Nowhere to go but up for B.C.

British Columbia is poised for economic recovery in 2010 after being pounded by the worst recession in decades. The consensus among economists is that B.C. will outperform Canada as a whole this year — in part, because it was hammered so badly in 2009.

Almost every sector suffered last year, from exports and resources to housing and retail sales. The result was an estimated 2.5% contraction in real gross domestic product, the largest pullback for B.C. since 1982. Furthermore, B.C. experienced Canada’s biggest drop in full-time employment, which plunged by 3.6% between August 2008 and May 2009; in turn, unemployment surged to 7.7% from 4.5% in the 12 months ended Sept. 30, 2009.

But recent data show signs of improvement, says Robert Hogue, senior economist with Royal Bank of Canada in Toronto, noting that the most striking development to date has been the stunning rally in sales of existing homes: “The resale market had fully recovered by October, thanks largely to extremely low mortgage rates. Retail sales and housing starts have also trended higher since last spring, albeit from low levels. Employment picked up last fall, and hosting the Winter Olympics will be a tonic.”

Despite the high value of the Canadian dollar, the Olympics will boost provincial GDP by propping up services related to retail, food, and accommodation, says Craig Alexander, senior vice president and deputy chief economist with Toronto-Dominion Bank in Toronto: “We think B.C.’s GDP will grow [by] 3% this year compared with 2.7% for the country as a whole. That represents a healthy but subdued pace of recovery. Historically, there’s a real pop in growth following a recession, but that seems unlikely this time because of our strong trade ties to the U.S.; it hasn’t recovered from the damage to its financial system.”

The Conference Board of Canada also believes that B.C. will outperform the rest of the country in 2010, with provincial GDP surging by 4.2%, thanks to rising commodities prices and a modest rebound in the U.S. housing market.

“We expect 750,000 U.S. housing starts this year, compared with a record-low 581,000 in 2009,” says Conference Board of Canada economist Alicia Macdonald in Ottawa. “That’s good news for the lumber industry and for the B.C. manufacturing sector, generally.”

As well, the harmonized sales tax, which B.C. plans to introduce on July 1, will boost housing starts in the province and remove a tax on equipment and materials. This might improve the industry’s competitiveness and increase productivity through investment in new technologies, while the strong dollar will reduce the cost of imported equipment.

However, CIBC World Markets Inc. executive director and senior economist Warren Lovely in Toronto is more cautious about the outlook for U.S. housing: “It will be some time before it picks up materially. One key question is how successfully B.C. can capitalize on the demand for wood products from other markets. China is investing heavily in both residential and non-residential construction. B.C. doesn’t feed much of that demand currently, but by better aligning its standards with those of China, the province could diversify its sources of demand.”

B.C. is uniquely positioned to capitalize on Asia’s strong demand for other commodities, including copper and gold. The province’s mining industry got a recent boost when the government approved Vancouver-based Taseko Mines Ltd.’s $800-million copper/gold Prosperity project, which is slated to begin construction this summer. Terrane Metals Corp., also of Vancouver, is expected to begin building its $915-million Mt. Milligan copper/gold mine this spring; and other projects are also moving ahead.

The fact that India, China and other Asian markets are expected to lead the global economic recovery is also good for B.C.’s shipping industry, adds Alexander: “The Vancouver Port Authority will see significant growth in volumes this year.”

Major shale deposits in B.C.’s northeast, with their vast potential for new natural gas production, continue to attract strong exploration activity, notes Jock Finlayson, the Business Council of British Columbia’s executive vice president in Vancouver: “Activity has been surprisingly buoyant, given that until recently, natural gas prices were atrociously low. The government has encouraged exploration and drilling with positive fiscal measures, and if prices stay at current levels or rise, activity levels may increase.”

Another expected key source of economic growth in B.C. for 2010 is consumer spending, Finlayson says: “We expect retail sales, which are the biggest single component of consumer spending, to climb by 5% to 5.5% in 2010, following a 5% decrease last year.”

@page_break@Hogue agrees that consumer spending will pick up this year, but the improvement will be less significant than might be expected: “Spending usually jumps quite substantially following a recession because of pent-up demand for cars, appliances, etc.; but this will be a moderate rebound, by historical standards. Scars from the recession will remain, and working off household debt will be a priority for many people.”

Furthermore, Hogue suggests, the introduction of the HST might distort the economic picture somewhat by accelerating the sales of new homes in the first half of the year. The HST may also affect the use of professional services that aren’t currently taxed, he says, such as those of lawyers and financial advi-sors.

“The government has introduced measures, including a rebate for new-home purchases up to $400,000 and an increase in the basic personal income tax amount, to ease the burden on consumers,” Hogue adds. “The longer-term impact will be positive as companies, especially those in the manufacturing sector, improve productivity and efficiency.”

Despite the rebound, businesses won’t be in a rush to start rehiring, says Alexander: “Over the next 12 months, the unemployment rate will fall [by] about one percentage point, and it could reach 7.4% by December.” Employment, he adds, is likely to get a boost from public-sector spending on infrastructure projects, which will continue through the year as previously committed money works its way through the pipeline.

Like all provinces, B.C. ran a deficit during the recession because of its stimulus efforts. The forecasted deficit for fiscal 2010 is almost $2.8 billion, and total debt is estimated at $42 billion; that figure could hit $50 billion in the next three to four years, says Helmut Pastrick, chief economist with Central 1 Credit Unionin Vancouver. But the deficit may not be as bad as it looks, he adds: “B.C.’s debt-to-GDP ratio was relatively low before the recession, and it hasn’t reached an alarming level. And the government is committed to balancing its books by 2013.”