic significance and its implications for both businesses and households. Last year the Canadian dollar made the list as well, although the speed and extent of its descent since the start of 2015 exceeded our expectations. Looking ahead, we see the Loonie under additional downward pressure that could push it all the way down to US 67 cents by mid-2016. The main sources of weakness are low and still falling oil prices, sluggish global commodity markets generally, the US Federal Reserve’s decision to increase interest rates while the Bank of Canada remains on hold, and the related fact that the US economy will easily outperform Canada both this year and next. The good news is that the declining Loonie provides a lift to BC’s all-important export sector because it makes our merchandise and services more competitive in the North American market. In a quantitative sense, a depreciating Canadian dollar is a net plus for economic growth in the province, at least in the short- to medium-term.
2. Weak commodity markets persist.
Prices for most globally traded commodities have tumbled over the past 18 months. Indeed, the Bank of Canada’s commodity price index has been slashed in half since mid-2014 and is now back to where it stood in 2003. For BC, low prices for coal, copper, gold, and natural gas -- and recent weakness in lumber prices -- are translating into lower government revenues, reduced industrial investment, and negative economic impacts on local communities, particularly outside of metro areas. In 2015 natural gas exports fell 40% and generated about $1.5 billion; a decade ago natural gas exports were worth $4 billion.
3. Federal budget deficit approaches $20 billion.
The victorious Liberal Party campaigned on a policy platform that projected a federal budget deficit of ~$10 billion for the fiscal year that begins on April 1, 2016. However, economic conditions in Canada have deteriorated since the platform was published and the outlook for growth has dimmed. In addition, some of the promises in the Liberal platform were not fully costed (e.g., a new health accord with the provinces). For these reasons, we believe the budget to be tabled by Finance Minister Bill Morneau in February or March of next year will feature a projected operating deficit considerably greater than $10 billion in 2016-17 – our guess is something closer to $20 billion.
4. BC to lead the country in economic growth.
We project that BC will top the provincial GDP growth rankings in 2016, with real GDP expanding by 2.8% after-inflation. This pace is somewhat better than the long-term historical average and should be enough to put BC ahead of all other provinces. British Columbia’s increasingly diverse economic and industrial base is helping to sustain solid growth despite the headwinds stemming from slumping commodity markets. Domestic economic activity is being supported by a population that is rising faster than the Canadian average, solid gains in consumer spending and a still-robust housing market.
5. With slower growth in China and other emerging markets, the US will drive BC’s export growth in the near term.
The slowdown in China and the continued economic expansion in the US suggest that BC’s export sector will see a further realignment towards the United States in the coming year. Over the past decade the rise of China and other emerging Asian economies led the share of BC’s exports destined for the Asia- Pacific to climb steadily while the proportion directed to the US fell from 66% to around 45%. This pattern is now shifting. There has been some realignment back to the US, which now accounts for more than 50% of the value of BC’s merchandise exports. We believe the US share will approach 55% in 2016.
6. More Canadian residents moving to BC.
A couple years ago BC returned to having a positive net inflow of interprovincial migrants. We believe the net inflow of people from other provinces will increase in 2016. In part this reflects BC’s relatively healthy economy. But it also attests to the economic difficulties facing Alberta and Saskatchewan amid an epic downturn in global oil prices. For many years Alberta has been attracting economic migrants from all parts of Canada – and in massive numbers. But this situation is changing. We expect more people will arrive in BC from other parts of the country in 2016, while the gross outflow of BC residents to Alberta should continue to diminish. This trend is already apparent as the net inflow of people coming to BC from elsewhere in Canada jumped to 6,300 in the third quarter of 2015, the strongest Q3 showing in two decades.
7. BC’s job market picks up speed.
After a number of years of generally sub-par job creation, employment growth in BC should accelerate in 2016. Again, there is evidence that this is already happening as employment growth has visibly picked up over the past six months. Growth in both domestic economic activity and in parts of the province’s export sector will help to underpin future job gains.
8. Agriculture continues to expand at a healthy clip.
This item makes our top ten list because BC’s agriculture sector tends to be underappreciated as an economic contributor. Yet agricultural exports have risen significantly over the past decade and the sector now represents one of the province’s major export engines. In 2015 the value of BC agricultural exports grew by more than 20% and is on track to hit $2.8 billion, which is almost on a par with major commodity exports such as coal or copper. Agricultural producers in BC have benefitted from the weaker currency, with exports to the US up a healthy 20% so far in 2015.
9. Another banner year for tourism.
After more than a decade of being hampered by security issues and other fallout from 9/11, a surging Canadian dollar (it was at par with the US dollar just three years ago), and various other factors, BC’s tourism industry saw an impressive rebound in 2015. The industry should continue to do well in 2016, as the US economy remains on a growth trajectory and the low Canadian dollar works its magic.
10. Faster growth in larger urban centres.
The province’s urban areas will continue to outperform other regions on most economic metrics. Boosted by population growth, real estate, a burgeoning advanced technology sector, rising service exports, ongoing growth in the Gateway sector, and the above noted upturn in tourism, the lower mainland will remain the key economic growth engine for the province in 2016. Some other regions such as Greater Victoria and Nanaimo are also benefitting from many of the same factors. The trend towards greater urbanization has been evident across Canada for many years. In the BC context, it is now being reinforced by sagging commodity markets and the inevitable contraction of BC’s forest products sector owing to reductions in the volume of harvestable fibre due to the pine beetle.