January 2015

BCPoisedforDecentGrowthinATurbulentWorld
Highlights

TheoutlookfortheworldeconomyhasbeendowngradedduetoweaknessinAsiaandan
unevenandgenerallystagnantperformanceacrosstheEurozone.
LoweroilpriceswillworktoBCseconomicadvantage,ashouseholdsreapsignificantsavingsat
thegaspump.BCproduceslittlecrudeoil,withimportsprovidingmostoftherefined
petroleumconsumedhere,solowerpricesareaneconomicplus.
TheUSeconomy,fortunately,isshiftingtoastrongergrowthtrajectoryandlookspositionedfor
thebiggestgainsinGDPandemploymentinmorethanadecade.
Despiteasubduedglobaleconomicbackdropandanumberofdownsiderisks,BCsexportsof
goodsandservicesshouldkeeprising,thankstoareboundingUSandasaggingLoonie.
TheBCjobmarketisfinallygainingmomentum.
ConsumersinBCwilldotheirparttosupporttheeconomy,spendingabitmorefreelythan
theydidinthefirsthalfofthedecade.Housingstartsareexpectedtoremainstable.
BritishColumbiasrealGDPshouldincreaseby2.6%in2015,upslightlyfrom2014.
TheturmoilinglobalenergymarketslikelymeansfurtherdelaysforLNG,althoughanexpanded
laboursupplylinkedtofalteringgrowthinAlbertamaybepositivefortheseproposedBC
projectsbyeasingcostpressures.IfoneormorelargeLNGprojectscommencein2016,BCs
realGDPgrowthshouldacceleratetoabout3%.Over201516,BCisexpectedtobenearthe
topoftheeconomicgrowthrankingsamongtheprovinces.

Theglobalgrowthoutlookhasdimmedinrecent
months,withtheworldeconomynowprojected
to grow by 3.5% (afterinflation) in 2015,
according to the latest forecast from the
InternationalMonetaryFund.1Lastsummerthe
outlookwasbrighter,butslowergrowthinChina
andotheremergingmarkets,sluggisheconomic
conditions across Europe and production and
capital spending cuts in some oil producing
countries are weighing on international growth
prospects. Fiscal restraint is also dampening
activity in a number of advanced economies,
includingCanada.

Collapsing crude oil prices have markets fearful

thatthedeclineisnotsimplyaresultofadditional
supply, but also reflects softer worldwide
demand. Stock markets have been wobbly and
government bond yields in many countries are
plumbing alltime lows, a sign of investors
concernovertheunderlyinghealthoftheglobal
economy. Greater volatility in financial markets
may hinder any move to a stronger and more
stableglobaleconomicfooting.

Therearesomeoffsettingtrends,however,that
shouldkeeptheworldeconomyexpandingata

1IMF,GlobalGrowthRevisedDown,DespiteCheaperOil,

FastUSGrowth,IMFSurvey,January20,2015.Available
at:www.imf.org

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BCEconomicReviewandOutlook

modest clip. Plummeting oil prices have left

consumers with more cash, which will boost
spending in other sectors and spur economic
growthinnetenergyimportingjurisdictionsa
group that includes the US, China, Japan, India,
and the EU. Lower oil prices mean reduced
businesscostsandlowerinflation,whichislikely
to prompt many central banks to further delay
the planned normalization of current, record
lowinterestrates.TheBankofCanadasJanuary
21 announcement of a 25 basis point cut to its
overnightlendingrateisanexample.2

Oilpricesshouldedgehigherovertime,butfor
nowdownsideriskspersist.Moderategrowthin
global demand has been overwhelmed by a
sizablejumpinUS(andCanadian)crudesupply,
as well as additional supply from several other
producingnations.SaudiArabiasdetermination
tomaintainitsoutputlevelsandmarketshareis
further underpinning the story of ample global
crudeoilsupplies.

Looking at the overall macroeconomic picture,

the key message is that a broadlybased,
synchronized global upturn remains elusive.
Geopoliticaltensions,theslowdowninemerging
markets,andunderperformingeconomiesacross
muchoftheOECDcontinuetostandintheway
ofahealthyglobalupcycle.

Withintheinternationalmix,theUSeconomyis
a bright spot. American real GDP is forecast to
advanceby3.6%in20153,thestrongestgrowth
inadecade.Lowoilpriceswillreinforcethemove
toafirmergrowthtrajectory,withUSconsumers
expected to reap annual energyrelated cost
savings of at least $1,000 per household.4 The
BankofCanadaestimatesthatadropinoilprices
from$110to$60perbarrel,ifmaintained,would
raisethelevelofrealGDPintheUnitedStatesby

Page2

1%bytheendofnextyear.5Americasjobmarket
has improved markedly, with nonfarm payroll
employment rising for 58 consecutive months
and the economy adding almost 3 million net
newjobslastyear.

Table1

WorldEconomicForecast
(percentchangeinrealGDP)

US
Canada
Eurozone
UK
Japan
China
World

2013

2014

2015f

2016f

2.2
2.0
0.5
1.7
1.6
7.8
3.3

2.4
2.4
0.8
2.6
0.1
7.4
3.3

3.6
2.3
1.2
2.7
0.6
6.8
3.5

3.3
2.1
1.4
2.4
0.8
6.3
3.7

Source:IMFWorldEconomicOutlookUpdate
(January20,2015)f=forecast

BoththeEurozoneandJapanarelikelytoremain
chronic underperformers, as much needed
economic, labour market and social policy
reformsandinsomeEUcountriesincreased
fiscalstimulusareslowtomaterialize.Lastweeks
Greek election underscores the political
uncertaintiesthatcharacterizetheEurozonea
region that represents almost onefifth of the
worldeconomy.Thetailriskofanunravellingof
the Eurozone would be a significant negative
shockfortheworldeconomy,buttheimpactof
such an event may be limited by the progress
madesince2011instrengtheningtheEurozone
bankingunionandfinancialsystemandthesteps
taken by the European Central Bank to bolster
economicactivity.6

EconomicgrowthinChinacontinuestoebb,with
real GDP expanding by 7.4% in 2014. Chinese
policymakers have implemented interest rate

2BankofCanada,MonetaryPolicyReport,January2015.

5MonetaryPolicyReport,January2015,p.6.

3BytheIMF.

6NicolasVernon,TheReshapingofEuropesFinancial

4TheamountsavedvariesacrossUSregionsdependingon

System,PetersonInstituteforInternationalEconomics,
January2015.

theenergymixincludingthesourcesofelectricityand
whetherhouseholdsrelyonoilforhomeheating,asmany
inthenortheastofthecountrydo.

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BCEconomicReviewandOutlook

cuts and hiked spending to forestall a sharper

deceleration.Economicgrowththisyearmayslip
below7%,withafurtherdroppossiblein2016.
TheslowingChineseeconomyisaprincipalfactor
behind lower global commodity prices a
reflection of Chinas vast appetite for natural
resourceproductsandindustrialrawmaterials.
Figure1

CanadaandUSEconomicGrowth
Percent
4
3
2
1
0
-1

US

Canada

2011

2012

-2
-3
2007

2008

2009

2010

2013

2014

2015

2016

Source:StatisticsCanada,Scotiabankforforecasts.

CanadasEconomyLosesaStep
IncontrasttotheUS,forecastsfortheCanadian
economy have been pared back. A diversified
economy should help to keep Canada on a
positivegrowthpath,despiteplungingoilprices
andafinanciallyoverstretchedhouseholdsector.

AsnotedbytheBankofCanada,loweroilprices
willtakeabiteout of realGDPgrowthinthe
rangeofhalfofonepercentin2015basedon
diminishing energy sector revenues, reduced
investmentintheoilpatch,andadeteriorationin
Canadas terms of trade.7 But the most visible
impact will be a redistribution of economic
growth across Canada. Alberta and
Newfoundland are sure to be hardest hit,
followed by Saskatchewan. With oil royalties
shrivelling and capital investment in the energy
sectorbeingslashed,theAlbertagovernmentis
looking at an operating deficit of more than $7

Page3

billion in 201516. Dwindling activity in the oil

patchwillspillintootherpartsoftheprovinces
economy and lead to slower job growth and
reducedinvestmentinothersectors.

On the other hand, net oil importing provinces

such as BC and Ontario will cheer cheaper
energy.8 Manufacturing will get a lift from
reducedenergycosts;themanufacturingsector
willalsobenefitfromastrongerUSeconomyand
the improvement in Canadian cost
competiveness stemming from the sinking
Loonie. So for Canada as a whole, some of the
negative impact from lower oil prices will be
offset by slightly stronger growth in nonoil
producingprovinces.However,asemphasizedby
theBankofCanada,thenetresultisstillweaker
economicgrowthforthecountry.NominalGDP,
businessinvestmentandgovernmentrevenues
at both the federal level and in oilproducing
provinces will be dampened by sagging oil
markets. Domestic demand will continue to get
somesupportfromrockbottomborrowingcosts
and an anticipated uptick in investment in non
energysectors.

The next two years should see a widening

economicperformancegapbetweenCanadaand
theUnitedStates.AhealthierAmericaneconomy
meanstheFederalReservewillbeinapositionto
start increasing its overnight policy rate in the
second half of 2015. The Bank of Canada has
adopted a more cautious stance, signalling that
interestratehikeshereareunlikelyuntil2016or
later. Canadas central bank is unwilling to
embark on monetary tightening until the
economy shows some positive momentum; at
present,thenationaleconomyislosingsteam.As
falling energy prices filter through to the wider
economyanddepresskeymeasuresofinflation,
theBankofCanadawillhaveevenmorereason
to postpone any increases in its policy interest
rate. Taken together, the above factors spell

7MonetaryPolicyReport,pp.910.Acountrystermsof

8ConferenceBoardofCanada,RegionalShakeup:The

trademeasurethevalueofitexportsrelativetothevalue
ofwhatitimports.

ImpactofLowerOilPricesonCanadasEconomy,January
20,2015.

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BCEconomicReviewandOutlook

furtherweaknessfortheCanadiandollar,which
wepredictwilldriftbelow80centsUSinthenext
fewmonths.LastyeartheLoonielostalmost10%
ofitsvalueagainsttheAmericangreenback.

BCBenefitsfromTumblingOilPrices
The downtrend in oil prices is a plus for British
Columbiaseconomy,addingperhapstwotenths
of a percentage point to real GDP growth this
yearandnext.9Aswiththenationaleconomy,the
greatestandmostdirectbenefitcomesfromthe
savings that accrue to consumers. With the
sizabledropingaspricesthathasoccurred,the
averageBChouseholdwillsavemorethan$500
annually(assumingfuelpricesremainatasimilar
level for the year). On an economywide basis,
this translates into more than $1 billion in
consumersavings,mostofwhichwillbespenton
othergoodsandservices.10BCexporterswillalso
applaud a lower Canadian dollar and the
additional boost to US economic growth that
shouldcomefromlesscostlyenergy.

BritishColumbiaproducesonlysmallamountsof
crude oil, so will see few direct negative
consequences from the commoditys epic price
slide.Still,somespilloverimpactswillbefelt.We
estimate that 30,00035,000 resident British
Columbians commute to Alberta for work.11
SuchBChouseholdscouldbeatriskasanumber
of these Alberta jobs disappear. There are
companiesinBCwhichsellproductsandservices
into the oil patch and thus will be hurt by the
announcedandupcomingreductionsinenergy
related capital investment in Alberta. Overall,
however,thegainsforBCconsumers,andthelift
to the provinces export sector from a lower
Canadian dollar, will outweigh the negative
effects of the downturn in Alberta and slower

Page4

economic growth in other oil producing

provinces.

ExportPictureMixed
As Figure 2 shows, the US economic revival is
already being reflected in BCs trade statistics.
The provinces southbound exports have risen
steeply in the past two years: in 2014,
merchandiseexportstotheUSjumpedbynearly
17% in dollar terms. At the same time, the
economicsofteninginothercountrieshasoffset
some ofthe gainsfromtherecovery oftheUS.
The value of BC goods sold to China and Japan
decreasedby3%and7%,respectively,lastyear.
ExportstoSouthKorearegistereda23%increase,
but that country accounts for a relatively small
share (less than 6%) of BCs international
merchandise exports (versus a share of almost
50%fortheUS).Exportstoallremainingforeign
countries collectively were essentially flat last
year (up by just 1%). The net result is that BCs
merchandiseexportsgrewbyalmost8%in2014,
mainly on the back of the improving American
economy.

Figure2

BCMerchandiseExports
billions$

Source:BCStats.2014dataestimatesbasedonJantoNovexports

9Ibid.
10AportionoftheenergycostsavingaccruingtoBC

residentswillbeusedtoreducedebtoraugment
householdsavings.
11Thisdoesnotincludethemuchlargernumberof
workingageBritishColumbianswhohavemovedto

Albertainthepastdecadeandarenowclassifiedasfull
timeAlbertaresidents.Someoftheseindividualscould
returntoBCifAlbertasjobmarketsoursforaprotracted
period.

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BCEconomicReviewandOutlook

Lookingahead,BCwillberelyingheavilyonthe
US to further boost exports over the next two
years.NotwithstandingsomerecentcoolinginUS
home building, shipments of wood products
increased by more than 10% in 2014. We
anticipate positive growth for most of the
provinces merchandise export categories over
201516. The primary exception is natural gas,
where exports may decline further because of
low prices and the continued expansion of US
production. Unfortunately, slower economic
growth in Asia and sluggish global markets for
coalandmetals/mineralswillcontinuetooffset
some of the USrelated gains, keeping BCs
overallexportgrowthbelow10%in2015.

TourismisanothervitalBCexportsectorthatis
poisedforbetterdays.12Weprojectsolidgains
for the tourism sector in 201516, with the US
beingthemajorimpetusbehindtheupswing.As
Americansconfidencegrowsandtheirappetite
for spending rises, the weaker Canadian dollar
andlowerfuelcostswillmaketraveltoCanada
anincreasinglyattractiveprospect.Thenumber
of American visitors to BC was up by 23% in
2014; we predict further growth over 201516.
And despite softer economic conditions in Asia,
the number of travellers from that part of the
world actuallyincreasedbymorethan 10% last
year. In part, this speaks to the dramatic
expansion of middle class populations in
emergingAsia.

DomesticEconomyontheMend
Theprovincesdomesticeconomyisalsoshowing
some positive signs, albeit the picture remains
mixed.Ofparticularimportanceisapickupinjob
creation. As we predicted, job growth
strengthened in the second half of 2014.
Supportedbyarevivingexportsector,weexpect
this trend to extend into 201516. However, a
cautionarynoteiswarrantedtotalemployment
inBCinchedaheadbyjust0.9%in2014,aftera

Page5

verydisappointingperformancein2013.Inother
words,employmenthasnotexactlycomeroaring
back. The underlying health of the provinces
labourmarketwillrequireclosescrutinyas2015
unfolds.
Figure3

BCEmploymentGrowth,quarterly
y/y%change
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
2010

2011

Source:StatisticsCanada.

2012

2013

2014

latestQ42014

Consumer spending rebounded in BC in 2014.

Better job numbers were a factor, but pentup
demandforcertainretailcategorieslikelyplayed
abiggerrole,assuggestedbysurgingautosales.
The slightly better economic environment that
we expect in 2015 should help to sustain
respectable growth in retail spending. Lower
gasolinepriceswillhave adampeningeffecton
thenominalvalueofaggregateretailsales,butas
notedabovemuchofthesavingsatthepumpwill
berespent.ThefallingCanadiandollarwillwork
toredirectsomeportionofconsumerspending
backintothedomesticmarketplaceastheranks
ofBCcrossbordershoppersdwindle.

OutlookforCapitalSpendingandHousing
Asweobservedinour2014midyeareconomic
forecast, a healthier mediumterm economic
scenario for British Columbia requires a steady
advance in large development projects, along
withanincreaseinprivatesectornonresidential

12Exportrelatedrevenuesderivedfromspendingby

internationalvisitorstoBCarenotcapturedinthe
merchandisetradestatistics.

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BCEconomicReviewandOutlook

Figure4

BCNonresidentialBuildingPermits
millions$
800
700

Avg. for first

11 months

600
500
400
300
200
100
2011

2012

2013

2014

Source:StatisticsCanada.

investmentmoregenerally.Inthisregard,recent
nonresidential building permit data give little
indication of a strong upturn in capital
investment, instead pointing to a sideways
pattern (Figure 4). A review of major capital
projects finds a record inventory of projects on
thebooks,butonlyasmallfractionofthesewill
proceed over 201516.13 Investment in the
miningsectorwillbeheldbackbyunfavourable
commodityandcapitalmarketconditions.Inthe
energy transportation segment, proposed oil
pipelinesfacestiffoppositionalongwithcomplex
regulatory and other challenges. BC forest
companies are investing in their US operations
andseemtobepayinglessattentiontotheirBC
facilities. Our assessment is that last years
SupremeCourtofCanadadecisionintheWilliam
case will contribute to further delays affecting
greenfield economic development projects in
landbased sectors of the economy.
ManufacturinginvestmentisweakinBC.Onthe
other hand, commercial construction has been
strong, and the province is benefitting from
healthy levels of projectrelated investment
spendingintheelectricityandportsectorsandin
somepartsofthepublicsector.

Page6

Althoughwestillexpect23LNGfacilitiestobe
developedinBC,thetimingoftheseprojectsis
likelytobepushedbackinlightoftheturmoilin
world energy markets. Many energy companies
are grappling with declining cash flows and are
taking steps to slash costs and prune capital
outlays.Itisdifficulttoimaginethatthisglobal
context will have no effect on the decision
makingofcompaniesconsideringLNG inBritish
Columbia. A scalingback of investment in
Albertasoilindustrymaytranslateintoalarger
pool of skilled labour available for the
construction and other industries elsewhere in
western Canada, which may improve the
business case for LNG in British Columbia by
creating a less overheated labour market for
skilled trades workers. At this juncture, our BC
economic forecast assumes that preliminary
work for a small number of LNG projects
continuesover2015,withconstructiontimelines
pushed back. Our 2016 forecast assumes that
one large and one smaller LNG project reach
positive investment decisions and begin
constructionduringthatyear.

Turning to the urban economy, a significant

amountofprojectactivityisunderway.Inthelower
mainland,workisproceedingonseveralnewoffice
towersaswellasretailandinfrastructureprojects,
including the Evergreen Line and large retail
complexesnearTsawwassenFirstNationlandand
adjacent to Vancouver International Airport. The
economicclimateforcommercialdevelopmentin
BCremainsfavourable.

Theprovinceshousingmarketlookssettoshift
tomoreofaholdingpattern.Wedonotexpect
residential investment to drive much additional
economicgrowthin201516.Undertheweight
of high prices and eroding affordability, sales
activitymayeaseslightly,promptingbuildersto
take a more cautious approach to developing
newproduct.HousingpricesinMetroVancouver

13JockFinlaysonandKenPeacock,BCsTourismIndustry:

PoisedforGrowth,PolicyPerspectives,BusinessCouncilof
BC,August2014.

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BCEconomicReviewandOutlook

Page7

oftourists).Thetourismandfilmindustries,among
others,willwelcomethelowerCanadiandollar.

For 2016, we see real GDP climbing by around

3.0% if, as anticipated, some work on LNG
projectsandrelatedpipelineconstructionbegins
during the year. Absent this activity, we would
trimourforecastfor2016.

have reached the point where many firsttime

buyershavebeenpricedoutofthemarketeven
with rock bottom mortgage rates. If Canadian
interest rates eventually rise, the lower
mainlandsaffordabilityproblemwillgetworse
unlessprices adjust.Butatthisstage wedont
anticipate much change in BC housing market
conditionsover201516.

Slightlyfasterpopulationgrowthshouldassistin
creatinganenvironmentsupportiveofeconomic
growth,withbenefitsfortheretailandhousing
sectors. British Columbia will continue to see
international immigration running at 35,000
40,000peryear,butthiswillbesupplementedby
modest net inflows of interprovincial migrants
linkedtothedownturnoftheAlbertaeconomy.

DiverseEconomyContributestoStableGrowth

Table2

BCEconomicOutlook
(annual%changeunlessotherwiseindicated)

RealGDP
Employment
Unemp.rate(%)
Housingstarts
(000units)
Retailsales
BCCPI

Overall,weprojectthatrealGDPinBCwillincrease
by2.6%in2015.Ifoilpricesstaylowthroughoutthe
year,theremaybeanupsiderisktothisbaseline
forecast.BritishColumbialookswellpositionedto
emergeasoneoftheCanadiangrowthleadersin
201516, as oil producing provinces are knocked
outofthetopspotsinthegrowthrankings.

Most of BCs exportoriented industries can look

forward to future growth, including tourism, high
technology, and a range of business,
scientific/technical, and professional services. The
forest sector will gain from the expansion of US
homebuildingaswellasaweakerCanadiandollar.
Thetransportationandlogisticssectorwillcontinue
tobeasourceofeconomicgrowthforBC.

Domesticactivitywillhelproundoutarespectable
macroeconomic performance. Retail spending
should see decent gains over 201516, while the
hospitality industry will benefit from consumer
savingsatthegaspump(andfromrisingnumbers

2014
2.3e
0.9
6.1

2015f
2.6
1.2
6.0

2016f
3.1
1.6
5.9

28.0

27.0

27.0

5.5
1.2

5.0
0.8

4.0
1.5

fforecasteestimate
Sources:StatisticsCanadaandBCStats;BCBCforforecasts.

Currentfiscalrestraintpoliciesatthefederallevel
and in BC suggest that governments will be
adding very little to GDP growth over 201516.
TheBCgovernmentscurrentplantoreducereal
percapitapublicsectorcapitaloutlaysatatime
ofhistoricallylowborrowingcostsrequiresare
thinking,inourview.

Insummary,ourassessmentisthatBCwillenjoy
slightlyfastereconomicgrowththisyearthanin
2014, underpinned by the rebounding US, a
weaker dollar, low oil prices and continued low
interestrates.By2016,theprovinceshouldgeta
furthereconomicliftwiththecommencementof
a few major investment projects, notably LNG
related,whichwilladdtowhatmaybythenbean
increasinglybroadlybasedeconomicexpansion.
*****
JockFinlayson
(jock.finlayson@bcbc.com)

KenPeacock
(ken.peacock@bcbc.com)

Questionsorcomments?Pleasecontactusatinfo@bcbc.comor6046843384.