Ministry of Finance and Corporate Relations Honourable Paul Ramsey, Minister	This electronic version is for informational purposes only. The printed version remains the official version.
Report A: ECONOMIC REVIEW AND OUTLOOK

Overview¹

The British Columbia economy grew an estimated 1.4 per cent in 1999, a much-improved performance from 1998. Exports and manufacturing shipments grew strongly early in the year, recovering along with some of the Asian economies, but driven mainly by a red-hot economy in the United States.

CHART A1 BRITISH COLUMBIA EXPORTS

Consumer spending and housing activity were slow through mid-1999, but began to pick up during the second half. Employment grew little until the fourth quarter. Nevertheless, the average level of employment was 1.9 per cent higher in 1999 than the year before. As a result, the unemployment rate fell from 8.8 per cent to 8.3 per cent. Net in-migration from the rest of Canada turned positive in the third quarter.

Business conditions were mixed overall, but improved during the year. The forest industry staged a strong recovery and rapid growth occurred in the high-technology, information and service sectors. Corporate profits and business investment appear to have picked up as the year progressed. Wage and price inflation increased from 1998, but remained low.

In 2000, the economy is expected to grow 2.2 per cent, faster than 1999's pace. In 2001, growth of 2.7 per cent is forecast. The resumption of in-migration flows from other provinces and continuing export growth should underpin higher growth in consumer spending and housing activity.

Higher interest rates, a sharper-than-expected rise in the Canada-U.S. exchange rate and economic developments in the U.S. are the main risks to the British Columbia outlook.

 
The British Columbia Economy: 1999 Performance

Last year, the economy began to recover from a year of virtually no growth in 1998. The economy is estimated to have grown 1.4 per cent in 1999.

Chart A1 shows that export activity was strong for most of the year. Chart A2 presents export growth rates by market.

• The value of exports rose 10.2 per cent. Exports to the United States accounted for most of the gain, rising almost 20 per cent. Exports to Japan fell 6 per cent.
• The value of manufacturing shipments rose 9.2 per cent, led by forest products.
• Most of the gains in the value of merchandise exports and manufacturing shipments were due to higher prices. Merchandise export volumes are estimated to have increased about 4 per cent.
• Production volumes of lumber rose 5.3 per cent, pulp and paper 12.8 per cent and natural gas 2.3 per cent. Coal production fell 4.5 per cent. Copper output dropped 38.6 per cent due to the shutdown of the Endako and Gibraltar mines and the six-month shutdown of Highland Valley Copper.

CHART A2 BRITISH COLUMBIA EXPORTS  BY COUNTRY, 1999

• Cargo tonnage handled by the Port of Vancouver fell 1 per cent, reflecting still-weak demand in Asia for commodities. In-bound container traffic increased 27 per cent to a record level.
• Air freight traffic through the Vancouver International Airport rose 12.7 per cent.

Consumer demand remained sluggish until late in 1999, when there were some signs of improvement.

• Retail sales rose 1.8 per cent in 1999. Sales picked up toward year-end as the British Columbia component of the Conference Board's Index of Consumer Attitudes rose 5 per cent in the final quarter of 1999.
• The dollar value of auto sales was up 11 per cent.
• Wholesale trade increased 2.9 per cent.
• Sales tax collections rose 4.3 per cent (the tax applies to business purchases as well as consumer goods).
• The number of overnight visitors to British Columbia increased 6.2 per cent. Passengers travelling through the Vancouver International Airport rose 2.4 per cent, led by a rebound in Asia-Pacific and European traffic. The number of cruise ship passengers sailing through the Port of Vancouver rose 9 per cent.
• However, restaurant, caterer and tavern revenues for the year fell 3.7 per cent.
• Housing starts fell 18.2 per cent. Multiple Listing Service residential sales rose almost 10 per cent, and average sales prices were slightly higher.

Business conditions were generally better than anticipated:

• Business non-residential investment rose 4.8 per cent in 1999, led by machinery and equipment purchases. The value of non-residential building permits was up 4 per cent.
• In its first quarter 2000 survey of business conditions, Statistics Canada found a significant increase in the balance between manufacturers who planned higher and lower levels of production in the next six months.
• Bloomberg's index of the stock prices of British Columbia-headquartered public companies languished through 1999, but rose sharply in the first quarter of 2000, driven largely by high-tech companies.

In the labour market:

• The unemployment rate fell from 8.8 per cent in 1998 to 8.3 per cent in 1999. It hit a 19-year low of 7 per cent in February 2000 (see Chart A3).
• Employment, as measured by the number of jobs, rose 1.9 per cent.
• Full-time paid employment accounted for most of the job gains in 1999, in contrast to 1998 when part-time jobs and self-employment were the sources of growth (see Chart A4).
• Employment fell 3 per cent in goods-producing industries, while it rose 3.3 per cent in the service sector.

CHART A3 BRITISH COLUMBIA UNEMPLOYMENT RATE

• The labour force grew 1.4 per cent, while the participation rate (the percentage of people 15 years of age and over in the labour force) increased from 64.9 per cent to 65.1 per cent, ending a decline from the recent peak of 67.2 per cent in 1994.

CHART A4 EMPLOYMENT IN BRITISH COLUMBIA

• Net in-migration in 1999 is estimated at 22,540 persons, up from 7,355 persons in 1998. British Columbia's population grew less than 1 per cent over this period.
• Labour income grew 2.2 per cent, with the largest gains in the service sector. Wage settlements in collective agreements involving 500 or more employees averaged 0.8 per cent, about half the national average.

British Columbia Economic Outlook²

The recovery that emerged in 1999 is expected to broaden and deepen in 2000 and 2001. This is premised on a slight moderation of growth in the North American economy and a relatively small increase in interest rates and appreciation of the Canadian dollar. The forecast incorporates the effects of federal and provincial tax measures introduced in fiscal year 2000/01 budgets.

External Conditions and Influences

As shown in Chart A5, world growth prospects have increased significantly over the last year as Asia recovered more quickly than expected and fears of a global financial crisis faded.

CHART A5 WORLD GROWTH PROSPECTS IMPROVE

North America — British Columbia was fortunate that the rest of the North American economy was operating at a high level during the recent downturn in Asia. Strong growth in the U.S. and other parts of Canada in 1998 and 1999 helped moderate the effects of the loss of exports to markets such as Japan. As well, the Asian recession reduced import prices in North America, minimizing the interest rate increases that might have accompanied the rapid expansion in North America.

The assumption in this forecast is that the U.S. and Canadian expansions will continue over the next year, with both economies growing nearly 3.5 per cent on an annual average basis. Growth is expected to moderate during the year, with the year-over-year gain in real GDP at about 3 per cent in the fourth quarter of 2000, close to recent estimates of potential non-inflationary growth. Similarly in 2001, real GDP is forecast to increase 2.8 per cent in Canada and 3 per cent in the United States.

Europe — The forecast assumes that the European economies will grow 2.8 per cent in 2000 and 2.7 per cent next year. This improvement from estimated growth of 2.1 per cent in 1999 results mainly from the stronger performance of Germany, France and the United Kingdom.

Asia — Japan's economy grew only 0.3 per cent in 1999. Signs of recovery in the first half of the year faded in the second half as real GDP contracted 4.8 per cent (annualized). The economy is assumed to remain sluggish over the next year, held back by weak domestic spending and investment, and the lagged effects of an appreciation of the yen against the U.S. dollar since the autumn of 1998. Recently, the yen has depreciated but the path of the yen/U.S. dollar exchange rate over the next year or two remains a major question mark for Japan's economy. From a policy standpoint, the weakness of the domestic economy calls for yen depreciation, while the outlook for capital and trade flows suggest that appreciation is more likely.

The Japanese economy is expected to grow 0.5 per cent in 2000 and 1.3 per cent in 2001, not much above the 0.3 per cent in 1999.

The recovery in other Asian economies that began in 1999 (see Chart A6) is expected to continue over the next couple of years with growth in the 3 to 5 per cent range expected in the region. China's economy is expected to grow in the 7 per cent range. With the currency tied to the U.S. dollar, a sliding greenback in coming months would amount to a de facto devaluation of China's yuan against the Japanese yen and other major currencies.

CHART A6 ASIAN RECOVERY IN 1999

Interest and Exchange Rates — Based on the global outlook discussed above, North American interest rates are forecast to continue rising through the third quarter of 2000. They are expected to stabilize and begin declining in 2001 as both Canadian and U.S. growth moderate in response.

Consistent with the consensus outlook, the Canadian dollar is expected to appreciate against its U.S. counterpart over the next two years, averaging 69.4 U.S. cents in 2000 and 71.4 U.S. cents in 2001.

As Chart A7 shows, the strong U.S. expansion relative to the rest of the world has caused global trade imbalances to widen. As a result, the U.S. has drawn in capital from other countries, helping to hold down U.S. interest rates. Should the attractiveness of investing in the U.S. wane, the greenback could decline against other major currencies and U.S. interest rates might rise as a result. With Canada's external trade position improving recently, the Canadian dollar could appreciate more than expected in such a scenario.

CHART A7 CURRENT ACCOUNT BALANCES

	British Columbia Real GDP Outlook

Real GDP is forecast to increase 2.2 per cent in 2000 and 2.7 per cent in 2001. This is generally in line with the consensus view of the Minister of Finance and Corporate Relations' Economic Forecast Council (see Topic Box for details).

External Trade Outlook

Export prices are generally expected to rise in 2000 and 2001, although prospects vary widely for individual commodities. The outlook for forest products appears good, but coal and some metal prices are expected to languish. Goods and services export prices are forecast to rise 2.5 per cent this year and 1.8 per cent in 2001.

CHART A8 REAL GDP OUTLOOK BY COMPONENT

The appreciation of the Canadian dollar should moderate import price inflation. With export prices advancing faster than import prices, another improvement in British Columbia's terms of trade³ is expected this year.

Goods and service export volumes are expected to increase 4.3 per cent in 2000 and 4.1 per cent in 2001, largely due to the continued strength of the U.S. economy. While growth in forest product exports is expected to slow, non-resource manufactured exports are forecast to increase rapidly, continuing the pattern of the last few years.

Import volumes are expected to rise 2.6 per cent in 2000 and 3.3 per cent next year. With export growth exceeding import growth, the province's net export deficit is expected to shrink from 9.8 per cent of GDP in 1999 to 9.3 per cent in 2001.

Employment and Income Outlook

The rise in export volumes and prices in 2000 and 2001 is expected to translate into stronger growth in employment and income.

Employment is expected to increase 2.3 per cent in 2000 and 2.9 per cent in 2001, up from 1.9 per cent in 1999. The unemployment rate is forecast to fall from 8.3 per cent in 1999 to 8.2 per cent this year and 7.5 per cent in 2001. Since the unemployment rate was just 7.0 per cent in February 2000, this forecast may prove to be too pessimistic.

Labour income (wages, salaries and benefits) is expected to rise 3.7 per cent in 2000 and 4.4 per cent in 2001, well above the 1999 growth rate of 2.2 per cent (although preliminary income tax data suggests upward revisions will be made to the 1998 and 1999 labour income figures).

Stronger exports are also forecast to boost corporate pre-tax profits by 15 per cent in 2000 and another 5 per cent in 2001. This elevates their share of provincial GDP from an estimated 6.2 per cent in 1999 to 7 per cent in 2001.

As a result of the stronger growth in export earnings and corporate profits, nominal GDP is expected to increase 3.8 per cent in 2000 and 4 per cent in 2001.

Consumer Expenditure Outlook

Consumer spending appears to have grown very slowly in 1999, partly due to depressed consumer confidence.

The Conference Board's Index of Consumer Attitudes for British Columbia began to recover midway through 1999. As well, employment and income growth are expected to accelerate in 2000. Recently-announced federal tax cuts, provincial tax cuts in Budget 2000, and the continued phase-in of previous provincial tax reductions will raise personal disposable income. Interprovincial in-migration is also expected to be a more positive factor in 2000 and 2001, compared to 1998 and 1999.

All these factors should boost consumer spending. However, rising interest rates, a low personal savings rate and a relatively low level of housing starts are expected to limit consumer spending growth to 1.5 per cent in real terms in 2000 and 2.6 per cent in 2001 (see Chart A8). Retail sales in current dollars are forecast to increase 2.8 per cent this year and 4.8 per cent in 2001.

Higher mortgage interest rates and consumer concerns about the quality of multiple-unit dwellings will also restrain housing construction. Housing starts are forecast at 18,000 units in 2000 and 22,000 units in 2001, mainly reflecting pent-up demand and higher in-migration. The Canada Mortgage and Housing Corporation is projecting a 4.9 per cent rise in home sales to 59,800 in 2000 and a further 3.7 per cent increase to 62,000 sales in 2001. The agency expects the average British Columbia home price to rise from $212,000 in 1999 to $213,000 by 2001.

Capital Investment Outlook

Business non-residential investment is forecast to rise significantly in 2000. This reflects the strong projected growth in corporate profits and export earnings, and a continuing decline in capital goods prices combined with the expected appreciation of the Canadian dollar.

The investment picture will continue to vary widely across industries. Rising prices and profitability in the forest sector should lead to more investment. However, no major capacity expansions are expected. Conditions remain difficult in the mining sector, although the strengthening global economy has boosted the prices of some metals, such as copper. Production capacity is growing rapidly in countries such as Chile, where copper output rose 18 per cent in 1999. Combined with mergers and consolidation in the North American industry, the investment outlook in base metals remains poor. Investment in natural gas development and related pipeline construction has been very strong in recent years. Although the end of the current phase of pipeline expansion is on the horizon, natural gas development is expected to continue.

Outside the resource sector, investment continues to rise in manufacturing and the service sector. In addition, the enormous pool of U.S. venture capital has begun searching out opportunities in Canada, resulting in several high-profile direct investments in British Columbia companies. In March 2000, Ventures West, a Vancouver venture capital firm, announced the formation of a large fund targeted at early stage Canadian technology companies. As well, stock offerings by British Columbia firms have attracted substantial amounts of capital to these new industries. A recent report by the B.C. Technology Industries Association noted that the market value of the largest 20 public technology companies totalled $74 billion at the end of February 2000, up from $6 billion only two years ago. Interest in such companies has fuelled stock prices (see Chart A9).

CHART A9 BLOOMBERG B.C. STOCK INDEX

All of this is expected to help fuel continued rapid growth in investment in the Internet and related communications technology, as well as other areas of the technology sector, including bio-technology.

Business inventories are expected to be drawn down in line with the pickup in economic activity in 2000 and 2001 (this forecast is subject to considerable uncertainty as no aggregate information on 1999 inventory levels is yet available).

Following strong growth in 1998 and 1999, public sector capital expenditures are assumed to level off in 2000 and 2001.

Government Operating Expenditure Outlook

Spending by all levels of government in British Columbia is estimated to have increased 2.4 per cent in real terms in 1999 after two consecutive years of decline. The forecast assumes a slower rate of growth in inflation-adjusted expenditures over the next two years.

Inflation Outlook

Sharply higher oil prices have boosted the headline inflation rate in recent months (see Chart A10). However, British Columbia's inflation rate is expected to continue to lag the nation's in 2000. With energy prices expected to moderate and housing prices unchanged, British Columbia consumer price inflation is forecast to average 1.3 per cent, up slightly from 1999.

CHART A10 OIL PRICES

	Risks to the 2000 and 2001 Forecast

There are several risks to the forecast that could reduce or increase economic growth from projected levels.

Upside risks to the economic outlook include:

• Higher-than-forecast export prices. Commodity prices staged a rally in 1999. Rising oil prices and stronger-than-anticipated world growth could be the catalysts for further gains in commodity prices. If so, British Columbia export prices could increase more than the 2.5 per cent forecast in 2000. This would lead to higher export revenues, profits, employment, domestic spending and investment, and overall economic growth.
• In-migration. Net in-migration to British Columbia could be stronger than forecast, boosting consumer spending, housing sales and starts.
• Lower-than-forecast interest rates. Accelerating productivity gains in Canada could head off core inflation pressures and limit the anticipated rise in interest rates this year. This would lead to higher-than-forecast consumer spending, housing activity and business investment.
• Stronger consumer and business confidence. Consumer confidence rose in the fourth quarter of 1999 and recent surveys suggest business sentiment has improved. Tax cuts may also help raise confidence and spending more than is anticipated in the forecast.

Downside risks include:

• Higher-than-expected interest rates. In recent testimony to the U.S. Congress, Federal Reserve Chairman Alan Greenspan hinted that interest rates may rise more than markets anticipate. While it is unclear whether the Bank of Canada would follow future U.S. interest rate increases, economic growth has been well above forecasts in Canada. If this pattern continues, Canadian interest rates could be higher than assumed in the forecast. This could reduce consumer outlays and business investment.
• The U.S. stock market. Early in 2000, stock markets rose to historically high levels and outsized valuations, based on conventional indicators such as price-earnings ratios. The stock market's rise has been fuelled by technology stocks, principally Internet ("dot.com") and communications-related issues. The increasingly narrow focus of the market's advance raises the concern of a major correction, followed by a decline in consumer expenditures. On the other hand, evidence continues to build that the new technologies are truly boosting productivity, which may help extend the current expansion.
• Continued weakness in Japan. Consumer spending remains weak, and bank lending continues to decline. The government's room for further fiscal stimulus is limited — the public debt-to-GDP ratio has soared and Moody's Investors Service recently warned of a possible credit rating downgrade. There are some signs of a recovery in private-sector investment. However, real GDP declined in the second half of 1999, suggesting that the economy may have slipped back into recession. If so, growth could be lower than the 0.5 per cent assumed for 2000.
• Rising oil prices. Early in 2000, oil prices rose sharply, raising fears of higher inflation and lower economic growth. However, the world economy is less dependent on oil than it was during the energy crises in the 1970s. As well, some oil-producing nations have recently said that they plan to raise output. As a result, consensus forecasts show oil prices falling from above US$30/barrel to an average of about $22 a year from now (see Chart A10). Parts of British Columbia's economy will benefit from higher oil prices, although consumers will be worse off.
• A stronger Canadian dollar. Large international trade imbalances could result in major exchange rate shifts. A larger-than-expected appreciation of the Canadian dollar could reduce British Columbia export growth in the near term.

TABLE A1 BRITISH COLUMBIA ECONOMIC OUTLOOK

THE REGIONAL ECONOMIES

THE ECONOMIC FORECAST COUNCIL