Wednesday, September 25, 2013

BC Economic Forecast 2013 - 2017


 More Aggressive Growth Cycle Forecast

VANCOUVER, BC, Sep 24, 2013/ Troy Media/ – B.C.’s sluggish economy will tread water for the remainder of 2013 before gaining traction through 2014 and into 2015 when a more aggressive growth cycle takes root.

Real gross domestic product (GDP) growth is pegged at a tepid 1.4 per cent this year – a downward revision from the previous outlook — with a modest gain of 2.4 per cent expected for 2014.

The subdued performance is hardly surprising given the performance of domestic demand drivers. Employment growth has been non-existent this year, migration is below decade lows, while new home construction is down and governments are belt-tightening.

Positive but uneven global growth, particularly in the U.S., has provided some offset through an export uplift but insufficient domestic and global demand has sidelined businesses from investing as they wait for signs of a more sustained and robust recovery.

Growth is set to pick up in the back-end of the forecast horizon to above 3 per cent from late-2015 onwards. A U.S. recovery in full-swing and commencement of large resource-oriented projects in the north will provide impetus to both export growth and business investment, leading to employment and consumption gains. The timing of this growth upshift is fluid, and may be delayed if the U.S. economy underperforms or other issues hold back exports and investment.

Nominal or current-dollar output is forecast to accelerate at a faster pace than real output due to an inflationary pickup in prices. Nominal GDP is forecast to rise to 4.4 per cent in 2014 and accelerate to an average of more than 6 per cent in 2016-17.

B.C.’s medium-term growth profile is largely influenced by the outlook for the global and national economies and its relation to export demand and commodity prices. Over the short-term, global growth will be constrained by ongoing weakness in Europe, a slowdown in China’s growth and a moderate U.S. expansion.

Monetary policy remains highly accommodative, although tapering of U.S. quantitative easing strategies will put upward pressure on long-term yields. Improvements in the U.S. housing market and consumer demand will be offset in part by restrictive fiscal policies in the short-term. Modest growth will underpin soft but stable commodity prices through 2014. A global growth upshift in 2015 extends through 2017.

U.S. growth is forecast to trend in a range of 3 to 3.5 per cent from 2015 to 17, reclaiming its status as the global growth engine and pulling other nations along for the ride. A relatively long growth cycle is expected, given the severity of the 2008/09 recession, the subpar recovery, and substantial pent-up demand. The considerable slack in the economy leaves substantial room to grow before restraining monetary and fiscal policy settings are needed.

Strengthening growth will generate more robust commodity price growth later in the forecast period. Canada will follow the U.S. with a lag as exports and business investment pull higher.
In the short term, real GDP growth is forecast at a below-average 1.7 per cent in 2013 due to the policy-induced housing slowdown, fiscal drag, and the global economic slowdown. When the U.S. economy grows more robustly after 2014, Canada’s economic growth will rise to, and possibly above, 3 per cent in 2016.

Interest rates remain low and rise moderately later in the five-year forecast to near-normal levels in 2017. The first Bank of Canada rate increase is expected later in 2014 or early 2015. Before the bank raises its policy rate, bond yields will increase as improved growth prospects push up administered lending rates.

The Canadian dollar depreciates against the U.S. dollar with upward pressure later in the forecast when domestic interest rates rise and commodity prices firm up. However, this will be from a lower Canadian dollar around 94 to 95 cents U.S.

Few pockets of growth for B.C. in 2013, major projects and global recovery lead the way in 2015
Most industries will face slow-growth conditions through 2014. Forestry and wood products are the exception with the weakest performers being those that cater to the domestic market, such as professional services, government and retail trade.

Later in the forecast, growth will be heavily dependent on improvements in the global economy and commencement of major projects to drive exports, construction, and business investment.

Forestry is one of the few bright lights for the provincial economy as it rides higher on improved demand and prices emanating from rising new home demand in the U.S. and Japanese reconstruction efforts. Dollar-volume exports and wood product production are up sharply from 2012 by about 30 per cent this year – largely reflecting higher prices. Real output growth has been more modest since current U.S. demand can largely be supplied by domestic suppliers, but is forecast to record above-average expansion over the forecast horizon. As U.S starts pull above one million units, upside pressure will build for imported wood products.

B.C. will also see long-term quantity and quality pivot towards Asian markets – particularly China. The accelerated harvest of pine beetle trees is a contributing factor to growth but this will begin to wane as supply constraints materialize.

Then there is most everything else…

Lower mineral and metal prices will hamper growth in resource extraction and support activity through 2014 putting a temporary pause to B.C.’s commodity-led growth story.

Excess supply and dampening of global industrial demand have lowered commodity prices and pressured corporate margins.

While output is up, a soft price environment for copper and gold and other commodities have made financing difficult and costly for junior miners, impeding exploration and investment. Natural Resources Canada projected a 13 per cent decline in exploration and deposit appraisal expenditures this year. Similarly, Statistics Canada’s survey of capital expenditures also pointed to a 28 per cent contraction in machinery and equipment spending in the mining sector but levels will remain elevated.

Direct non-oil and gas mining-related growth is forecast to trend below 1 per cent this year from nearly 20 per cent in 2012 and expand less than 4 per cent in 2014. Despite this deceleration, B.C. mining activity is forecast to remain elevated.

Ongoing urbanization of the world’s most populous countries underpins long-term commodity demand, reflecting the need for infrastructure investments. Growth is forecast to accelerate to more than 5 per cent in 2015 as the Mt. Milligan mine begins commercial production and higher commodity prices drive growth in new mine development.

Following a lull this year, manufacturing of primary and finished metal is set to rebound. The natural gas sector will eke out modest gains this year after contracting in 2012. Production is up and crown land sales will be ahead of last year’s weak performance, suggesting some rebound in exploration and drilling activity.

However, the sector activity is a far cry from the heady years of the mid-2000s when prices were higher and companies were staking claims in the early days of the fracking boom. Sector output will expand modestly through 2017.

A growth upshift from 2014/15 onwards is predicated on the great white hope –the advancement of major projects across the province’s northern regions. Multi-billion dollar liquefied natural gas (LNG) projects in the northwest to facilitate long-term demand from Asia and include plants, terminals and pipelines are set for construction from mid- to late- decade. These projects led by consortiums of global energy giants include the Kitimat LNG Terminal ($4.7 billion), LNG Canada ($12 billion), and the Pacific Northwest LNG ($16 billion) project.
Multiple mining projects are also slated for construction during the period, including Taseko’s Prosperity mine near Williams Lake, KSM gold/copper near Stewart, and Copper Fox in Iskut. However timing of the latter will depend on market conditions and commodity prices. Project commencements will boost construction and related goods and service industries.

Tourism, which encompasses several industries, will hold steady this year. International tourist visits are up slightly, while hotel occupancy is consistent with 2012 performance. Growth will gain momentum as a strengthening U.S. economy and lower Canadian dollar attract more Americans to make the trek north. Tourism from Asia offers considerable long-term potential, while European traffic will remain constrained by its recession and weak recovery. Domestic tourism will experience more growth from the Prairies.

Economic growth will find little support from government as federal and provincial authorities remain focused on slaying the deficit dragon and debt-reduction. Alongside federal restraint, the B.C. government signaled a deceleration in spending growth in line with inflation in both 2013/14 and 2014/15. Nominal growth below 1.5 per cent points to near-zero real expansion and per-capita spending cuts.

Public-sector capital spending will remain elevated but is also projected to flatten. Government output will pick up marginally in the later part of the forecast as economy-induced strengthening of government revenues underpins higher expenditures.

Housing to drag on growth
B.C.’s housing market found its legs during the first half of 2013 with a sharp sales rebound following last year’s contraction. While pointing to a positive turn in the housing cycle, momentum will slow by the end of the year.

Some buyers took advantage of lower pre-approved contract rates in advance of recent rate hikes to fuel some of the gains. Expect a pullback in the pace of monthly sales due to a combination of weak consumer demand, elevated inventories, higher borrowing costs and federal policies to slow the housing market.

Recent sales momentum will be enough to push annual sales activity up 5 per cent this year with a further gain of 6 per cent in 2014. Sales volume will move above the 10-year average by 2015. Low sales volume and buyers’ market conditions through 2012 will generate lower new home construction this year. Provincial housing starts are expected to fall 6 per cent to 25,800 units, before gradually moving to about 30,000 units by 2016 driven by household formation.
Labour market
Slow growth conditions dictate a tepid labour market performance through 2015. Employers have been tentative to hire this year, adapting to what little growth there is by shifting part-time workers to full-time, resulting in nearly zero net gains in employment this year and the weakest performance since 2001, other than the recessionary contraction in 2009.

The outlook for 2014 and 2015 is improved at about 1.6 per cent per annum, but is playing catch-up after this year’s poor performance. Growth will accelerate above 2.5 per cent in the final two years of the forecast on a stronger economic growth profile.

Average job growth over the forecast period is higher in construction, led by major projects and an uptrend in housing starts later in the forecast horizon. Resource sector employment is also projected to pull higher beginning in 2015 as commodity markets rebound and exploration and extraction activities trend higher.

Government belt-tightening will limit growth in public-sector employment. Direct government employment growth will average 0.5 per cent per year over the forecast horizon, while education-related employment growth is comparable. Health and social services will buck the trend with average annual growth of about 2 per cent reflecting the needs associated with an aging population.

Labour force growth will under pace employment growth through 2015, lowering the unemployment rate to near 6.0 per cent. While low population growth constrains growth in the workforce, labour force participation trends higher in response to positive employment gains. Employment will continue to outpace labour force growth in 2016 and 2017 lowering unemployment to an average of near 5 per cent.

Tempered growth in both the economy and labour market slack will keep a lid on upward wage pressure through 2015. Hourly labour income is forecast to expand by about 2 per cent in 2014 and 2015, before moving to about 3 per cent in the remainder of the forecast period.

Population growth lags as outflow to the Prairies persist
Population growth will hold below 1 per cent through 2015, marking the slowest growth phase since the early 2000s. Net migration declines sharply this year despite a steady inflow of international migrants as negative interprovincial migration accelerates. Relatively faster economic growth in Alberta and Saskatchewan is attracting workers from B.C., contributing to weaker labour force growth. Higher economic growth in the province in 2014 onwards will lead to a reversal in the interprovincial migration flow part-way through 2015.

Population growth is predicted to rise to 1.3 per cent in 2017 aided by immigration gains and a reversal in interprovincial net outflows.

Expenditures
Our industry and labour market outlooks correspond to slow growth in most domestic sectors through 2014, with major projects and improved global economic conditions underpinning exports and non-residential construction later in the forecast horizon.

Consumption growth is forecast to grow only 1.3 per cent this year as weak employment and income growth, elevated debt, and low population growth constrain spending. Subdued spending has been reflected in low retail spending growth, which is forecast to remain flat in real per capita terms from 2012. Consumer spending will rise above 2.5 per cent in 2014 and 2015 before accelerating through 2017 on improvements in the economy and stronger population growth.

Fewer housing starts and sluggish resale activity will drive declines in residential investment this year and add modestly to growth in 2014. Renovation spending will provide some uplift in 2013 before flattening in 2014.

Residential investment growth is forecast to pick up in 2015-2017 on a cyclical uptrend in housing starts. Non-residential investment activity will hold steady this year despite a sharp decline in non-residential permit volumes as the 2012 upshift in major project starts fuels economic activity that extends into 2014.

However, investment in new machinery and equipment will take a breather as businesses adjust to uncertainties in the economy. Non-residential construction spending will surge in 2014 on major project commencements and pre-investments, a trend which persists through the forecast horizon. Non-residential spending fuels feedback effects into consumption and housing growth.

Gradual improvements in the broader economy will fuel ongoing export growth through 2017. Exports growth will generally outpace import growth, generating stronger trade-oriented economic growth.

Inflation
Subdued economic conditions and the persistence of a weak labour market will hold back inflationary pressure in the province. Growth in the consumer price index for B.C. will reach an anemic 0.2 per cent this year, largely reflecting a one-time downshift in after-tax prices following the shift from a HST regime back to a PST/GST system. Inflation will rise to 1.2 per cent in 2014 before gradually trending higher to an average of about 1.7 per cent through the forecast horizon as a strengthening economy and labour market push prices higher.
| Central 1 Credit Union

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