A. Topic Box:
MINISTER OF FINANCE'S ECONOMIC OUTLOOK CONFERENCE
As part of the 1997 budget preparation process, the Honourable Andrew Petter met with 15 economic experts from British Columbia and other parts of Canada on February 20, 1997. The purpose of this meeting was to seek advice and information in setting the budget economic and revenue forecasts. The roundtable gave participants an opportunity to exchange their views on the British Columbia economic outlook, and to discuss longer-term economic issues. Overall, most participants expected economic conditions in the province to improve modestly in 1997, although they suggested there were more downside risks to the British Columbia outlook than the Canadian outlook.
This topic box provides a summary of the views expressed by participants. The table provides a summary of the participants' forecasts of key economic indicators.
International Developments
Foreign Economies
On balance, participants felt there was enough momentum in the world economy to improve British Columbia's growth prospects with two caveats -- Japanese growth could be lower than expected and the Canadian dollar could appreciate more than anticipated.
In the United States, the momentum from strong growth in the fourth quarter is expected to continue into 1997. Real GDP will increase between 2.3 and 2.5 per cent. The risk to the U.S. outlook is on the upside -- that growth will be too strong, igniting inflation and leading to higher short-term interest rates.
Some improvement is expected in Japan's economy in 1997, although most participants viewed the extent of improvement as being very uncertain. Structural problems in the Japanese economy, including problems in financial markets, could hold back economic growth in Japan for some time.
In Europe, economic conditions are expected to remain weak. The United Kingdom is the one bright spot.
The Canadian Economy
The Canadian economy is expected to post stronger growth in 1997. Economic growth projections from the conference ranged from 1.1 per cent to 3.7 per cent with most at the higher end of this range; the average increase was 3.0 per cent. Low interest rates will stimulate investment and may prompt accelerated consumer spending. Some participants cited improvement in the housing sector and increased consumer spending on durable goods as evidence that low interest rates are beginning to have a positive impact.
The risk to the Canadian outlook is on the upside, given the large amount of slack in the economy, low interest rates, low inflation and continued economic growth in the United States.
Financial Markets
Interest rates in Canada are expected to remain low despite a generally anticipated increase in U.S. short-term rates later this year. Canada's low inflation environment will help keep short-term interest rates in the 2.7 to 3.8 per cent range. Long-term interest rates will remain near current levels in both Canada and the United States.
The value of the Canadian dollar is expected to rise against its U.S. counterpart, averaging 74.9 cents U.S. in 1997, up from 73.4 cents in 1996. The expected appreciation is greater against the currencies of other major trading partners. Some participants noted the possible negative effects of currency appreciation on Canada's and British Columbia's trade.
British Columbia
On average, the participants expected the British Columbia economy to grow 2.4 per cent in 1997. Forecasts for real GDP growth ranged from a low of 0.5 per cent to a high of 3.75 per cent. British Columbia participants generally were less optimistic than those based in central Canada. As in several of the national forecasts, several participants expect consumer spending and residential investment to lead British Columbia growth this year, although others were less optimistic about a consumer spending recovery. Some participants suggested the export sector will contribute less to growth than in 1996, while the service sector and non-traditional sectors (including tourism and high-technology) would increase their contribution.
Domestic Spending and Investment
Some participants said that low interest rates will stimulate consumer spending on big-ticket items like furniture and appliances. However, there was debate about whether consumer spending would recover or whether it would remain sluggish due to increased saving for retirement and other longer-term concerns. The extent of the increase in spending will depend on the amount of pent-up demand.
When combined with last year's decline in house prices, low interest rates will make housing more affordable and will likely lead to increased activity in the housing sector. In-migration is expected to continue near current levels, maintaining demand for housing and related goods and services. Housing starts are expected to increase 9.0 per cent in 1997. Participants had mixed opinions on the outlook for non-residential investment. While the low interest rate environment is expected to be favourable for investment, the outlook for capital spending in the forest and mining sectors is uncertain.
External Trade
On balance, participants expected that growth in the industrial countries during 1997 will generate more demand for resource-sector products. The issue was how strong the increase in demand would be and whether it would translate into higher prices. Most expect key commodity prices to improve slightly this year, although several underlined the possible downside risks. The outlooks for copper, newsprint, and lumber remain positive if recent trends continue. However, some expected the lumber market to weaken as U.S. housing construction declines. Most also agreed that high inventory levels will keep pulp prices from rising dramatically, but that some improvement is likely. Aside from price developments, export volumes are expected to increase this year due to growth in the economies of British Columbia's trading partners.
There was some concern expressed about the ability of the province's resource sectors to compete on a global market, given their cost structure and the regulatory environment.
The Labour Market
Employment growth will continue in 1997 with the mix of jobs shifting more towards full-time employment. The average predicted increase in employment was 2.2 per cent. Participants noted that British Columbia has a higher proportion of self-employed persons than the Canadian average. The unemployment rate is expected to be similar to 1996's rate. It was also suggested that, both in Canada and British Columbia, any strength in employment may be accompanied by re-entry into the labour market of "discouraged workers". As a result, even with respectable employment growth, the unemployment rate could remain flat or even rise.
Prices and Wages
Inflation will remain low in British Columbia. Participants expect the annual increase in consumer prices to be in the 1.2 to 1.8 per cent range, and below the national average.
Total wage and salary income is expected to increase between 3 and 5 per cent in 1997. This implies average wage growth of between 0.5 and 2.5 per cent.
Risks to the British Columbia Outlook
Most participants cited uncertainty about the extent of improvement in the Japanese economy as a risk to the British Columbia outlook. The February Consensus Economics publication shows growth of only 1.4 per cent in 1997 in Japan but some warned that growth could be lower than this. An appreciation of the Canadian dollar was also cited as a risk to British Columbia's economic outlook, although most participants felt it was unlikely that the Canadian dollar would rise to 80 cents U.S. in 1998 as suggested by some forecasters in early January. Commodity prices are another downside risk.
On the upside, British Columbia could benefit from stronger growth in the rest of Canada. Higher-than-expected growth at the national level would generate more demand for British Columbia goods and services from other Canadians. However, a booming Canadian economy could result in lower in-migration from the other provinces.
Outlook for 1998
Although the discussion at the conference focused on economic developments in 1997, the participants were also surveyed on their outlooks for the provincial economy in 1998. Overall, economic growth is expected to be stronger in 1998, averaging 3.0 per cent next year. (See table on the next page for the range and average forecasts of key economic indicators.)
Economic and Fiscal Policy
Several participants noted the need for government policy to foster a positive climate for economic growth, job creation and investment. They also emphasized the importance of setting fiscal targets and meeting them by using prudent budget forecasts. One person noted the risks of using consensus forecasts for budgeting, citing how the consensus far over-estimated 1996 growth. While there was no consensus, some participants cautioned the Minister of Finance against balancing the budget in 1997/98 if this would cause the economy to weaken significantly.
| All figures are based on annual averages |
1997 Range of Participants' Opinions |
1997 Average Participant's Opinion 1 |
1998 Range of Participants' Opinions |
1998 Average Participant's Opinion 1 |
| Canada | ||||
| -- Real GDP (% change) | 1.1 -- 3.7 | 3.0 (11) | 2.1 -- 3.5 | 2.9 (10) |
| -- 3-month interest rates (%) | 2.7 -- 4.0 | 3.2 (11) | 2.6 -- 4.3 | 3.5 (10) |
| -- 10-year (+ over) interest rates (%) | 5.9 -- 7.9 | 6.6 (11) | 5.5 -- 7.5 | 6.3 (10) |
| -- Exchange rate (U.S.¢/Can.$) | 73.5 -- 76.2 | 74.9 (11) | 74.5 -- 79.1 | 76.5 (10) |
| British Columbia | ||||
| -- Real GDP (% change) | 0.5 -- 3.75 | 2.4 (14) 2 | 2.1 -- 3.8 | 3.0 (10) |
| -- Employment (% change) | 1.4 -- 3.1 | 2.2 (11) | 1.25 -- 3.0 | 2.3 (10) |
| -- Unemployment rate (%) | 8.6 -- 10.3 | 9.0 (11) | 7.7 -- 9.2 | 8.5 (10) |
| -- Total wage and salary income (% change) | 2.8 -- 5.7 | 4.2 (7) | 3.5 -- 6.0 | 4.7 (6) |
| -- Consumer price index (% change) | 1.2 -- 1.8 | 1.5 (11) | 1.1 -- 2.2 | 1.8 (10) |
| -- Housing starts (% change) | 1.3 -- 27.5 | 9.0 (11) | -9.8 -- +30.5 | 9.1 (10) |
| -- Retail sales (% change) | 1.6 -- 6.0 | 3.4 (10) | 2.0 -- 6.0 | 4.0 (9) |
| 1 | Based on responses from participants who attended the conference and provided forecasts. Number of respondents is shown in parentheses. |
| 2 | The average is 2.3 per cent if the published forecast of the Credit Union Central of British Columbia (Richard Allen) is included. |
The Ministry of Finance and Corporate Relations extends its thanks to all the people who were able to attend the Minister's economic roundtable:
Conference participants:
Luc Bussière -- Conference Board of Canada
Carl Sonnen -- Informetrica Ltd.
Nick Staines -- WEFA Canada
Teresa Courchene -- Toronto Dominion Bank
Josh Mendelsohn -- Canadian Imperial Bank of Commerce
John McCallum -- Royal Bank
Rick Egelton -- Bank of Montreal
Warren Jestin -- Scotiabank
Jock Finlayson -- Business Council of British Columbia
Darcy Rezac -- Vancouver Board of Trade
George Pedersson -- G.A. Pedersson & Associates
Peter Cook -- PAC Consulting
David Baxter -- Urban Futures Institute
John de Wolf -- CCG Consulting
James McRae -- University of Victoria
Invited but unable to attend:
Richard Allen -- Credit Union Central of British Columbia
Richard Harris -- Simon Fraser University
John Helliwell -- University of British Columbia
Douglas Smyth -- IWA - Canada
BC Ministry of Finance and Corporate Relations