1995 BUDGET REPORTS
Looking ahead, exports are expected to remain strong, aided by the combination of stronger growth in the world economy, high commodity prices, a lower-valued Canadian dollar and continued low inflation. Higher interest rates will affect demand for housing and big-ticket consumer goods such as furniture, appliances, cars and trucks. Economic growth in British Columbia is forecast at 3 per cent in 1995 and 2.5 per cent in 1996.
[ Chart A1 -- B.C. Unemployment and Inflation, 1975-94 ]
Economic growth in 1994 was driven by exports and non-residential investment. Export volumes were up 14.4 per cent while imports rose 9.6 per cent. Stronger growth abroad contributed to increased demand for key Canadian exports such as automotive and resource products. In contrast, domestic demand was held back by declines in government spending and slow growth in consumer spending on services. Other areas of consumer spending grew relatively strongly, although rising interest rates reduced demand for housing during the second half of the year. Business investment rose sharply during the year, led by strong growth in machinery and equipment spending and a rebound in non-residential construction after three years of depressed activity. Despite strong growth, the underlying rate of consumer price inflation remained in the 1.5 per cent range and a broader measure of inflation, the GDP implicit price index, rose only 0.6 per cent.
The Canadian economy is expected to grow 3.5 per cent in 1995 and 3.2 per cent in 1996. Domestic demand will grow more slowly due to higher interest rates. External trade should continue to benefit from a strong competitive position resulting from low inflation and the low value of the Canadian dollar.
The U.S. economy is expected to grow 3 per cent in 1995. Interest rate increases already in the pipeline are expected to help slow the expansion by the second half of the year. Growth is expected to slow to 2.5 per cent in 1996.
[ Chart A2 -- Economic Growth ]
All regions of the U.S. except California have been growing strongly. California is one of British Columbia's key markets and its economy has only recently emerged from a severe recession and the after-effects of natural disasters. The Mexican financial crisis will affect the southern region of the state, but overall, the prospects for significantly increased exports of goods, services and tourism from British Columbia to California are good.
Before the earthquake, economic growth in 1995 was expected to be in the 2 to 2.5 per cent range, held down by slower growth in public investment, the continued migration of manufacturing overseas and balance-sheet restructuring by banks and large corporations.
The damage caused by the earthquake is still being tallied, but forecasters guess that it will shave 0.3 to 0.5 percentage points from 1995 growth. The earthquake is likely to have a negative effect initially on some of British Columbia's exports to Japan. However, the Industrial Bank of Japan estimates that 87,000 homes suffered damage (although a row of Canadian-style model homes came through with flying colours). As a result, rebuilding may boost demand for lumber and other building materials in the second half of the year.
The Japanese economy is expected to grow 3.5 per cent in 1996.
The value of British Columbia's exports to Europe declined 40 per cent between 1990 and 1993, due to falling prices for pulp and paper and market access problems. However, this trend was reversed in 1994 as exports rose 24 per cent. The gains were the result of higher forest product prices.
British Columbia's exports to Europe should continue to expand this year. Europe's economy is expected to grow 2.8 per cent in 1995, up from 2 per cent last year.
As a result of these developments, Canadian and foreign interest rates rose much more than had been predicted at the beginning of 1994. Many forecasters had expected that interest rates would remain stable due to Canada's low inflation. However, short-term interest rates rose from 4 per cent at the end of 1993 to over 7 per cent at the end of 1994. Five-year mortgage rates and long-term government bond rates rose 3 and 2 percentage points, respectively, over this period. The impact of rising interest rates on the economy was offset by a 6 per cent decline in the value of the Canadian dollar against the currencies of major trading partners.
Late in 1994, the devaluation of the Mexican peso and fiscal concerns put pressure on the Canadian dollar and led to sharp increases in short-term interest rates. Financial market sentiment improved briefly and long-term interest rates fell in February, as inflation concerns abated on signs of slower U.S. growth. However, the sharp drop in the value of the U.S. and Canadian dollars against the yen and deutschemark precipitated another round of interest rate increases. This has left the spread between short- and long-term interest rates much narrower than it was at the end of 1994.
The consensus view in financial markets is that U.S. interest rates will continue to rise at least until mid-year and that Canadian rates will move in lock-step. As yet, there are no clear signs that the U.S. economy is cooling off and that inflation concerns will disappear. Therefore, this budget forecast assumes that interest rates will remain high through most of 1995 and begin to decline gradually in 1996. Even so, real short-term interest rates will remain very high in Canada. A further small depreciation of the Canadian dollar is expected in 1995 followed by a small rebound in 1996 (See Table A1). The combination of continued high real interest rates and the low value of the Canadian dollar will boost the export sector and dampen demand for imports and interest-sensitive goods.
[ Chart A3 -- Canadian Interest Rates ]
Consumer spending surged in 1994 reflecting more jobs and higher consumer confidence. Population growth due to continued high in-migration helped boost retail sales to $28.9 billion, a 9.7 per cent increase from 1993. However, not all the increase in consumer spending was due to population growth as the volume of retail sales per person rose last year. Some of the strength was fuelled by pent-up demand for autos. In the second half of the year, higher interest rates had an effect on major consumer purchases; car and truck sales fell in July and August before recovering at the end of the year.
Consumer spending outgrew incomes for most of 1994 as people borrowed or dipped into savings to finance purchases (see Chart A4). The gap between spending and income growth will not continue indefinitely. In 1995, higher interest rates and moderate growth in incomes will slow the growth in consumer spending. Consumers are likely to spend less on furniture and appliances, reflecting a decline in housing starts. Current-dollar retail sales are expected to grow 5.5 per cent in 1995 and 4.1 per cent in 1996. Total consumer spending on goods and services is forecast to increase 2.7 per cent in real terms in 1995 and 2.5 per cent in 1996 (see Table A1 for forecast details).
In 1994, capital investment in the province contributed significantly to economic growth. Rising interest rates had little effect on capital investment, which rose 14.4 per cent in current-dollar terms, according to Statistics Canada's investment survey. Non-residential capital investment rose 23.5 per cent, reflecting increased corporate profits, forest-sector investment in new technology and a strong market for office space. Residential investment rose only 1.1 per cent last year as the housing market began to cool.
The increase in non-residential capital investment was due to strength in commodity prices, as well as demand for office space. High commodity prices helped return the resource sector to profitability. As a result, many forest-sector companies are investing in new machinery and equipment. There are currently two medium density fibreboard plants under construction in British Columbia. Fibreboard is used extensively in furniture and interior finishing products such as kitchen cabinets and mouldings. Other capital spending in the forest sector included technology-intensive investment in pulp and paper manufacturing and sawmills.
Last year, there was substantial investment in the natural gas sector as a result of high prices in 1993. The current weakness in natural gas prices will likely depress exploration and development spending in 1995.
In Vancouver and Victoria, office vacancy rates were the lowest in Canada in 1994 and are still declining. New supply in the Greater Vancouver region accounted for half of the national increase in office space last year. New supply is not expected to meet demand, driving vacancy rates down further and lease rates up.
[ Chart A4 -- B.C. Income and Retail Sales ]
Some examples of projects underway or planned in the province include:
Most regions benefited from British Columbia's robust economic performance in 1994. Population increases boosted employment growth in the regions, as did an improving resource sector and increased tourism and consumer spending. However, weaker housing markets point to a possible slowdown in economic activity in most regions in 1995.
Population
British Columbia's population expanded by 2.6 per cent in 1994 as net in-migration from overseas and other provinces reached record levels. All regions experienced population increases with the Interior and Vancouver Island growing the fastest. However, the majority of people moving to the province continued to settle in the Lower Mainland.
Employment and Labour Markets
Employment growth in 1994 was strongest in areas outside the Lower Mainland, particularly in the Interior and northern regions (see chart). Employment growth in the Vancouver Island/Coastal region slowed to 4.7 per cent while the Lower Mainland improved on slow 1993 growth to post a gain of 3.7 per cent. Because of its size, the Lower Mainland accounted for over half of all new jobs created in 1994.Labour markets slowly absorbed the record number of in-migrants entering the province, and as a result the 1994 unemployment rate fell in all but three regions (see chart). The largest decline was in the Okanagan/Boundary region where the unemployment rate fell 2.5 percentage points to 8.7 per cent. The unemployment rate fell 0.6 percentage points to 9.4 per cent in the Vancouver Island/Coastal region, and declined slightly from 9.3 per cent to 9.1 per cent in the Lower Mainland.
Resource Industries
Resource-dependent regions gained in 1994 from rising commodity prices, a lower-valued Canadian dollar and faster growth in the United States and overseas. The northeast benefited from increased natural gas exploration and drilling activity. While this activity is expected to slow considerably in 1995, future investment is planned in the region to expand gas pipeline capacity to tap new export markets.Coal production expanded in the southeast, following mine shutdowns in 1992 and early 1993. The re-opening of the former Byron Creek mine is one of several planned re-openings or expansions in the region.
Higher timber, pulp and paper prices benefited the coastal and Interior regions. However, the industry is faced with ongoing shortages of wood chips and timber. Mills have responded by buying logs from Alberta and Alaska.
The northwest, southern Interior and Vancouver Island regions benefited from stronger markets for copper, molybdenum, zinc and lead. The Similco mine in the Okanagan and Vancouver Island's Myra Falls mine were two of several base and precious metals operations to re-open. Export prices are expected to soften somewhat as additional worldwide supply is brought on-line, but British Columbia producers are well positioned to compete in the fast-growing Pacific Rim market.
Tourism and Sales Tax Revenue
Higher tourism revenues, helped by the lower-valued dollar, benefited most parts of the province. Room revenues for accommodation were up in all regions, including the Lower Mainland and Vancouver Island regions, which accounted for two-thirds of total revenue.Provincial sales tax revenue, an indicator of the strength of consumer and business spending, increased by 6.5 per cent (after adjustment for tax changes) in 1994 to $2.9 billion. Revenue increases occurred in all regions and ranged from 3.6 per cent in the Vancouver Island/Sunshine Coast region to over 20 per cent in the Thompson/Okanagan and Nechako/Northeast regions.
Housing Starts and Sales
Higher interest rates and rising house prices during 1994 combined to depress housing affordability in all regions of the province. By the end of the year, existing home sales and housing starts were falling. For all of 1994, housing starts fell 7.9 per cent to 39,408 units, while existing home sales dropped 9.3 per cent to 73,400 units.In Vancouver, housing starts were off 3.9 per cent and home sales 3.6 per cent. Victoria was harder hit with a 12.5 per cent decline in housing starts and a 14.8 per cent fall in home sales. Sales and starts were also off sharply in the fast-growing Fraser Valley and east coast of Vancouver Island. With interest rates expected to remain high, the housing market is expected to continue to soften in 1995.
[ Regional Labour Markets in 1994 ]
[ 1994 Housing Starts and MLS* Sales ]
Housing starts in British Columbia fell 7.9 per cent to 39,408 units last year from a record high in 1993. Continued high in-migration helped to maintain demand for housing; however, most of the growth in housing starts occurred early in the year. By the end of 1994, starts and sales volumes had fallen in most regions of the province (see Regional Developments topic box). Despite the drop in housing starts, residential investment was supported by renovation expenditures, which were up significantly last year. With housing prices relatively high in most areas of the province, many people chose to make changes to their homes rather than sell and move. Weakness in the housing market is expected to continue into 1995 as high prices and high interest rates reduce affordability. As a result, housing starts are expected to total 31,000 units in 1995 and 28,000 units in 1996. Housing investment is expected to decline almost 10 per cent this year, reflecting the lower level of housing starts.
Statistics Canada's private and public investment intentions survey, conducted between November 1994 and early February 1995, showed that planned investment in British Columbia is expected to increase $1.2 billion in current-dollar terms, or 6.1 per cent, in 1995. The Ministry of Finance and Corporate Relations projects that total investment will rise 2.6 per cent in real terms this year and 2.2 per cent in 1996. The rise in planned capital spending in 1995 is largely due to an increase in machinery and equipment investment. Construction investment is expected to increase only slightly, as strong growth in business non-residential construction is offset by a sharp decline in residential investment.
Current spending by all three levels of government rose 1.2 per cent in real (inflation-adjusted) terms in 1994. Reductions in spending growth at the federal and provincial levels are expected to reduce total real government spending in 1995 and 1996.
The British Columbia export commodity price index rose 15 per cent in 1994, reflecting increases in forest product and mineral prices (see Chart A5). This increase in commodity prices was much higher than expected. The one area of weakness was energy prices, due in part to reduced demand as a result of above-average winter temperatures in North America. Most commodity prices, except natural gas, are expected to continue to rise in 1995 but not as much as in 1994 (see Outlook for Resource Exports topic box). Commodity prices are expected to level off in 1996.
Strong demand for British Columbia commodities resulted in an 11.3 per cent increase in cargo shipments through the Port of Vancouver last year, despite a two-week longshore workers strike. Tonnage increases were recorded for every type of cargo, led by strong gains in bulk commodities like coal, grain, sulphur and potash, and substantial increases in container and forest product shipments. Containers shipped were a record for the port and the figures for January show the trend is continuing.
[ Chart A5 -- B.C. Export Commodity Price Index ]
A lower Canadian dollar not only helped boost British Columbia's goods exports last year, it also helped to lure many foreign visitors to British Columbia holiday destinations. Cruise passenger volumes through Vancouver increased to a record level in 1994. The rising popularity of the Vancouver-Alaska cruise market and capacity increases by the major cruise lines contributed to the increase. The Commonwealth Games held in August in Victoria gave British Columbia worldwide exposure and drew visitors from around the world. BC Ferries' fleet carried more than 22 million passengers last year, a 4 per cent increase from 1993.
Export volumes are expected to rise 3.8 per cent in 1995 and 3.3 per cent in 1996. Import growth is expected to slow to 2.1 per cent in both years, reflecting the impact of higher prices caused by the depreciation of the Canadian dollar versus other major currencies.
Most of the job growth occurred early in the year as shown in Chart A6. A large increase in employment in May was followed by slower growth in the summer and declining employment in the fall. Job growth was evenly split between part-time and full-time employment -- unlike 1993 when most of the job growth was in full-time employment.
Commodity prices rose much faster than expected in 1994, led by gains in copper, pulp and newsprint. This topic box discusses price trends in markets for British Columbia's key resource exports.The forest sector rebounded in 1994 on strength in pulp and paper. Strong demand and a shortage of wood chips drove pulp prices up last year and this pressure is expected to continue through 1995. The value of pulp exports was up 50 per cent in 1994. Pulp is currently selling for $825 U.S. per tonne and is expected to rise to $910 in June.
Newsprint prices have also been on the rise as the result of the chip shortage and strong world demand. Some newspapers have cut back on the size of their publications to reduce consumption of costly newsprint.
Lumber prices fell slightly below the record high set in 1993, although the value of lumber exports surged based on strength in the U.S. and Japanese housing markets. U.S. housing starts were at their highest level since 1988. As land prices fell in Japan, housing affordability increased and with it, the demand for high quality British Columbia lumber. In 1995, lumber prices are expected to decline slightly because of a 7 per cent decline in U.S. housing starts. However, British Columbia could benefit from higher demand caused by rebuilding in Japan following the earthquake in early January.
Metal prices were boosted by strengthening activity in the industrialized countries last year. Rapid growth in the U.S. was accompanied by a pickup in Germany and Japan in the second half of 1994. Copper, which is widely used in residential construction and auto production, benefited from strong growth in both these sectors. As a result, copper prices rose almost 30 per cent from their 1993 average. Zinc prices have lagged the recovery in metal prices. High inventories of zinc kept U.S.-dollar prices from rising although British Columbia producers benefited from the depreciation of the Canadian dollar. Molybdenum prices rose sharply due to supply shortages and rising steel output. Molybdenum is used as a strengthening agent in steel.
Buoyed in part by increases in copper and gold prices, three British Columbia mines re-opened in 1994. Also in response to higher metal prices, exploration activity totalled an estimated $100 million in 1994, a 30 per cent increase from 1993. More than half of the exploration activity was in the northwest region of the province in pursuit of base and precious metals.
Metal prices are expected to rise in 1995, but level off in 1996 as new supplies become available. Copper capacity is expected to increase almost 25 per cent between 1994 and 1998. Demand for copper is expected to increase but price increases will not match the large rise in 1994. U.S. residential construction and auto production, which provided a boost to metal demand last year, will probably be dampened in 1995 by rising interest rates. However, further production increases in machinery and equipment will offset some of the slowdown in demand from the housing sector. Inflation pressures in the United States and continued instability in financial markets could drive up gold prices as investors hedge against uncertainty.
[ 1994 Commodity Prices (in Canadian dollars) ]
British Columbia's two key energy exports are natural gas and coal. High prices in 1993 led to extensive exploration and drilling activity in 1994. As a result, natural gas prices fell sharply due to abundant supply and weak demand. Natural gas prices are not expected to increase in the near future and exploration and development activity has slowed. Coal production returned to pre-1992 levels as some mines re-opened following labour disputes and financial restructuring in 1993. Many coal operations are still running below capacity and production is expected to increase in 1995. Coal prices fell slightly in 1994 and are expected to be unchanged in 1995.
Salmon accounts for over half of the wholesale value of British Columbia's fish production. Despite a lower-than-expected return of salmon to British Columbia waters in 1994, prices fell 2.3 per cent due to ample world supplies of farmed salmon.
[ Chart A6 -- B.C. Labour Market: Recent Trends ]
Employment growth is expected to slow to 2.5 per cent, or about 43,000 jobs, in 1995. Improving labour market conditions in the rest of Canada and reduced national immigration quotas will cut the province's labour force growth to 2.3 per cent. The unemployment rate is expected to fall to 9.2 per cent in 1995 and 9.1 per cent in 1996.
Despite strong employment growth in 1994, income growth was more modest. Labour income grew 5.9 per cent. This reflects the impact of relatively low wage settlements, which averaged only 1.9 per cent for the year. Private-sector settlements averaging 2.2 per cent surpassed public-sector settlements at 1.6 per cent, due to above-average pay awards in the pulp and paper sector. Low wage growth helped reduce inflation to just 2 per cent last year. Inflation is expected to increase to 2.7 per cent in 1995 due in part to the lower value of the Canadian dollar which makes imports more expensive. Inflation is forecast at 2.4 per cent in 1996.
[ Chart A7 -- Forecasts of B.C. Economic Growth, 1995 ]
Key contributions to economic growth over the medium term come from external trade early in the period and from business investment and the consumer sector later in the decade. Government spending is expected to decline in real terms through the entire forecast. The forecast also recognizes that commodity prices, in-migration and the provincial timber harvest are probably close to their peaks.
Growth could well turn out to be stronger over the next five years, as the forecast incorporates cautious but realistic assumptions about interest rates and the economic performances of British Columbia's key trading partners.
Budget Actual/
Forecast Estimate* Forecast
----------------------- ---------------
1994 1995 1996
Gross Domestic Product (GDP: percentage change in current dollars) 6.5 7.1 5.1 4.6
Economic Growth -- Real GDP (percentage change in 1986 dollars)... 3.4 4.3 3.0 2.5
Consumer Expenditure.......................................... 3.7 4.8 2.7 2.5
Government Expenditure........................................ 0.8 1.2 -0.2 -0.6
Capital Investment............................................ 1.5 4.1 2.6 2.2
Exports of Goods and Services................................. 4.3 6.7 3.8 3.3
Imports of Goods and Services................................. 2.8 6.9 2.1 2.1
Population (percentage change).................................... 2.9 2.6 2.6 2.4
Net In-migration.................................................. 67,600 80,315 66,100 60,000
Interprovincial............................................... 36,000 38,800 36,100 30,500
International................................................. 31,600 41,515 30,000 29,500
Labour Force (thousands).......................................... 1,900** 1,913 1,957 2,004
(percentage change)........................................... 3.0 3.7 2.3 2.4
Employment (thousands)............................................ 1,716** 1,733 1,776 1,821
(percentage change)........................................... 3.0 4.0 2.5 2.5
Unemployment Rate (per cent)...................................... 9.7 9.4 9.2 9.1
Retail Sales (millions of current dollars)........................ 27,925 28,899 30,490 31,740
(percentage change)........................................... 6.0 9.7 5.5 4.1
Labour Income*** (millions of current dollars).................... 54,420 54,425 57,530 60,810
(percentage change)........................................... 5.9 5.9 5.7 5.7
Housing Starts (units)............................................ 39,500 39,408 31,000 28,000
(percentage change)........................................... -7.7 -7.9 -21.3 -9.7
Consumer Price Index (1986 = 100)................................. 134.2 134.2 137.8 141.2
(percentage change)........................................... 2.0 2.0 2.7 2.4
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Key Assumptions:
Economic Growth (per cent)
Canada.................................................... 3.5 4.5 3.5 3.2
United States............................................. 3.0 4.0 3.0 2.5
Japan..................................................... 0.0 0.6 2.0 3.5
Europe.................................................... 1.2 2.0 2.8 2.7
Canadian Interest Rates (per cent; annual average)
3-month................................................... 4.0 5.4 8.5 8.3
10-year and over.......................................... 6.8 8.6 9.3 8.9
U.S. cents/Canadian dollars................................... 75.2 73.2 71.2 72.0
*British Columbia GDP data for 1994 are Ministry of Finance and Corporate Relations estimates.
**Statistics Canada revised its labour force data in January 1995 to reflect revised population estimates.
The 1994 budget forecast has been re-stated to reflect these historical changes.
***Wages, salaries and supplementary labour income.
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