B.C. economy continues to post solid growth,but credit dependent sectors set to feel the pinch as interest rates rise
October 25, 2018 (Vancouver, B.C.) - Today, the Business Council of British Columbia released its 2018 third quarter BC Economic Review and Outlook. Amid solid global growth and a booming U.S. economy, the British Columbia economy is in good shape and will continue to grow at a respectable, albeit more moderate, pace over the next two years. B.C.’s real GDP growth is expected to be in the 2.3% to 2.5% range for 2018 and 2019.
Most of the slowdown is attributable to softer domestic economic activities as the composition of growth shifts toward business investment and export growth spurred by global economy activity. However, B.C.’s long real estate boom appears to be cooling. Credit-dependent sectors are set to become a drag on growth as interest rates rise and financial conditions tighten.
“British Columbia’s continued economic momentum, driven in large part by exports and non-residential construction, should be enough to keep us near the top of the provincial growth rankings over the 2018-20 period,” said Ken Peacock, Chief Economist at the Business Council and report co-author. “LNG Canada’s recent $40 billion investment decision represents the largest capital investment in Canadian history. We estimate this will add roughly 0.2 percentage points to real GDP growth in 2019, which prompted us to bump our previous outlook for next year to 2.5%.”
The Bank of Canada’s decision yesterday to raise interest rates a further 25 basis points to 1.75% reflects its keenness to reduce the accommodativeness of monetary policy in a relatively strong Canadian economy. The upward trajectory of interest rates presents an important downside risk for British Columbia where housing, real estate and related economic activity has been responsible for over one third of economic growth over the last four years. Higher borrowing costs will further erode housing affordability and dampen housing-related segments of consumer spending.
“Rising global and domestic interest rates are a key factor shaping the outlook for Canada and B.C.,” said David Williams, Vice President of Policy at BCBC and report co-author. “The current leverage cycle is easily the largest of the post-war era. Canada is among the leading nations in increased private sector indebtedness over the past decade. This is a significant vulnerability for the economy as interest rates rise. B.C.’s real estate economy and consumer spending are already feeling the effects of higher borrowing costs. More adjustment is in store as many mortgages come due for renewal over the next five years.”
Policy changes and government-created policy risks have also emerged as factors weighing on the broader business outlook. The tax burden for business and highly-skilled earners in B.C. and Canada has increased at a time when the United States has reduced taxes, particularly for businesses, and taken steps to lighten and streamline regulatory burdens.
The Business Council’s report also highlights a number of other key trends in British Columbia’s economy and business climate:
- Job growth slows: The province’s labour market has been so strong that B.C. has accounted for approximately one-quarter of all new jobs in Canada since 2015. Despite last year’s employment growth of 3.7%, job growth this year has slowed to 0.8% (through September). This reflects some moderation in economic activity, but also the hiring challenges facing employers as the province’s job vacancy rate sits at 4.7% - the highest in Canada. On the positive side, as the labour market tightens, wages are beginning to increase and are now running ahead of the national benchmark, which is unusual for British Columbia.
- Consumer spending sees a significant drop: B.C. consumers are pulling back on spending as demonstrated in the tepid 1% year over year increase in consumer spending so far in 2018, compared to a 10% growth throughout much of 2017. The slowing trend is very apparent in auto sales, which have flattened.
- Real estate adjusts: The easing of activity in the residential real estate sector will have an impact across B.C.’s economy. Just as the elevated level of resales had positive spill-over effects in finance, legal, inspection, renovation and other household services, the ongoing downturn in the rate of turnover of established properties means diminished activity in many other parts of the domestic economy.
- Construction remains robust: Over the first eight months of 2018, the value of non-residential building permits in B.C. was 20% higher than last year. Non-residential investment is set to get a big boost from the LNG Canada project. Residential building remains elevated, with an annualized pace of about 40,000 new units over the last two quarters. Other factors pushing capital spending higher are increased public sector investment and the reality that many firms in B.C. are operating at full capacity.
- USMCA: Despite trade-offs in the new United States Mexico Canada Trade Agreement, the deal provides ongoing stability for commercial relations with and access to the market of our largest trading partner, at a time when there is a global trend towards trade tariffs and retaliatory measures.
- Exports, tourism remain bright spots: B.C.’s international merchandise exports are up 7% over the same period in 2017, and the number of tourists visiting the province has grown across all major markets. India is now B.C.’s fifth biggest export international market with sales up 48% so far this year -- in large part due to coal and copper.
Despite the positive macro outlook and an anticipated increase in capital investment, there is growing concern in the business community over the erosion of competitiveness and rising government-imposed tax and regulatory costs in B.C., and also in Canada generally. This trend, if not reversed, may eventually weigh on capital formation, business growth and overall economic performance.
BC Economic Review and Outlook, published quarterly by the Business Council of British Columbia, is available online at BCBC.com.
About the Business Council of British Columbia
Now in its 52nd year as the premier business organization in British Columbia, the Business Council of B.C. is a non-partisan organization made up of 250 leading companies, post-secondary institutions and industry associations from across B.C.'s diverse economy. The Council produces exceptional public policy research and advocacy in support of creating a competitive economy for the benefit of all British Columbians.
Cheryl Maitland Muir