British Columbia -- Budget '99
Ministry of Finance and Corporate Relations
Joy K. MacPhail, Minister

Budget Reports
This electronic version is for informational purposes only.
The printed version remains the official version.

Report A:
ECONOMIC REVIEW AND OUTLOOK

Introduction

In 1998, British Columbia's economy suffered the dual impact of the economic crisis in Asia, and a major decline in commodity prices. The larger-than-expected downturn in Japan and other Asian countries sharply reduced the province's resource exports to the region. Trade with the booming United States economy partly offset these losses.

Domestic economic activity was affected by the downturn in export income and corporate profits. A reduction in the number of people moving to British Columbia led to a sharp decline in housing activity and contributed to softer retail spending.

Despite the deteriorating trade picture and the downturn in the resource and construction industries, the economy continued to produce jobs. Employment rose 1.2 per cent in 1998, and strengthened noticeably by year-end. Between December 1997 and December 1998, nearly 60,000 jobs were created. The unemployment rate fell during the year, despite the growing number of people entering the job market.

After a decline in 1998, growth in the provincial economy is expected to resume in 1999, with real GDP forecast to increase 0.5 per cent, and strengthen the following year. The expansion will be restrained in 1999 by conditions in the Asian economies, notably Japan. On the plus side, growth in the Canadian and U.S. economies should remain healthy, despite the recent rise in long-term interest rates. Inflation expectations across the continent are low, suggesting that monetary conditions should remain conducive to steady economic growth (if less spectacular than seen recently).

 
Economic Consultation

The Minister of Finance and Corporate Relations received advice on the provincial outlook from several Canadian economic experts at the annual economic outlook conference held in February 1999. At this gathering, the average forecast was that British Columbia's economy would remain unchanged in 1999, following a 0.5 per cent decline in 1998. (A topic box at the end of this report provides a summary of the discussions at this conference.) Since the conference was held in February, some participants have publicly released the predictions they tabled at the conference.

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 (the "Ministry") is ultimately responsible for the budget's economic forecast. While the average outlook of the conference participants was for zero growth, the Ministry is forecasting 0.5 per cent real GDP growth in 1999. Details of the Ministry's economic forecast are contained in the Economic Outlook section of this report. The revenue projections in the budget are based on a lower real GDP forecast of -0.6 per cent, as outlined in Report B.

 
1998 in Review

A year ago, the Budget economic outlook predicted that the economy would grow 0.9 per cent in 1998, slightly less than the 1.4 per cent average of predictions by the forecasting panel.

The Ministry of Finance and Corporate Relations now estimates that the economy contracted 0.5 per cent last year (see Tables A1, A2 and H1 for details). This is in line with the revised estimate provided by the Minister's panel this February. Similarly, in its recent quarterly Review, the Bank of Canada observed that the province's ". . . output may have contracted slightly reflecting the impact of the Asian crisis on a heavily resource-based economy". However, there is considerable uncertainty about any estimate, given the varying signals from different areas of the economy last year. Statistics Canada's provincial real GDP figures for 1998 will be released in October.

Table
TABLE A1
CONTRIBUTIONS TO BRITISH COLUMBIA
1998 REAL GDP GROWTH

Investment was the weakest component of aggregate expenditure, reflecting a sharp downturn in residential construction, reduced corporate profits and poor conditions in the resource sector. Housing starts and existing home sales dropped by about one-third, with the impact on housing investment mitigated by growth in spending on renovations and improvements. Capital expenditures by provincially funded agencies helped support non-residential construction. Business inventory investment is also estimated to have fallen in 1998, following a large increase in 1997.

Consumer expenditures increased an estimated 0.6 per cent in real terms as gains in spending on services offset a decline in spending on goods. Services spending was buoyed by American and European tourists. A decline in auto sales and reduced furniture and appliance sales caused by the slump in housing contributed to reduced spending on goods (see Chart A1).

Chart
CHART A1
CONSUMER SPENDING

The external trade sector was relatively weak in 1998. The total volume of exports is estimated to have declined, with losses in merchandise trade partly offset by larger service exports. Import volumes also fell, mirroring declines in auto sales. The drop in the value of the Canadian dollar against its American counterpart made U.S. imports more expensive, offsetting the impact of lower prices for imports from Asia.

Government expenditures on goods and services rose an estimated 0.6 per cent in real terms.

Employment grew steadily during 1998, following a sharp decline in the November 1997–January 1998 period. Part-time employment grew rapidly during the first three quarters before full-time employment began to pick up in the fourth quarter. As a result, total hours worked over the entire year declined about half a per cent.

The provincial unemployment rate approached 10 per cent early in 1998, but fell sharply over the rest of the year, hitting 7.8 per cent in November and ending the year at 8.2 per cent. This is close to all-time lows.

Chart A2 shows the different patterns of wage and salary growth across industries in 1998, reflecting the combined changes in hours worked and average earnings. Although employment rose sharply during the year, wage gains were muted. Average weekly earnings and wage settlements in collective agreements rose 0.7 per cent in 1998, less than the national increase but higher than the provincial inflation rate of 0.3 per cent. Housing costs continued to push down inflation.

Chart
CHART A2
TOTAL WAGES AND
SALARIES BY INDUSTRY

 
British Columbia Economic Outlook

Economic conditions are expected to improve in 1999, reflecting recent strong employment and income growth and the pick up in manufacturing shipments and exports. This should contribute to a modest recovery in consumer spending. Interest rates should remain conducive to spending growth, despite recent increases in long-term rates. The slight appreciation of the Canadian dollar since the end of 1998 is unlikely to have much of an effect on exports.

Topic Box
TOPIC BOX
A BRITISH COLUMBIA RECESSION?

Real GDP is expected to grow 0.5 per cent in 1999 and 2.0 per cent in 2000. The 0.5 per cent growth forecast in 1999 is slightly above the zero growth forecast by the Minister's panel. This reflects evidence of stronger economic activity that became available after the forecast conference was held on February 4:

These factors might argue for a higher growth forecast than 0.5 per cent. However, continued weakness in consumer activity argues for caution.

 
Major Markets

For the third year in a row, the United States economy turned in a stronger performance in 1998 than was expected at the beginning of the year. The economy grew 3.9 per cent, twice the expected growth rate (see Chart A3).

The U.S. economy finished 1998 at a high level of activity, buoyed by strong growth in domestic demand. Recently, the U.S. has shrugged off concerns that the Asian downturn and sluggish exports were dragging manufacturing into recession. Consumer spending and housing activity are at very high levels, posing a potential threat to the British Columbia economy should demand tail off due to rising interest rates or a stock market decline. With these possible exceptions, there are few of the critical imbalances that have tipped the U.S. economy into recession in the past. This suggests growth of 3.0 per cent is likely in 1999, followed by 2.3 per cent in 2000.

British Columbia and the rest of the Canadian economy benefited from U.S. strength, the depreciation of the Canadian dollar and low inflation. Canada's economy also finished the year on a strong note in the fourth quarter but, in contrast to the United States, domestic demand growth slowed to less than 1 per cent. Most of the growth in the fourth quarter was generated by inventory rebuilding in the wake of the General Motors strike in the third quarter. Overall growth in 1998 was 3.0 per cent, identical to the Ministry's forecast. In 1999, consumers will benefit from federal and provincial personal income tax cuts that will boost disposable income. Canadian economic growth of 2.4 per cent is expected in 1999 and 2.5 per cent in 2000.

Japan remains the weakest of the major industrial economies, with real GDP shrinking 2.8 per cent in 1998. This was far below the Ministry's budget forecast of 0.3 per cent growth. Several economic stimulus packages have failed to revive the economy, which is weighed down by a combination of weak demand from other Asian countries and bad debts at financial institutions. This has constricted business lending and investment. Consumer confidence and spending have been stagnant for some time, with housing a key factor dragging down the economy. This has sharply reduced demand for British Columbia exports, particularly coastal hemlock lumber widely used in Japanese housing. Part way into 1999, there are a few signs that the recession in Japan may be nearing an end. Nevertheless, the economy is expected to shrink another 1.3 per cent in 1999 before recovering to 1 per cent growth in 2000. Housing starts this year are not expected to be much above 1998's level.

Chart
CHART A3
GROWTH IN MAJOR ECONOMIES

Entering 1999, the European economy has slowed. The 11 countries making up the new Euro currency zone grew at an annual rate of just under 1 per cent in the fourth quarter of 1998. The slow growth was mainly due to a 1.6 per cent decline in German real GDP. The new currency was introduced smoothly, appreciating against the U.S. dollar in its first few days and slipping about 8 per cent since then. The Euro is unlikely to have any significant economic impact in the near term. Growth of 2.1 per cent is expected in Europe in 1999 and 2.4 per cent in 2000.

 
Financial Markets

Canadian short-term interest rates averaged 4.7 per cent in 1998, up from 1997 levels. However, Canadian and U.S. long-term interest rates fell on average during 1998, ending the year just above 5 per cent. The Canadian dollar traded at 70 U.S. cents at the beginning of the year but fell steadily after the first quarter to 65 cents by year end, hitting all-time lows along the way. The currency averaged 67.5 cents U.S. in 1998, down from 72.2 cents in 1997 and well below the 70.2 cent budget forecast. The depreciation of the dollar helped offset the impact of falling commodity prices on British Columbia exporters.

U.S. equity markets soared in 1998 — the Standard & Poor's 500 index rose 27 per cent — while in Canada, the TSE 300 composite index fell about 3 per cent. The downturn in commodity markets weighed heavily on the Canadian stock market and the Canadian dollar.

Financial markets encountered extreme volatility in late August and early September following problems in Russia. Credit quality spreads skyrocketed (see Chart A4) and many borrowers were unable to obtain financing. Stock markets around the world dropped sharply in response. Canadian interest rates rose sharply in response to a weak Canadian dollar. Late in 1998 and early this year, the prospect of further problems in Brazil and Russia caused more turbulence but calm returned to the markets by mid-February.

Chart
CHART A4
FINANCIAL MARKET VOLATILITY

Low inflation expectations should keep long-term interest rates in the 5.0 to 5.5 per cent range in 1999 and 2000, despite recent increases. The Canadian dollar is expected to rise through 1999 — averaging 66.6 cents U.S., lower than the 1998 average — then strengthen to 69.4 cents in 2000. With some improvement in commodity prices expected for 1999 and low domestic inflation, the slight appreciation of the currency should pose little competitive threat to British Columbia exporters.

 
Export Prices

Prices for commodity exports were lower than expected in 1998, reflecting the severe slump in demand from Asia and, in some instances, increased supply from emerging economies. This weakness was partly offset by higher prices for traded services such as transportation and hotel accommodation. Overall Canadian dollar prices for goods and services exported from British Columbia fell an estimated 1.0 per cent in 1998. In 1999, commodity prices are expected to regain some lost ground. This will contribute to export prices rising 0.8 per cent, with the gains coming mainly in the second half of the year. In 2000, export prices should rise 1.1 per cent.

 
Population, Labour Market and Incomes

Net in-migration is forecast to total 25,900 persons in 1999, up from an estimated 8,900 persons in 1998 (see Chart A5). International in-migration is expected to increase from 1998 levels. The improvement in 1999 is due mainly to an expected easing of the outflow of people to other provinces. Net interprovincial migration will remain negative with a predicted 7,400 person net outflow in 1999, compared to a net outflow of 19,500 persons last year. British Columbia's population is expected to increase 0.9 per cent in 1999 and 1.3 per cent in 2000.

Chart
CHART A5
BRITISH COLUMBIA HOUSING
STARTS AND NET MIGRATION

Employment is forecast to average 1,918,000 in 1999, an increase of 3.1 per cent, or 58,000 jobs. The labour force is projected to increase 2.3 per cent, resulting in an unemployment rate of 8.2 per cent. In 2000, employment growth is expected to moderate to 0.8 per cent and the unemployment rate is forecast to average 8.4 per cent.

The relatively strong employment growth in 1999 and moderation in 2000 is the result of the pattern of employment in 1998. Since January 1998, employment in British Columbia increased steadily (see Chart A6). As a result, in February 1999, employment was 5.7 per cent above February 1998 levels, and above the forecast average for this year.

Growth in average earnings of about 0.5 per cent, plus smaller increases in hours worked than in total employment, should result in total labour income growth of 3.0 per cent in 1999 and 2.3 per cent in 2000. Personal income is expected to increase 2.6 per cent in 1999 and 2.3 per cent in 2000.

 
The Consumer Sector

Strong employment growth, continued low interest rates and improved consumer confidence in recent months (see Chart A7) will lead to an increase in consumer spending this year. In addition, provincial and federal tax cuts and a recovery in net migration later in the year are expected to stimulate consumer spending. Tourism spending should continue to benefit from the low Canadian-U.S. dollar exchange rate, which continues to attract more U.S. visitors to the province. Real consumer spending is forecast to increase 1.8 per cent in 1999 and 1.3 per cent in 2000.

Housing, one of the most cyclical sectors of the economy, will likely experience another slow year in 1999. Housing starts are projected to fall to 18,000 units in 1999 before recovering to 20,700 units in 2000. Improved consumer confidence, strong employment growth and a recovery in net migration later in 1999 will support a gradual recovery in housing starts. Renovation spending will continue to trend upward as people upgrade their current residences rather than move.

Chart
CHART A6
BRITISH COLUMBIA EMPLOYMENT

Inflation is expected to remain low with consumer prices forecast to rise 0.5 per cent in 1999 and 1.2 per cent in 2000.

Chart
CHART A7
INDEX OF
CONSUMER ATTITUDES, B.C.

 
The Business Sector

The outlook for business activity in British Columbia continues to be affected by global economic uncertainty, which began with the Asian crisis and extended to Russia, Brazil and other emerging markets. Corporate profits are expected to decline in 1999 for the second consecutive year, leading to weak investment.

Corporate profits declined an estimated 15 per cent in 1998, following a 10.1 per cent increase in 1997. The drop in profits led to a decline in business investment last year. However, there were numerous capital projects underway in 1998. Private sector investment was mainly in accommodation, with new hotels and resorts being built throughout the province including Ucluelet, Princeton and Radium. There was increased investment in entertainment with a number of cinema complexes being built, including the new Metropolis complex at the Eaton Centre in Metrotown. Despite the drop in retail sales, the retail sector continued to take a long-term perspective, with a number of "big box" stores opening in the Lower Mainland and Victoria area.

With most of the province's resource exporters facing low prices for their products, overall corporate profits are forecast to fall 5 per cent in 1999 before rebounding 20 per cent in 2000.

Low corporate profits and business confidence will result in a decline in planned investment in 1999. The recently-released Statistics Canada survey of public and private investment intentions suggested a 3.6 per cent current-dollar decline in planned business non-residential investment. The drop in planned investment was led by the primary, manufacturing and trade industries, more than offsetting the planned increase in utilities and transportation investment.

In 1999 there are some areas of strength in investment, particularly the natural gas sector. There are currently three major pipeline projects proposed or under construction in British Columbia:

While private sector investment is expected to decline in 1999, planned investment by the three levels of government and their Crown corporations and agencies will increase. Provincial government capital spending will total $1.95 billion in 1999/00, up from $1.5 billion this year.

Chart
CHART A8
MACHINERY AND
EQUIPMENT INVESTMENT

Projects proposed or underway include:

According to the Statistics Canada survey, planned machinery and equipment investment will increase 2.7 per cent (about 1 per cent in real terms) or $172 million in 1999. Some of this will come from businesses upgrading computer equipment and related software to comply with the Year 2000 date change.

Total capital investment is forecast to fall 0.9 per cent in real terms in 1999 and rebound with a 5.0 per cent increase in 2000. Accelerated capital spending on public sector infrastructure, schools and hospitals is expected to boost economic growth.

 
The Government Sector

Spending on goods and services by all levels of government is expected to increase slightly in 1999, partly reflecting the large increase in program spending announced in the recent federal budget. In response to the increase in health care spending, the provincial government will continue to restrain operating expenditure growth outside the health and education areas. Total spending by all levels of government is expected to increase 0.9 per cent in real terms in 1999 and 0.5 per cent in 2000.

 
Risks to the Outlook

The economic forecast for British Columbia is based on 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 these economic variables could turn out to be higher or lower than expected.

As mentioned above, the general view of those attending the Minister's pre-budget economic consultation was that the provincial outlook faces continued external risks during the next year. In particular, the direction of growth in the Japanese economy will remain a risk for the British Columbia economy. Global uncertainty will remain a factor in influencing economic growth in British Columbia.

In addition to the major risks noted above, other forecast sensitivities include:

The forecast panel's range of real GDP growth in 1999 was from +2.0 to -2.0 per cent. This wide range fairly reflects the amount of uncertainty in the economic outlook.

Table
TABLE A2
BRITISH COLUMBIA ECONOMIC OUTLOOK

 

Topic Box
TOPIC BOX
MINISTER'S ECONOMIC OUTLOOK CONFERENCE

 

Topic Box
TOPIC BOX
REGIONAL ECONOMIC DEVELOPMENTS

 

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