The Business Council's 2018 fourth quarter B.C. Economic Review and Outlook shows the economies in Canada and British Columbia are cooling from recent highs but remain reasonably positive despite external headwinds, domestic challenges, and changes to the industrial and regional dynamics of growth in the province.
In British Columbia, the multiyear real estate boom is unwinding and affected sectors are likely to detract from overall GDP growth in 2019 -- and perhaps 2020. Consumer spending has also cooled amid slumping real estate markets, higher interest rates and tighter access to residentially-secured credit. The province has recorded solid growth in both merchandise and service exports, although we anticipate more muted gains over the next two years. Business investment should pick up, as the massive LNG Canada project gets under way and more companies step up capital spending in the face of intense competitive pressure, digital disruption, and cyclically tight labour markets.
It is important to consider medium- and longer-term trends that will affect future growth and prosperity in British Columbia. Many business leaders are concerned about the erosion of Canada’s – including B.C.’s – competitive position at a time of rapid technological change, mounting protectionism, and significant shifts in American tax, regulatory and energy policies. In the last two years, Canada has suffered large capital outflows, as companies keen to invest increasingly choose other locations. The business tax advantages that Canada long had visà-vis the United States have completely disappeared. The corporate head office sector is shrinking – nationally, and in B.C. as well.
Canada, including B.C., has acquired a reputation as a jurisdiction where regulatory and legal regimes are increasingly hostile to industrial and infrastructure development – and where the costs of doing business are rising across-the-board, as evidenced by B.C.’s new Employer Health Tax which comes into effect this year, as well as escalating energy taxes. So far, governments have done little to acknowledge, let alone address, the taxation, regulatory and other competitiveness challenges that are holding back business growth and new investment. This must change if national and provincial policymakers aspire to build a more productive and prosperous economy in the decades ahead.
- Global GDP growth is expected to cool to around 3½% in 2019 and 2020. The downgrade reflects the effects of tightening financial conditions and trade tensions. These developments, coupled with the U.S.-China trade war and political chaos in Washington, D.C., have rattled financial markets. Over the past quarter, valuations contracted in global equities. In addition, the U.S. corporate debt market shows signs of a nascent credit crunch, and the U.S. yield curve has flattened. Risks to the global outlook are slightly weighted to the downside.
- Canada’s economy should continue to grow around 2% per annum, close to its potential but a meagre pace by historical standards. Growth will dip lower in 2019, as heavy price discounts on western Canadian oil and Alberta’s decision to cut oil production to cope with them reduces output.
- With little spare capacity in the rest of the economy and core measures of inflation close to 2%, the Bank of Canada intends to remove monetary policy stimulus over time to keep inflation at its target. Outside of oil-producing regions, labour markets are tight and wage growth is solid. Risks to the Canadian outlook are slightly weighted to the downside, on balance.
- B.C.’s economy slowed in 2018 due to a sharp downturn in consumption and activities tied to real estate. Still, labour market conditions remain tight and wage growth is well above historic norms.
- B.C. GDP growth is projected to ease slightly over the next two years, to around 2.2% to 2.4%. The $40 billion LNG Canada project gets underway later this year and will provide a substantial lift. Without this project, provincial growth would slip below 2% as the real estate boom unwinds.
- The composition of economic growth is expected to shift toward northern B.C., driven by LNG and related upstream drilling activity and pipeline construction, and greater reliance on business investment and exports more generally. Economic conditions will be softer in the lower mainland as the real estate boom deflates. A key downside risk is whether this rotation in provincial growth drivers can be achieved smoothly