Report A: ECONOMIC REVIEW AND OUTLOOK
On January 22, 1998, the former Minister of Finance and Corporate Relations, the Honourable Andrew Petter, met with economic experts from British Columbia and across Canada. The purpose of the meeting was to discuss the current conditions and prospects for the British Columbia economy. Thirteen participants tabled forecasts for the economy.
This is the second year in which the minister has sought the opinions and advice of independent professionals in preparation for the annual budget. As with last year's round table, the participants outlined their views of the province's economic outlook for the near term, as well as issues affecting the province's longer-term outlook.
The general view of the round table's participants was that British Columbia's economy is expected to grow at a moderate pace over the next one to two years while the longer-term outlook is more positive. An over-riding concern was the significant negative risks generated by the Asian economic upheaval. Most participants felt that policy adjustments were needed for the economy to achieve its full potential.
Participants in the consultation agreed that Asia's financial and economic problems, which have overshadowed international economic developments since mid-1997, will play a dominant role in shaping events in British Columbia for the near term. Most agreed that British Columbia's extensive trade links with the Asian economic region will result in the province experiencing a disproportionate share of the impact from Asia's downturn compared to the rest of Canada.
The Japanese economy is expected to be significantly affected by problems in neighbouring economies, with exports reduced and its banking system shaken by bad external loans. Japan's economy is expected to record little or no growth in 1998.
The momentum in the United States economy is expected to be only modestly affected by Asia's economic problems. Some noted a positive side to the Asian problems with the reduction in U.S. growth caused by the Asian situation perhaps dampening inflation pressures enough to avoid an increase in short-term interest rates. Europe is also expected to avoid any major fallout from the Asian crisis with growth in 1998 picking up from relatively low levels in recent years.
The Canadian economy is expected to continue growing at a relatively brisk pace in 1998 with domestic demand the main source of growth. Most participants agreed that low interest rates and accelerating employment growth are expected to spur consumer spending on big ticket items, business investment on machinery and equipment, and residential housing construction. Canadian growth was generally expected to be in the 3.0 to 3.5 per cent range, although forecasts ranged as high as 4.0 per cent and as low as 0.2 per cent. A few participants raised concerns that Canadian economic growth could be dampened by an unexpected tightening of monetary policy or a significant slowdown in the U.S. economy.
The recent weakness in the dollar has pushed short-term interest rates above 1997 levels. However, most participants expected Canada's low inflation and the gap between actual and potential growth to lead the Bank of Canada to resist significant increases in short-term interest rates. Short-term interest rates are expected to average around the mid-4-per cent range while long-term interest rates are expected to fall slightly from 1997 levels.
The recent depreciation in the Canadian dollar relative to its U.S. counterpart reflects international market concerns about the impact of the Asian crisis on Canada's growth prospects. However, some participants believed the dollar's weakness is only temporary with Canada's positive fundamentals, including the general improvement in government finances, likely to boost the dollar over the medium term. The general view was that the dollar will remain below its 1997 level in 1998.
Most participants expected the pace of growth in the British Columbia economy to slow in 1998. The dramatic reduction in growth prospects for the Asian economies was cited as the main cause of British Columbia's lower growth outlook, in view of the province's significant trade links with that region. On average, the British Columbia economy was expected to grow 1.4 per cent in 1998. Forecasts ranged from a high of 2.5 per cent to one participant projecting a 0.9 per cent fall in British Columbia real GDP in 1998.
Participants noted that the province's resource industries were struggling prior to the onset of Asia's problems. The general view at the meeting was that provincial exports will be adversely affected by reduced demand in Asian markets and the fall in most commodity prices. In addition, the province is expected to experience reduced in-migration flows, particularly from other provinces, as the rest of Canada continues to produce more job opportunities.
Several participants noted that a decline in employment opportunities in British Columbia is reducing the inflow of migrants from other parts of Canada. Others noted, however, that offshore in-migration should remain relatively high, especially if British Columbia is viewed as a safe haven for Asians moving to avoid the region's economic problems.
Slower population growth, together with declining consumer confidence and slower employment and income growth, were noted as factors likely to dampen consumer spending growth in 1998. Total wages and salaries are expected to grow 2.7 per cent in 1998, down slightly from 1997's pace. Retail sales growth is expected to slow to about 3.0 per cent in 1998, although the range of forecasts was wide. While some participants expected the tourism sector to do relatively well in 1998 due to the low Canada-U.S. exchange rate, one noted that the increased cost competitiveness of Asian destinations resulting from the depreciation in some Asian currencies could draw a significant proportion of the market away from British Columbia.
Business investment is expected to be dampened by falling business profits while the province's housing market is expected to weaken due to lower levels of net in-migration and low levels of consumer confidence. Although some participants expected housing starts to increase by as much as 7 per cent, most forecast housing construction to fall in 1998.
Some areas of strength were noted, including the province's oil and gas sectors, and the high technology, transportation (Vancouver International Airport, ports, etc.) and entertainment industries.
While British Columbia employment growth is expected to continue in 1998, all participants projected it will slow from its 1997 level. Similarly, most forecast the unemployment rate to average above the 1997 level, although a few expected lower labour force growth to generate a fall in the unemployment rate.
Inflation was expected to remain low in 1999 with participants expecting the annual increase in the consumer price index to be around 1.0 per cent.
Developments in Asian economies are expected to shape the pattern of British Columbia trade in the near term. While continued strength in the U.S., Canadian and European economies is forecast, reduced industrial activity in Japan and the rest of Asia will dampen overall exports. This decline in the volume of overall exports, together with a general decline in commodity prices, affects the outlook for provincial export earnings. Many at the meeting noted, however, that the depreciation of the Canadian dollar against the U.S. dollar has helped offset some of the negative impact of Asian developments.
All participants were more optimistic for the province's economic prospects in 1999, with growth forecast to rebound to slightly over 2 per cent. The range of opinions regarding next year's growth was also narrower with a low forecast of a 1.3 per cent increase in provincial real GDP compared to a high of 3.0 per cent. One participant noted that the Asian economies will likely stabilize and improve in 1999, leading to increased overall growth for British Columbia.
While many at the meeting emphasized that the province's long-term economic prospects were positive, most agreed that the risks to British Columbia's near term outlook were on the downside. A major risk to the outlook, especially for the short term, is the uncertainty about the depth, duration and scope of the Asian downturn. One participant noted that most forecasts assume the Asian situation will be "managed" to the extent that international financial assistance will be sufficient to prevent a further deterioration in economic conditions. If this assumption turns out to be wrong, then most current outlooks may prove to be overly optimistic. Others noted that the unfolding of the situation could be marked by "surprise" adjustments in financial markets.
Other risks included the possibility that growth in other major trading partners, especially the United States, could be weaker than expected; one participant suggested the United States is likely to experience a recession sometime before 2000. In addition, Canadian as well as British Columbia economic activity could be slower than expected if the Bank of Canada uses overly aggressive monetary policies to support the Canadian dollar. Finally, consumer spending could be at risk should individuals decide to reduce their borrowing and/or rebuild their depleted savings.
Many participants emphasized the need for the government to create conditions for stronger economic growth over the long term by improving the province's business climate. They identified possible measures to enhance the province's competitiveness, such as reducing regulation and costs in resource industries and cutting business and personal taxes, all with a view to stimulating business investment.
Several participants emphasized the importance for business and investor confidence of the government meeting its current fiscal targets, including balancing the budget in 1998/99 and meeting the debt-to-GDP targets. Similarly, the government should base its fiscal projections on very conservative economic forecasts and/or incorporate contingency reserves to ensure it will achieve its financial targets. Finally, the significant impact of the Asian economic crisis on British Columbia's resource sector prompted a few participants to comment on the need for increased industrial diversification.
The Ministry of Finance and Corporate Relations would like to thank all of the participants in the Minister's economic outlook conference.
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