BC Economic Snapshot July 20, 2013

VANCOUVER, BC, Jul 20, 2013/ Troy Media/ – In June B.C.’s consumer price index (CPI) edged slightly higher from May but lagged national level gains, pointing to the persistence of low inflationary pressure in the province. Seasonally-adjusted monthly growth in the CPI came in at less than 0.1 per cent during the month, which was well below the national gain of about 0.3 per cent.

June’s marginal monthly uptick was driven primarily by an increase in gasoline prices, while price levels for various foods, household operations and clothing declined from May. Year-over-year growth in the CPI (annual inflation) was negative for a third month, down 0.5 per cent from same-month in 2012.

The negative annual reading primarily reflects April’s shift back to a PST system from the HST, which lowered after-tax prices for a number of goods and services, notably restaurant meals which were down 4.2 per cent in June.

The negative inflation reading does not signal a deflationary environment as the policy shift was a one-time event. Monthly CPI has moved back towards trend growth since April, albeit at a lower level. Annual inflation readings will continue to exhibit the effects of the policy change until April of next year.

Recent fluctuations aside, B.C. continues to operate in a low consumer price inflation environment. June’s monthly gain came in at a less than 1 per cent annualized rate, and annual CPI inflation fluctuated below 1 per cent in the eight months prior to the tax change. Low inflation will continue as a reflection of the slow growth economy.

Housing
B.C.’s housing market uptrend continued into June with a fourth straight increase in MLS sales and a moderate uptick in average prices. Home sales accelerated 6.7 per cent from May to a seasonally-adjusted 6,189 units in June on gains in most areas of the province.

Since bottoming out in February, the monthly sales pace has climbed more than 23 per cent, narrowing the year-to-date sales deficit to less than 8 per cent, down from nearly 11 per cent from May. Monthly sales were the highest since January of last year.

Average price growth was mixed across regions, but rose 1.4 per cent from May at the provincial level to $525,400. While a relatively poor metric, average prices have trended higher since the beginning of the year. June figures signaled further strengthening in B.C.’s housing market and demand profile despite a slow-growth economy, as the initial shocks from of last year’s implementation of tighter mortgage insurance rules dissipate.

However, last month’s gain was larger than expected and could reflect a response to a bump in mortgage rates as some prospective buyers jumped off the fence to take advantage of lower pre-approved contract rates.

While sales momentum has been aggressive in recent months, market conditions remain subdued. Sales remain well below the long-term population-adjusted average, and markets remain oversupplied, particularly in recreation-oriented regions including Vancouver Island and Thompson-Okanagan.

We expect an ongoing transition towards a stable but low volume environment given tempered economic and employment growth, tight mortgage credit constraints, and marginally higher interest rates.

Rising sales and a tapering of inventory will continue to move markets into a more balanced state, providing support for prices. Rising sales and steady values will induce gains in related-consumer spending and contribute to economic growth in coming quarters. Provincial home sales and price levels are forecast to edge slightly below 2012 levels on a full-year basis.

Automotive
New vehicle sales in B.C. slipped in May but the underlying trend continued to rise from early year lows. Total sales fell to a seasonally-adjusted 14,870 units during the month, marking a 1.7 per cent decline from April. Nonetheless, year-to-date sales continued to outpace same period 2012 by about 3.7 per cent.

Vehicle sales are a secondary economic indicator for B.C.’s economy given the province’s minimal reliance on vehicle-related production and generally provide an indication of consumer confidence and willingness to make large-scale purchases.

Annual vehicle sales are projected to rise by a modest 4 per cent this year to about 183,300 units, the highest level since 2007. However, with ongoing weakness in employment and population growth and elevated household debt, gains will largely be driven by replacement demand, low interest rates and pent-up activity following a number of years of low sales.

Construction
Investment in non-residential building construction held above the same-period of 2012 levels in the second quarter by about 8 per cent, but eased slightly on a quarterly basis for the first time in five quarters. Total activity reached $1.46 billion in the second quarter, marking a quarterly decline of about 2 per cent in current-dollar terms.

Lower construction costs contributed in part, but real investment also fell by 0.8 per cent, pointing to a slight curtailment in construction activity led by commercial sector declines.
On a year-to-date basis, investment spending was up more than 12 per cent in both current-dollar and real terms. While continuing to outpace last year levels, the lull in second-quarter construction activity dampened the pace of provincial economic growth.

Non-residential investment is likely to drag on growth trends through the end of the year as sharply lower building permits in recent quarters mean fewer major projects will get under way this year. Permits are a leading indicator for investment activity.

Tourism
The number of international tourists flocking to B.C. in May held steady relative to previous months. Total overnight visitors reached a seasonally-adjusted 355,500 tourists during the month. While essentially unchanged from the previous month, estimated entries over the previous three months were revised higher, pointing to a stronger sector performance than initially thought.

Through May, total international tourist visits were up 2.3 per cent from the first five months of 2012. While activity has improved this year and is generally steady, the trend remains at low levels and a far cry from the more than 400,000 monthly visitors prior to 2007.

We expect the pace of international visits to gradually increase as the improving U.S. economy and the weaker Canadian dollar fuel recreational and business travel north of the border.
However, gains will be modest at about 3 per cent this year, and pre-recession levels will not be re-visited over the foreseeable future.

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