Budget 2000
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.


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.


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.


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

Business conditions were generally better than anticipated:

In the labour market:


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.


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 key questions for the near-term outlook are:
— Will the U.S. and Canadian expansions continue unabated?
— Or, will interest rates have to rise to moderate an overheating economy (with the risk of turning a boom to bust if the U.S. stock market turns down)?
—  Will the large U.S. current account deficit cause the U.S. dollar to depreciate significantly, adding to interest rate pressures?

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.

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.

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.


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).


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.

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:

Downside risks include:

Topic Box
Topic Box


1 This report incorporates information available as of March 17, 2000. All annual and quarterly references are for the calendar year.
2 A description of the Ministry of Finance and Corporate Relations' economic forecasting process, methodology and econometric model can be found in The British Columbia Macroeconomic Model. This 1999 working paper is available in the "Reports and Publications" section of the ministry's Web site: www.fin.gov.bc.ca or by writing to the Communications Branch, Ministry of Finance and Corporate Relations, P.O. Box 9417, STN PROV GOVT, Victoria, British Columbia, V8W 9V1.
3 The "terms of trade" is the ratio of export prices to import prices.

HOME PAGES: Budget 2000
Legislative Assembly of British Columbia
Ministry of Finance and Corporate Relations
Government of British Columbia
COMMENTS OR QUESTIONS: Communications Branch (e-mail)

Copyright © 2000: Queen’s Printer, Victoria, British Columbia, Canada