The B.C. economy grew by a surprisingly robust 3.8% (after inflation) last year. This is surprising because not only does it follow a strong 3.2% expansion in 2016, but it also marks another year when the province grew at a pace above its long-run potential.
Some observers may be taken slightly aback that B.C. managed to achieve such an impressive growth rate amid an unsettled global backdrop and the early stages of a slowdown in the province’s normally busy residential housing complex.
A couple of years ago, we published a back-of-the-envelope calculation estimating that the “residential housing complex” was driving 35% to 40% of all economic growth in B.C. With the final numbers now in, it turns out that in 2015 the residential housing complex – which includes residential construction, renovation spending, the offices of realtors and related activity and a measure of homeowners’ imputed rent – was directly responsible for two-fifths of GDP growth that year. In 2016, the share slipped to a still substantial one-third. This is just the direct contribution. When retail sales linked to housing (building materials, home furnishings and appliances, etc.), related financial and legal services and moving services are added into the mix, housing’s economic footprint in B.C. is even larger.
Following seven consecutive years of growth, culminating in a very strong 15% rise in 2016, total investment in residential construction, including renovation spending, finally edged lower in 2017. New home-building construction still eked out a small gain, but well shy of the double-digit growth seen in the three previous years. Diminished housing sales also fed into an outright drop in the contribution to GDP from the “offices of realtors and related activity,” which swung from among the top growth industries to one of the biggest decliners in 2017. Essentially, residential real estate and related construction activity went from directly accounting for 30% to 40% of economic growth in B.C. to around 10% last year.
How is it that B.C.’s economy expanded so strongly in 2017, while the residential housing complex made only a small contribution to this growth?
The main answer is that our economy got an outsized lift from the natural gas sector. A new compressor station near Dawson Creek represented almost $1 billion in incremental capital spending. At the same time, the Towerbirch expansion project, involving the construction of new pipelines and associated facilities in northeast B.C., amounts to another $440 million. In addition, a propane export terminal is under construction on Ridley Island, off of Prince Rupert (representing a $500 million investment).
Much of the nearly $2 billion in new construction on these natural gas-related projects was deployed in 2017, which boosted business investment. Indeed, output in the oil and gas engineering construction industry nearly doubled, making it the fastest-growing industry sector in the province last year. Support activities for natural gas extraction (which includes drilling) was also a leading growth sector in 2017. Oil and gas engineering construction and related engineering services, environmental services and other inputs into the building of these and other energy projects collectively added close to a full percentage point to B.C.’s 2017 growth rate, an amount roughly equal to the lost economic lift from weaker conditions in the residential real estate complex.
The data for 2017 confirms that the anticipated rotation away from B.C.’s earlier real estate- and housing-fuelled growth dynamic is already underway. But it also speaks to the diversity of the province’s economy and the ongoing importance of natural resources – especially when it comes to business investment. In truth, B.C. can crank out decent growth numbers even when real estate markets soften and home building makes only a small contribution to the overall increase in GDP.
However, last year’s growth story also serves to underscore the fact that B.C. needs to attract capital investment across a mix of industry sectors, including infrastructure and natural resources, if our economy is to prosper over time.
Looking ahead, we expect that residential real estate will be an outright drag on economic growth in 2018 and 2019, as interest rates grind higher and sales activity moderates further. Fortunately, the recent announcement that LNG Canada plans to proceed with its $40 billion capital project should deliver a welcome economic boost. The investment spending will be concentrated in the north, but the benefits will flow throughout the province. The lesson is clear: B.C. doesn’t need a frenzied housing market to grow its economy, but we do need to attract capital investment and keep B.C.’s resource industries competitive. •
Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.
As published by Business in Vancouver.