Until recently, many observers thought British Columbia would weather the global economic crisis better than other provinces. Those illusions have now faded.

Despite its many advantages, B.C. is just as vulnerable as the rest of the country to the deteriorating global economy. The Business Council of B.C. is now forecasting no growth in the province’s real gross domestic product this year, along with a 5%-10% decline in the value of its exports compared with 2008.

The speed with which B.C.’s economic landscape has shifted has caught many people offguard, admits Jock Finlayson, executive vice president of the BCBC in Vancouver: “Most B.C. opinion leaders believed that the province would not feel the full brunt of the U.S. recession and credit crunch because we don’t have an auto-manufacturing sector, we do more trade with Asia than other provinces and we will get an economic boost from the Olympics in 2010.”

The reality, he says, is that the U.S. housing implosion has hit B.C. harder than any other part of Canada. Additionally, the weakening global economy, particularly slowing Asian economies, have led to a decline in demand for and the prices of commodities that are important to B.C.’s well-being — zinc, copper, pulp, aluminum and natural gas.

And unlike 2008, when weakening exports were offset by strong domestic demand, this year there are concerns that consumers are retrenching, thus worsening an already difficult situation.

Consumer spending plays a larger role in B.C. than in other parts of Canada, accounting for almost 70% of B.C.’s GDP, vs 60% for Canada as a whole. And that makes consumer psychology arguably more important in B.C., Finlayson says: “We expect very little increase in retail sales in 2009: 0.7% for the year on an average annual basis, which is well below the 4%-6% increase recorded over most of the 2003-07 period. If consumer spending rises in real terms, it would help to mitigate the situation, but even a modest pullback could send B.C. into a full-scale tailspin.”

Vancouver-based Central 1 Credit Union certainly expects slower growth in consumer spending to underpin the province’s weakened economic performance in 2009. Its recent report forecasts a 1.2% decline in retail sales.

In fact, the Central 1 report predicts a 1% drop in real GDP, which would be the first annual contraction in the province’s economy since 1982. The report also forecasts declines in total personal income in each of the next two years, along with the loss of 42,500 jobs this year, with unemployment exceeding 7% by the end of 2009.

The vast majority — 85% — of the job losses will be concentrated in the residential construction and the retail and wholesale trade sectors, with the rest spread among manufacturing, finance/insurance/real estate, professional/managerial/support and accommodation/food services, says Central 1 chief economist Helmut Pastrick. Government-related employment is expected to post small gains.

Other forecasters also are predicting significant job losses, ranging from 13,000 (the Conference Board of Canada) to 45,000 (the BCBC), although the recent federal budget should provide some uptick for B.C.’s construction and engineering industries, says Finlayson: “Ottawa is also making $170 million a year available to support various forestry-sector initiatives, including new product and market development.”

Toronto-Dominion Bank vice president and deputy chief economist Craig Alexander certainly believes B.C.’s labour market will hold up better than those of most other provinces: “Overall, employment will be flat in the coming year. There will be some losses but offsetting gains in the latter part of the year.”

A recent TD report calls for the province’s unemployment rate to rise to 5.3% this year from 4.5% in 2008; nationally, unemployment is expected to increase to 7.7% from 6.1%. “So, B.C. will outperform in a very weak market,” Alexander says.

On the nominal GDP side, total income in B.C. will fall by 2% in 2009, vs 3.2% for Canada as a whole. Construction and forestry will be major sources of weakness, Alexander says, along with other commodities-related industries.

Royal Bank of Canada senior economist Robert Hogue agrees. The forestry sector — once the backbone of B.C.’s economy — has been in crisis for years, thanks to the soaring loonie, the pine beetle invasion and the softwood lumber dispute. (See page 31.) Since 2006, the U.S. housing crisis has further battered the industry, to the point at which the volume of timber produced in B.C. last year hit an unprecedented low. The pace of job losses also has accelerated, with several mills announcing closures.

@page_break@“There’s very little hope for forestry in the near to mid-term,” Hogue says. “Long term, it depends on the situation in the U.S., which is the biggest market for those products. The housing market there will probably take longer to recover than the overall economy. Even if it stabilizes soon, it won’t be enough to relaunch the forestry sector.”

Eroding consumer confidence is hitting key housing markets hard, Hogue says: “Poor affordability levels in Vancouver and Victoria — resulting from the sharp run-up in prices during the boom — will constitute major hurdles for housing demand.” New housing construction, which was slipping fast late in 2008, is expected to decline significantly this year, with housing starts projected at 23,500 units, down from 35,000 units in 2008 and a recent peak of 39,200 in 2007.

RBC forecasts a 0.6% increase in B.C.’s real GDP in 2009, while employment is projected to grow by just 0.2%. Unemployment will average 5.6%, Hogue adds.

The BCBC expects non-residential construction to hold up better because of the many multi-year projects underway. But, Finlayson says, the rate will still be negative year-over-year.

Finlayson also anticipates significant cutbacks in business investment, which will eliminate any real prospects for growth this year. “The equity markets are effectively closed, in terms of tapping them for business growth,” he says, “especially for speculative ventures such as mineral exploration.”

One bright spot is the frenzy of activity in northeastern B.C., where the province’s sale of oil and gas rights to exploration and development companies has generated a record $2.4 billion this past fiscal year. Despite the current low price for natural gas, rights holders, including heavyweight EnCana Corp., are bullish about the prospects for natural gas deposits in the shale rock in that part of the province; there is speculation that B.C. could become one of the hottest shale gas production areas in North America.

The public sector may provide another boost. Investment by the federal and provincial governments will help mitigate the impact of the downturn, Finlayson says. On the other hand, the 2010 Olympic Games won’t be much of a factor this year, as most of the capital spending has already been done. But as the event draws closer, delegations will start to visit and the Games should provide a significant boost to B.C.’s GDP in 2010. IE