1995 Overview

The British Columbia economy continued to operate at a high level of output and employment in 1995, even though growth slowed from 1994's rapid pace. Real gross domestic product increased an estimated 2.7 per cent. Employment rose by 29,000 persons and the unemployment rate fell to 9.0 per cent. Although the average inflation rate during 1995 rose slightly to 2.3 per cent, by December the year-over-year rate was just 1.5 per cent.

Economic conditions were choppy during the year, with most of the growth coming in the first and third quarters.

1995 Income and Expenditure

Labour income rose 5.3 per cent during the year reflecting 2 per cent growth in total hours worked, a 3 per cent increase in estimated average hourly compensation and a shift toward higher-paying full-time jobs.

Corporate pretax profits rose an estimated 19 per cent in 1995 following a 59 per cent increase in 1994. Profits rose sharply in the resource and financial services industries, while intense competition eroded profits in retailing, transportation and communications, and real estate.

Interest, dividend and other investment income is estimated to have risen sharply as a result of higher interest rates in 1995 and rising corporate earnings. Transfer payment income from governments (such as unemployment insurance and income assistance) grew 3.6 per cent. Small business and farm income rose more than 5 per cent.

Consumer spending and net exports were the major contributors to growth in real GDP in 1995, as shown in Table A1. Real investment in fixed capital fell because of a sharp decline in housing construction during the year. However, non-residential investment increased 1.6 per cent in real terms. Government expenditure showed little growth in real terms, owing to continued restraint at all levels of government. Real consumer spending grew at half 1994's rapid pace, but was still a major contributor to real GDP growth in 1995. Net exports rose sharply due to strong growth in export volumes and slower growth in imports. Late in the year, softening domestic and foreign demand boosted inventories, adding to 1995 output but foreshadowing reduced production in 1996.

TABLE A1
CONTRIBUTIONS TO 1995 REAL GDP(1) GROWTH

*Change as a percentage of 1994 real GDP
**Includes residual error.

1. This report incorporates information available through April 12. Provincial real GDP data for 1995 is scheduled to be released by Statistics Canada on May 13, 1996.
   

1995 Industry Performance

Employment and output in the goods-producing sector of the economy declined in 1995. Pulp and paper manufacturing output declined while employment rose. A decline in wood manufacturing employment was partly offset by gains in primary forestry/logging employment. Activity and employment in construction fell due to the slump in residential starts. Fishing activity was sharply curtailed due to a cyclical decline in Canadian salmon stocks, although fish processing increased slightly.

Strong growth continued in service-sector employment, offsetting losses in the goods-producing industries. There were large gains in transportation and communications employment that reflected an increased number of firms. Wholesale and retail trade employment returned to the peak reached in 1993, despite slower sales growth. business services employment continued to boost the number of jobs in the community, business and personal service sector. Employment in public administration and finance, insurance and real estate was down slightly, reflecting downsizing by governments and financial services firms and a decline in the number of real estate agents in the face of a weak housing market.

1996 British Columbia Outlook: Overview

The economy is expected to grow 2.7 per cent in 1996, about the same pace as in 1995. The pattern will be different in 1996 with growth starting out slowly and then picking up as the year proceeds. By mid-year, the Canadian, Japanese and U.S. economies should be growing at a faster pace, boosting demand for British Columbia's exports. The inventory adjustment in the housing sector should have been completed, leading to a pick up in construction in the second half of 1996. Inflation should remain under 2 per cent, despite higher food and energy prices.

Major Markets: British Columbia's key markets are the rest of Canada, the United States and Japan, which together absorb 85 per cent of the province's exports. These three markets are expected to grow slightly faster than in 1995. The main factor in the improvement is the Japanese economy, which is expected to grow 2 per cent as compared to 0.7 per cent in 1995. Growth in Canada and the U.S. is expected to be in the 2.0 to 2.5 per cent range, similar to 1995.

Export Prices: Prices for the province's goods and services exports rose an average 6.5 per cent in 1995. This was largely the result of sharp increases in the prices of key resource products, as shown by the 13 per cent jump in the Ministry of Finance and Corporate Relations export commodity price index. Recently, the prices of several key commodities including pulp, newsprint and copper have fallen below their 1995 peaks. Even so, export prices are forecast to be 2 per cent higher on average in 1996, largely reflecting the sharp rise in prices during 1995 and an expected rebound in lumber prices.

Financial Markets: Monetatry conditions have been more favourable early in 1996 than they were a year ago. Canadian short-term interest rates fell considerably after the Quebec referendum and are now slightly below U.S. rates; long-term interest rates contain a substantial, although narrowing, risk premium relative to U.S. rates. Interest rates have risen in the United States, but should remain low enough in Canada to spark faster growth as 1996 proceeds.

Employment and Income Outlook

Employment is expected to grow 2.3 per cent in 1996, on both a "jobs" and "total hours worked" basis. The labour force will grow about the same pace, reducing the unemployment rate to under 9 per cent. Net in-migration is forecast to total 61,000 people again this year, and a greater proportion will continue to come from overseas rather than from other parts of Canada.

Growth in hourly earnings of 2.5 per cent should result in an increase in labour income of 4.7 per cent. Interest, dividend and miscellaneous investment income is expected to increase 3.2 per cent, much less than in 1995 due to lower average interest rates. Small business and farm income is expected to grow 4.5 per cent, reflecting renewed growth in consumer spending and growth in business services.

Corporate pretax profits are the most volatile of the major components of aggregate income, and their 1996 outlook depends heavily on the path of natural resource prices. Although profits rose sharply in 1994 and 1995, they did so from a very low level. As a result, corporate profits in the current expansion have yet to reach the peaks attained in earlier cycles, relative to provincial GDP. Nevertheless, the recent declines in copper, pulp and newsprint prices, if sustained through 1996, could result in a decline in profits. Some analysts think that the downturn in prices will be temporary and reverse by mid-year. If so, profits would continue to rise in 1996, although at a slower rate than last year.

In recent years, increases in productivity ("output per person-hour" see Chart A2) have contributed to slower growth in costs and rising corporate profits. Gains in productivity are the foundation for improving living standards in the future.

Expenditure Outlook

Real GDP is expected to grow 2.7 per cent in 1996 with the provincial inflation rate in the 2 per cent range. This section provides details on the outlook for the components of real GDP presented in Table A2.

Final domestic demand: This component of real GDP consists of personal and government expenditures on goods and services and investment in structures and equipment.

In British Columbia, the consumer sector has been more buoyant than it has been nationally. Recent surveys indicate that, although consumer confidence in British Columbia remains higher than in other regions of Canada, individual households do not appear to be planning to spend more than they did in 1995. These surveys are consistent with consumer spending growth that is slightly in excess of population growth. Therefore, real consumer expenditure should grow 3 per cent in 1996, reflecting continued high levels of in-migration to British Columbia, and strong tourism activity. Despite recent increases, interest rates should be much lower on average than in 1995, leading to a turnaround in the housing market in the second half of the year and increased sales of autos, furniture and appliances and other durable goods.

Spending at all levels of government remains constrained by deficit and debt reduction targets. Growth in total expenditure by all levels of government is expected to be close to zero in real terms in 1996.

Non-residential investment is forecast to increase 2.4 per cent in real terms in 1996. However, total capital investment will continue to be held back by the housing market. Even with a second-half rebound in housing starts, residential investment will remain below the peak reached in 1994. As a result, residential and non-residential investment combined is expected to grow 1 per cent in 1995.

TABLE A2

BRITISH COLUMBIA ECONOMIC OUTLOOK

1. British Columbia GDP data for 1995 are Ministry of Finance and Corporate Relations estimates.
   
2. Wages, salaries and supplementary labour income.

External trade: Export volumes are forecast to grow 2.5 per cent, slightly faster than economic growth in the province's key export markets. Import volumes will grow 1.8 per cent, reflecting slower growth in plant and equipment investment than occurred in 1995. After making a large contribution to 1995 real GDP growth, net exports (export volume minus import volume) should add 0.1 per cent in 1996.

Inventory accumulation: Business conditions surveys and developments in the retail and forest products sectors suggest that many firms entered 1996 with inventories at undesirably high levels. Discounting eliminated the bulk of retail inventories during the first quarter of 1996. However, pulp and paper inventories accumulated during the second half of 1995, which will result in lower production in the first half of 1996.

Sectoral Outlook

After contributing to stellar profit growth the last two years, pulp and paper prices levelled off late in 1995 and declined early in 1996. Some industry analysts believe that the Atlanta Olympics and the U.S. Presidential election will boost advertising and newsprint prices in the second half of the year. Profits and employment in this industry are likely to be under pressure this year. However, wood prices are expected to be higher than last year. In addition, although the agreement on softwood lumber may result in reduced exports to the United States, this could be offset by increased demand from other foreign markets such as Japan.

The residential construction industry will continue to experience slow conditions until demand for existing and new housing strengthens. The fishing industry faces another difficult year due to the small number of salmon expected to return to British Columbia waters. Many agricultural prices continue to rise rapidly, which should benefit the farm sector. Metals prices are expected to remain high, leading to another profitable year for many mining companies.

In the business and personal services sector, activity will continue to be stimulated by inmigration and the growth in contracting-out by larger companies. Intense competition in the airline business has resulted in two new low-fare carriers starting service in British Columbia this year, the two existing major airlines adding flights and new cross-border services being provided by U.S. carriers. Along with heightened competition along the telecommunications "information highway", this should result in continued strong growth in output and employment in the transportation and communications sector. Wholesale and retail trade activity should increase as consumer spending picks up following the second-half slowdown in 1995. Growth in finance, insurance and real estate activity will be determined largely by the speed of the recovery in the housing market.

Other Forecasts

The Ministry of Finance and Corporate Relations forecast projects 2.7 per cent growth in British Columbia's economy in 1996. The chart compares the average of forecasts for British Columbia and other provinces.

1997 Forecast

The economy is expected to grow about 2.5 per cent, in line with growth in the major economies. With another year of strong employment growth of 2.4 per cent, the unemployment rate will continue to fall. Inflation is expected to remain in the 1.5 to 2.0 per cent range. Capital investment is expected to grow strongly, led by a large increase in housing starts.

Risks to the Outlook

Early in 1996, there were fears that a recession was beginning in North America. Short-term interest rates fell due to the perceived weakness, although the stock market continued to rise and long-term interest rates began creeping up. By mid-March, it appeared that the expansion had resumed in both the Canadian and U.S. economies. Concerns that inflation might accelerate due to rising prices for food and energy continued to boost U.S. long-term interest rates. This poses a minimal threat to the Canadian and British Columbia forecasts since the national economy is operating some 3 percentage points below potential and there is little reason for Canadian interest rates to continue rising. In fact, interest rates could fall in such an environment.

There are a number of other potential developments that could lead to stronger growth than forecast:

• Prices for key products such as newsprint and lumber could rebound on growing demand from Asia and a strengthening North American economy.
  

• Investment could expand more than is expected due to the growing realization that British Columbia provides a stable environment in which companies and workers alike can prosper.

Uncertainties in the outlook include:

• In-migration and its impact on the housing market recovery.

• The outlook for consumer spending, given longer-term concerns about job prospects and living standards, and greater efforts to save for retirement.

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