B.C.’s economy faces headwinds

But the bad news is that B.C.’s economy still faces some brisk headwinds on the home front. In addition to slack U.S. demand and listing prices for natural gas, the province faces the Herculean task of reverting to the old provincial sales tax. B.C. voters rejected the harmonized sales tax last year.

Consequently, most economists forecast lower growth for B.C. this year. Toronto-Dominion Bank, for example, downgraded B.C.’s real gross domestic product growth to 1.7% for 2012 and calls for only 2% growth next year.

The Business Council of B.C.’s forecast sees 1.9% growth in 2012 and 2.6% in 2013, while Central 1 Credit Union has this year’s growth pegged higher, at 2.5%, and 2.8% next year. Meanwhile, the B.C. government’s projection calls for 2.3% growth in 2012 and 2.4% for 2013.

These mediocre GDP outlooks translate into equally lacklustre job growth. TD, for one, pegs B.C. job growth at 0.6% this year.

“The outlook is for the B.C. economy to expand at a subpar pace and the external setting is clouded with an unusually high degree of uncertainty,” the BCBC states in the advisory submission it sent to Victoria this past autumn for the 2012 provincial budget, which will be introduced on Feb. 21.

But the fact that the Asia-Pacific region is drawing a higher percentage of B.C. exports than the still-sluggish U.S. economy is a helpful offset, says BCBC CEO Jock Finlayson. The most recent B.C. government statistics show that Pacific Rim countries now receive 43.1% of B.C. export value while the U.S. accounts for 42.8%.

Finlayson also notes that a stronger-than-anticipated U.S. recovery over the next few years could return it to the traditional top spot, especially if U.S. housing rebounds, which will boost B.C. lumber exports to the south.

Another significant contributor to the decline in U.S.-bound B.C. exports is the huge drop in natural gas prices and accompanying drop in gas royalties for Victoria. Whereas B.C. natural gas royalties totalled $1.3 billion in 2008-09, they were only $313 million in 2010-11.

Another issue is the province’s abnormally high household debt-to-income ratio, which stood at about 160% last year vs a national average of almost 130%.

A significant contributor is the lower mainland’s and Victoria’s extremely high housing costs. In metro Vancouver, for example, the latest year-over-year price increase for a single detached home was 11.2%, bringing the cost to $887,000, while in the city of Vancouver’s west side, average prices surged by 20.7% to reach $2 million.

The resulting big mortgages incurred by many homeowners are leaving many British Columbians asset-rich but cash poor. Consequently, forecasts call for B.C. to rank dead last nationally in retail sales this year, with growth of 2.1% vs 4.8% in the 2010 Olympic year.

Some resources exports may also weaken. “The strong growth of exports of coal and lumber [from B.C.] to China observed in 2011 is likely to lose steam as China’s economic expansion is reined in by the European recession,” the recent TD provincial report states.

However, the Conference Board of Canada suggests that some recovery in U.S. housing could mean a 3% rebound in B.C. forestry production this year and 4.1% in 2013.

Furthermore, B.C. can also look forward to growth in other key sectors. Winning an $8-billion portion of Ottawa’s shipbuilding program will help total real manufacturing output grow by 4% this year and by 5.4% in 2013. Continued construction of road and bridge infrastructure in the lower mainland — to ease both commuter congestion and Pacific Rim container traffic — will also help.

In addition, Premier Christy Clark has launched a multi-pronged jobs initiative that includes lowering taxes, balancing B.C.’s budget by 2013-14 and making further cuts in red tape for business. Tax credit programs and apprenticeship training schemes are also being enhanced.

As well, there’s a push to have eight new mines opened by 2015, and new northern power line development will proceed. An additional goal is to have major container port expansions at Deltaport in metro Vancouver and Ridley Island in Prince Rupert completed by 2015. Establishing a liquefied natural gas plant and a $2.5-billion aluminum smelter plant upgrade are slated for Kitimat.

“We can see some very positive momentum building for B.C. over the medium term, especially in the north,” Finalyson says.

Another positive: B.C. hopes to benefit from supplying commodities and raw materials for Japan’s extensive rebuilding programs following the devastating earthquake and ensuing tsunami in early 2011.

However, the B.C. government is also facing major challenges: in particular, the rejection of tax harmonization by voters means that B.C. has to repay Ottawa $1.6 billion in transition funding in addition to paying for conversion back to the old PST. Total estimates for the reversal run as high as $3 billion.

Still, B.C. has reached agreement with Ottawa to spread the payback over five years, with no interest charged, although Victoria will take the $1.6 billion “hit” only in fiscal 2011-12.

Another issue Victoria faces is expiring contracts this year for most of its 307,000 unionized workers. Although provincial Finance Minister Kevin Falcon says there’s no money for wage increases, many public employees are coming off a two-year wage freeze they accepted in 2010 to facilitate labour peace during the Winter Olympics.

But Victoria is sticking to last year’s pledge for a balanced budget by 2013-14 — even though current projections show that after deficit forecasts of $3.1 billion for 2011-12 and $805 million in 2012-13, there’s still a shortfall of $458 million in 2013-14. The provincial debt in 2011-12 is projected at $36.5 billion.

Looking ahead to the 2012 budget, Victoria is sending clear signals that it will be relying almost exclusively on spending cuts, not tax hikes, to make ends meet — eventually, that is. IE