The following electronic version is for
informational purposes only.
The printed version remains the official version.
Budget '98: Reports -- Ministry of Finance and Corporate Relations -- Province of British Columbia

Report A: Economic Review and Outlook


In the first half of 1997, British Columbia's economic growth picked up after the slowdown in 1996. Since then, the provincial economy has been growing at a slow pace. Economic activity has been dampened by an economic slowdown in the Japanese and other Asian economies, a fall in some key commodity prices through the year and declines in net in-migration to the province. Output has also been reduced by a labour dispute affecting three pulp and paper mills and production disruptions at other operations in the resource sector.

The pace of provincial economic activity is expected to remain subdued during the remainder of 1998 and into 1999. British Columbia's longer-term prospects remain positive with growth expected to recover as the economic problems in Asia subside and the provincial government's tax and regulation initiatives spur new investment and jobs.

The Asian financial upheaval has added considerable uncertainty to British Columbia's economic outlook. However, while much attention has been focused on Asia's problems, other important factors affecting the provincial economic outlook are also worth noting. For example:


Economic Consultation

The Minister of Finance and Corporate Relations once again received comments on the provincial outlook from several Canadian economic experts at an economic outlook conference held in January 1998. At this gathering, the average prediction was that British Columbia's economy would grow 1.4 per cent in 1998. (A topic box starting on page 13 provides a summary of the discussions at this conference.) Since the conference was held in January, some participants have revised down their forecasts of British Columbia economic growth.

While the diverse views expressed at the conference have been a valuable contribution to the development of the provincial economic outlook, the Ministry of Finance and Corporate Relations is responsible for all aspects of the budget's economic forecast.


1997 in Review

Last year began with the province experiencing a moderate recovery in economic activity after recording sluggish growth in both 1995 and 1996. However, initial signs of strength gave way to a more mixed performance during the remainder of 1997. The pace of growth slowed during the second half of the year as a contraction in the Japanese economy and production disruptions at a number of British Columbia forest industry operations reduced exports.

Real gross domestic product (GDP) rose an estimated 2.0 per cent in 1997, close to the 2.2 per cent projected in the 1997 budget economic outlook (see Table A1).

The British Columbia economy continued to produce jobs in 1997, albeit at a slower pace than in 1996. Job growth was sluggish earlier in the year after large increases in the fourth quarter of 1996. A subsequent jump in employment in the summer months was followed by declines in the fourth quarter. Overall, employment increased 1.8 per cent in 1997, equal to 32,000 new jobs.

This growth was in line with the 1.9 per cent increase in employment at the national level. Part-time jobs accounted for two-thirds of the increase in British Columbia employment. The provincial unemployment rate averaged 8.7 per cent in 1997, down from 8.9 per cent in 1996.

Net in-migration to the province totalled an estimated 49,700 in 1997. Net interprovincial in-migration to British Columbia totalled 7,400, compared to 21,150 in 1996, as the strong recovery in economic activity and employment growth in the rest of Canada reduced the flow of job seekers to British Columbia. Net international in-migration fell only 2 per cent to 42,300 persons in 1997.


Consumer expenditures on goods and services, buoyed by purchases of big ticket items such as appliances and motor vehicles, grew an estimated 3.1 per cent in real terms in 1997. The number of motor vehicles sold was up 14.2 per cent. Spending was spurred by low interest rates and a rebound in consumer confidence from low levels reached in 1995. The value of retail sales rose 4.9 per cent in 1997, or 4.2 per cent after adjusting for inflation.

Inflation in British Columbia remained subdued in 1997 with the province's consumer price index rising only 0.7 per cent, the second consecutive year of overall price increases below one per cent. British Columbia's inflation rate was half the national average and the lowest among the provinces.

British Columbia housing affordability improved in 1997 due to low interest rates and decreases in house prices from peaks reached in recent years. Sales of existing homes fell 5.5 per cent while housing starts increased 6.2 per cent to 29,351 units.

The volume of British Columbia's goods and service exports to other countries and the rest of Canada rose an estimated 3.3 per cent in 1997. The average price of British Columbia's exports was unchanged in Canadian dollar terms. Most of the increase in exports was due to strength early in the year. Exports to Japan began to soften in the second quarter after an increase in the Japanese consumption tax dampened house construction activity and overall economic growth. Exports were also affected by the labour dispute at Fletcher Challenge pulp and paper operations, which halted production at three mills, and a shutdown at the Skeena Cellulose pulp mill and its related operations. Weak export earnings cut into corporate profits in 1997, leading to slow growth in business investment.

Real capital investment rose an estimated 2.6 per cent in 1997, largely due to increased residential construction and business purchases of machinery and equipment. Growth in non-residential construction investment, on the other hand, was relatively weak.

Ongoing restraint measures at all three levels of government held down growth in government spending. At the provincial level, significant cuts were made in the size of the civil service and a capital freeze reduced total capital spending. The federal government also reduced program spending as it moved toward achieving its balanced budget goal.


British Columbia Economic Outlook

The pace of provincial economic growth is expected to slow in 1998, mainly due to continuing sluggish growth in the Japanese economy and a sharp slowdown in other Asian economies. Softening international commodity prices and declining population growth will also hold down growth in 1998. However, the ongoing strength in the North American economy, together with relatively low interest rates and a competitively priced dollar, should help the economy avoid a recession in 1998. British Columbia real GDP is forecast to increase 0.9 per cent in 1998 and 1.7 per cent in 1999.

Major Markets

The North American economy was stronger than expected in 1997 with both Canada and the United States growing 3.8 per cent. Asia's economic problems are expected to have only a limited negative impact on the United States economy. Indeed, the popular view is that any slowdown resulting from the "Asian Flu" will help dampen potential inflation pressures and reduce the likelihood of a significant increase in interest rates. Growth in the U.S. economy is expected to slow to a more sustainable pace, with real GDP increasing 2.0 per cent in 1998 and 2.2 per cent in 1999. U.S. housing starts, which are a major source of demand for British Columbia lumber products, are expected to remain at relatively high levels, totalling 1.45 million units in 1998 and 1.4 million in 1999.

Thumbnail of Chart A1 CHART A1
[ Click to view larger image of Chart A1 ]

Asia's economic difficulties are expected to have a modest impact on growth in the rest of Canada. The national economy is benefiting from a rebound in domestic demand, which is being spurred by increased employment growth, low interest rates and high levels of consumer confidence. The ice storm in central Canada dampened economic activity in the first quarter of 1998, but rebuilding efforts will likely boost growth in the remainder of the year. Canadian real GDP is forecast to rise 3.0 per cent in 1998 and 2.5 per cent in 1999.

The Japanese economy is expected to show little growth in 1998 with real GDP rising only 0.3 per cent. Japan is the main conduit through which Asia's economic troubles will affect British Columbia. Japan and other Asian countries together account for 21 per cent of British Columbia's total goods and service exports. Economic growth in Japan is expected to reach 1.5 per cent in 1999.

Growth in the European economy is expected to average 2.5 per cent in 1998 and 2.3 per cent in 1999.

Thumbnail of Chart A2 CHART A2
[ Click to view larger image of Chart A2 ]

Financial Markets

While Canadian short-term interest rates have been rising since mid-1997, they remain below comparable U.S. interest rates. Long-term Canadian bond yields, on the other hand, drifted down during 1997 and remain on par with comparable U.S. yields. Stronger growth in the national economy and exchange rate weakness prompted the Bank of Canada to raise its Bank rate to 5 per cent early in 1998 from its mid-1997 low of 3.25 per cent. The forecast assumes that short-term interest rates average 4.7 per cent in 1998, up from 3.2 per cent in 1997. Canadian bond yields are expected to remain close to recent levels with long-term government bond yields averaging 6.0 per cent in 1998 compared to 6.4 per cent in 1997.

Thumbnail of Chart A3 CHART A3
[ Click to view larger image of Chart A3 ]

The dollar came under increasing pressure in late 1997 and early 1998, in part due to uncertainty in international financial markets about the effect of the Asian crisis on commodity-producing economies such as Canada. The dollar fell to the 69 U.S. cent range in early February before interest rate increases by the Bank of Canada, together with positive national economic news, pushed it above 70 U.S. cents later in the month. In March, political developments in Quebec caused the dollar to rise almost a full cent. The dollar has been appreciating against the Japanese yen and other Asian currencies caught up in the recent financial crisis, adding to competitive difficulties in those markets.

Thumbnail of Chart A4 CHART A4
[ Click to view larger image of Chart A4 ]

The forecast assumes the Canadian dollar will average slightly over 70 U.S. cents in 1998 and then appreciate gradually over the next few years.

Export Prices

Prices for several of British Columbia's export commodities, such as lumber, pulp and metals, have been falling in recent months. One bright spot in commodity markets is newsprint, which is less affected by Asian market developments. Newsprint prices have been on an upward trend since early 1997 and producers are proposing further price increases in coming months. British Columbia goods and service export prices are forecast to fall 1.3 per cent in 1998 before rebounding by 3.0 per cent in 1999.

Population, Labour Market and Incomes

Net in-migration is forecast to total 40,700 persons in 1998, down from 49,700 in 1997. Both international and interprovincial net in-migration are expected to decline as improving employment prospects in other parts of Canada continue to attract job seekers. However, British Columbia immigration levels could receive a boost from individuals seeking a "safe haven" from Asian economic uncertainty. With in-migration expected to remain relatively subdued, overall population growth is forecast at 1.7 per cent in both 1998 and 1999.

Employment is forecast to increase 0.5 per cent in 1998, equal to 9,000 jobs. The labour force is projected to increase 1.6 per cent, resulting in an unemployment rate of 9.6 per cent. In 1999, employment is expected to rise 1.6 per cent and the unemployment rate is forecast to average 9.7 per cent.

Thumbnail of Chart A5 CHART A5
[ Click to view larger image of Chart A5 ]

Growth in average weekly earnings of about 1 per cent plus the forecast growth in employment should result in an increase in total labour income of 1.5 per cent in 1998 and 2.6 per cent in 1999. Personal income is expected to increase 1.7 per cent in 1998 and 2.6 per cent in 1999.

The Consumer Sector

Slower employment growth and the rise in short-term interest rates in recent months have dampened consumer confidence in British Columbia, according to recent surveys. This, together with slower population growth, will lead to slower growth in consumer spending this year. Real consumer spending is forecast to increase 1.5 per cent in 1998 and 1.6 per cent in 1999. Tourism spending should be boosted by the low Canada-U.S. exchange rate, which will attract more U.S. visitors to the province. This likely will be offset by a drop in Asian tourists.

Housing starts are projected to fall 4.9 per cent in 1998 to 27,900 units. However, many home owners continue to upgrade their houses rather than moving up. A recent Statistics Canada survey indicates that 50 per cent of British Columbia's renovation businesses are expecting an increase in activity in 1998. In 1999, housing starts are forecast to rise 1.4 per cent to 28,300 units.

Inflation is expected to remain low with consumer prices forecast to rise 0.7 per cent in 1998 and 1.1 per cent in 1999.

Thumbnail of Chart A6 CHART A6
[ Click to view larger image of Chart A6 ]

The Business Sector

The corporate profit outlook for British Columbia is clouded by Asia's economic problems and weakness in commodity prices. With most of the province's resource exporters facing low prices for their products, overall pre-tax corporate profits are forecast to fall in 1998 before rebounding in 1999. As a result, investment in the resource sector will be weak. Outside the resource sector, however, the investment picture is relatively good. This is reflected in a recently-released Statistics Canada survey of private and public investment which suggests a 1.3 per cent current-dollar increase in planned capital investment in 1998; investment in the primary and manufacturing industries is expected to decline by $127 million, more than offset by a $391-million increase in the rest of the economy.

Non-residential construction is being boosted by current and planned hotel construction projects in the Lower Mainland and Victoria areas. In addition, the Vancouver International Airport is planning to expand its terminal capacity and a cruise ship terminal and new convention centre are planned for downtown Vancouver. Also, low office vacancy rates and relatively high rents in Greater Vancouver are likely to lead to new office construction over the next two years. Falling prices for computers and other office equipment and expenditures on "Year 2000" solutions will continue the boom in machinery and equipment and related software spending. Statistics Canada reports that Canadian firms will spend $12 billion to deal with the Year 2000 problem. Government efforts to promote business investment are also expected to generate stronger growth in non-residential construction and machinery and equipment purchases over the next few years.

Total capital investment is forecast to increase 1.4 per cent in real terms in 1998 and 2.2 per cent in 1999.

Thumbnail of Chart A7 CHART A7
[ Click to view larger image of Chart A7 ]

The Government Sector

Spending by all levels of government is expected to remain virtually unchanged in real terms in 1998. The provincial government is holding down expenditure growth in recognition of its financial targets. The federal government has announced reductions in program spending over the next year despite achieving a balanced budget. Total government spending is expected to increase 0.2 per cent in real terms in 1998 and 0.9 per cent in 1999.

Risks to the Outlook

The economic forecast for British Columbia is built upon assumptions about interest rates, exchange rates, growth in the province's trading partners and movements in commodity prices. All of these assumptions are subject to risk.

As mentioned above, the general view of those attending the Minister's pre-budget economic consultation was that the provincial outlook faces greater external risks than usual over the next two years, mainly due to the uncertainty of the Asia economic situation. These views were based on fears that Asia's economic downturn could be broader, deeper or more prolonged than currently anticipated. A further deterioration in the Asian situation would result in lower-than-forecast growth in British Columbia. Alternatively, Asian countries could pull out of the current malaise much sooner than forecast with some countries' growth rates returning to near pre-crisis levels within the next two years.

Other risks to the outlook include:







 F&CR BC Ministry of Finance and Corporate Relations

If you have questions or comments about content please contact: Communications Branch