The Olympic flag flies over British Columbia, heralding the coming 2010 Winter Games. Even the Olympic creed of “swifter, higher, stronger” seems to pass appropriate comment on the growing strength and sustainability of the West Coast province’s economy.

But while B.C. runs a strong race in the competitive global economy, the slowing U.S. economy could still cause B.C. to stumble.

On the positive side, preparatory construction for the 2010 Games is now in full swing and the economic stimulus from that activity has spilled over into non-Olympic capital-spending projects.

Other factors are also helping: strong world commodity prices have triggered revitalized mineral exploration spending; major port and related infrastructure expansion to accommodate the growing trade with Asia; and improved trade and labour mobility between B.C. and Canada’s hottest provincial economy, Alberta.

But obstacles are emerging to counter those powerful economic strides. The most significant is the slowing economy in the U.S., the destination for about 60% of B.C.’s total exports.

In particular, the recent slowdown in U.S. housing starts has affected B.C.’s critical forestry sector, which for a number of years has been locked in an equally serious battle with Mother Nature and the ever-spreading devastation from the mountain pine beetle.

Add into the mix the continued strength of the Canadian dollar, which has affected B.C.’s usually strong tourism sector, and it becomes crystal clear that the province’s economy has a few challenges ahead.

The B.C. economic index, a measurement devised a few years ago by the Business Council of B.C. and its chief economist, Jock Finlayson, has taken the measure of these challenges. The index recently registered only a small gain of just 0.3% in the fourth quarter of 2007 — nothing to cheer about.

“Although the result confirms that the B.C. economy continued to expand, two back-to-back below-average quarterly gains suggest that the faltering export sector is acting as a significant drag on the province’s economy,” Finlayson says. “Taken together, the last two readings are the weakest six-month period for the index since 2001.”

By comparison, the index’s average quarterly growth for the 1990-2006 period stands at approximately 0.75%.

“The fall-off in U.S. home-building, a C$ hovering near parity and, more recently, a growing threat of recession in the U.S. are all taking a toll on B.C.’s export sector,” Finlayson adds. “In the index, this is reflected in a sharp drop in manufacturing shipments. These same factors also continue to affect tourism, as the number of international visitors to the province fell again in the fourth quarter.”

Another negative indicator — and a surprising one at that — was retail spending, adjusted for inflation.

“Over the past five months, spending in retail stores has levelled off and, in real terms, has declined slightly,” Finlayson wrote in his fourth-quarter report. “Some of this may reflect the decline in international visitors and the fact that the strong dollar is prompting more British Columbians to shop south of the border or online.”

On the positive side, he says, employment growth was healthy throughout the year and provided the largest boost to the index in the final quarter.

Regardless, taken together, all the numbers point to a “comparatively soft hand-off” for the start of 2008, he suggests.

The signs of slowdown in B.C.’s economy are also seen in recent reports by Credit Union Central of British Columbia’s economics department, headed by economist Helmut Patrick.

In a recent issue of Weekly Economic Briefing, Patrick says that full-time jobs in B.C. declined by an estimated 37,000 in December, according to figures supplied by the latest Labour Force Survey estimates from Statistics Canada. But part-time work increased by an estimated 26,700 jobs, which left total employment “down by an insignificant amount from November,” the briefing points out. B.C.’s unemployment rate remained unchanged in December, at 4.2% of the labour force.

“For 2008, Credit Union Central of British Columbia is forecasting a moderately robust year-over-year gain in average total employment of 2.6% in B.C.,” the report says. “The provincial unemployment rate is forecast to average a record-low 4.1% of the labour force.”

As for exports, the report says, the dollar value of B.C.-origin goods was little changed in November from October, following significant declines earlier in 2007: “B.C.’s merchandise exports have been decimated by the deepening recession in U.S. housing construction and the soaring U.S./Canadian exchange rate.”

@page_break@Unadjusted exports totalled $2.3 billion in November, down by a slight $36 million (1.6%) from October, it says.

But here’s the Credit Union Central report’s most telling statistic: “B.C. forest-product exports totalled $790 million in November, the lowest monthly total in more than 15 years. Lumber prices and quantities were again cut by the U.S. housing slump, while pulp and paper exports were slashed by another sharp drop in newsprint shipments.”

In fact, the report notes, for the first 11 months of 2007, B.C.-origin exports totalled $28.9 billion, a decline of $1.7 billion, or 6%, from the same period in 2006.

“Credit Union Central of B.C. expects the final figures to show a year-over-year decline of 6% in international exports of B.C.-origin goods in 2007,” it adds. “For 2008, exports are forecast to remain range-bound near the 2007 level as the U.S. dollar and [gross domestic product] growth remain modestly weak.”

Key indicators supplied by TD Bank Financial Group for both 2008 and an average of the period between 2003 and 2007 also show a bias toward forecasting a downturn for the B.C. economy.

In real GDP growth, for example, TD report shows that forecast growth of 2.8% for the current year, while still good, is well off the five-year average of 3.4% for the 2003-07 period, which peaked at 4.5% in 2005.

While inflation in B.C. remains well under control, with a forecast rise of 1.7% in the consumer price index this year following a five-year annual average rise of 1.9%, the unemployment rate is forecast to be 4.3% this year, compared with a five-year average of 6%. A single-year unemployment rate of 8.1% in 2003 reflects the highly cyclical nature of B.C.’s resources-based economy.

Retailers are also beginning to feel the pinch from increasingly cautious consumers in the West Coast province. The 5% growth forecast for nominal retail sales in 2008 is down slightly from the five-year average of 5.4%.

However, public and private capital spending has been one of the primary drivers in the B.C. economy over the past few years. And while some projects have been directly associated with the 2010 Winter Olympics, others are centred on the province’s scramble to have the public transit system in Greater Vancouver catch up to B.C.’s fast-growing population.

In January, for example, the Liberal government of Premier Gordon Campbell announced a $14-billion public transit expansion program. Most of the spending was earmarked for Skytrain and bus expansion programs in Metro Vancouver.

Some of these projects, such as the Canada Line extension to Metro Vancouver’s Skytrain system — it will run from downtown Vancouver to Vancouver International Airport when it opens just before the 2010 Olympics — are already under construction.

But even these projects occasion a word of caution from Royal Bank of Canada. “Capital spending [in B.C.] will probably peak during the next years,” its latest report on the provincial outlook says. “Public capital spending has been on an upward path since fiscal year 2003-04 but is expected to have peaked at $5.5 billion.

“In fiscal year 2008-09 and fiscal year 2009-10,” the report continues, “spending will remain at elevated levels (around the $5-billion mark) but will not be as positive for economic growth as in the past five years.”

The RBC report also says economists are concerned that a softening in B.C. capital spending will amplify the effects of already slowing trends in other critical sectors, such as forestry and energy. “Cracks are appearing in the economies of British Columbia, Alberta and Saskatchewan that will result in softer growth this year,” it adds.

Obviously, the biggest “crack” for B.C. is in its forestry sector, in which a coastal lumber strike in 2007 only added to the industry’s problems of a rising C$ and shrinking U.S. export markets, which also resulted in several major mill closures, including two Canfor mills in the past month alone.

And even though this sector carries less clout than it did a decade or two ago, forestry is still the backbone of B.C.’s export economy. It is still responsible for about 40% of the province’s total export earnings and has a similar share of manufacturing output, says the B.C. Business Council’s Finlayson.

He warns some forecasters are expecting U.S. housing starts to dip below the one-million mark this year, vs more than two million starts in both 2004 and 2005. That downturn is reflected in lumber prices, which by mid-January were near US$210 per thousand board-feet, vs an annual average of US$284 in 2007, US$327 in 2006 and US$387 in 2005.

The rising C$ compounds this problem because B.C. forest companies post their selling prices in US$ but incur most of their costs in C$. “The [Canadian] dollar’s unprecedented rise has crushed profit margins,” Finlayson says, “and severely eroded the industry’s overall competitive position.”

That is why the B.C. government recently announced a new review of B.C. forest regulations and the creation of a “working round table on forestry” in a bid to offset external negative factors.

The mountain pine beetle is the other huge threat to B.C. forestry — and thus to the overall provincial economy. A joint report issued in December by the Business Council of B.C. and the B.C. Council of Forest Industries concludes that this voracious little bug will significantly affect the province’s economy.

The report estimates that almost 80% of lodgepole pine in the province’s Interior will have been killed by the time the beetle has run its course by the middle of the next decade. That equates to about 30% of all trees in the B.C. Interior.But pine trees killed by the beetle are less economical to process into lumber and so, the paper suggests, we’ll see a reduction in traditional forest activity of 20%-40% in the Interior over the next 25 years.

One of the best possible responses to the infestation is to ensure that harvest levels of beetle-killed timber remain as high as possible for as long as is economically practical, the report says.

However, it’s not all bad news in B.C.’s resources sector.

Recent B.C. government numbers show that the province’s mineral exploration expenditures in 2007 reached a record $416 million. That’s up by 57% from the previous year’s total of $265 million, and by a whopping 1,300% from the paltry $29 million spent in 2001.

Nationally, B.C. attracted 17% of the total amount spent on mining exploration across the country, compared with 7% in 2000. And Vancouver remains the centre of the venture-capital market for much of the world’s junior mining activities. IE