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Finlayson Op-Ed: Economic prospects bright for BC (Vancouver Sun)

As Finance Minister Mike de Jong gets ready to table his 2015 budget, the incoming economic data paint a mixed picture.  Projections for global growth have been marked down by the International Monetary Fund and other leading forecasting agencies.  The Eurozone hovers on the brink of recession, China’s once frenetic economy is slowing, and the prices of many internationally traded commodities remain in the doldrums.   

Canada has also lost a step, with real gross domestic product (GDP) shrinking in November and the job market seeming to run out steam as 2014 progressed.  Last month’s decision by the Bank of Canada to trim its trend-setting overnight lending rate by 25 basis points signalled policymakers’ worries about the state of the national economy.  

Yet from a British Columbia perspective, the macroeconomic situation looks more favourable.  Four developments external to the province are likely to underpin a respectable economic performance over the coming 12-24 months.   

The first is plunging oil prices, which (in U.S. dollar terms) are down by almost 60 per cent since last summer.  While the oil market slump will dampen economic growth for Canada as a whole – energy constituted fully one quarter of Canada’s merchandise exports in 2013, with crude oil accounting for the lion’s share of this – cheaper energy offers some benefits to B.C.  This province produces little crude oil, with imports satisfying the bulk of our needs.  Lower prices for gasoline and other refined petroleum products could generate up to $1 billion in savings for British Columbians in 2015, assuming oil prices stay near current levels for the rest of the year.  Much of this will be spent on other goods and services in the local market, buoying domestic demand.  The oil price slide has not left B.C. completely unscathed, however.  For one thing, it has put downward pressure on the price of natural gas, a key commodity export for the province.  And B.C. businesses that supply the Alberta energy sector will feel the pinch as oil-related capital spending is sharply reduced.  However, most of our residents and businesses should gain from less expensive energy.  

A second important trend is the rebounding U.S. economy, which is coming to life after a half decade of sub-par growth following the 2008-09 recession and financial crisis.  Adjusted for inflation, U.S. economic output expanded at an annualized rate of roughly 4 per cent over the last nine months of 2014, and the country added an impressive 3 million new jobs last year.  Consumer spending is trending higher, bolstered by lower oil prices, continued low borrowing costs, and healthier household balance sheets.

The sagging Canadian dollar is a third macroeconomic development that promises to boost B.C.’s economy.  Having depreciated by 15 per cent against the U.S. dollar in the past year, the Loonie is now trading at a level that will allow more Canadian industries to grow and compete.  For trade-exposed industries in B.C., including tourism, manufacturing, forestry, film production, and parts of the advanced technology and professional services sectors, a falling dollar is a helpful tonic. In addition, retailers in the lower mainland will applaud as the ranks of British Columbians crossing the border to shop stateside continue to dwindle.  

Finally, the arrival of even lower Canadian interest rates – rates that now look destined to stay low for longer – should also be positive for economic growth, by improving the financial position of most B.C. households.  Nationally, household debt has reached 163 per cent of disposable income; we estimate that the debt/income ratio in B.C. exceeds 175 per cent.  Historically low borrowing costs, including five-year mortgages at under 3 per cent, will be well-received by many B.C. residents (if not by retirees hoping to earn a return on their savings) and provide an added lift to housing markets and parts of the retail sector in 2015-16.  Rock bottom borrowing costs are a short-term economic plus; however, by encouraging even more growth in household debt, they also make our economy more vulnerable to future shocks, as the Bank of Canada itself has often noted.

Add it all up, and these external developments should help B.C. to post economic growth in the vicinity of 2.5 per cent this year, up a notch from 2014. Looking to 2016, real GDP growth is likely to climb to 3 per cent or so if one or two of the large proposed LNG projects on the books in B.C. reach positive final investment decisions and commence construction.  For Finance Minister de Jong and his forthcoming budget, the macro-economic backdrop includes some glimmers of light.     

Published in the February 16 print and online edition of the Vancouver Sun