External demand should drive the B.C. economy despite domestic challenges

05/31/2013 by John Clinkard

Mid-way through the second quarter of 2013, the economic climate in British Columbia is showing very few signs of spring. This observation is illustrated by the fact that, year-to-date (April), total employment in the province is essentially unchanged compared to the same period in 2012.

By far the major contributor to this weak pattern of job creation is a 3.3% year-to-date retreat in employment in goods-producing industries that was largely due to a 10.4% year-to-date drop in manufacturing employment.

It more than offset a very solid 18.3% year-to-date increase in hiring in the agriculture sector and a 6.6% rise in the forestry sector. Since the beginning of the year, all of the net year-to-date increase in jobs has been in the services sector where employment in the first four months is up by 1% compared to the same period in 2012 due to gains in wholesale and retail trade; public administration; finance, insurance and real estate; and professional services.

Consistent with the weak pattern of job creation and lackluster growth of weekly earnings, consumer spending as reflected by retail sales, has contracted slightly year-to-date in 2013 primarily on account of weakness in sales of motor vehicles, electronics products, clothing and accessories and sporting goods.

These weak fundamentals together with a pronounced deterioration in affordability have also contributed to significant erosion of housing demand as indicated by a 14% year-to-date decline in existing home sales that has been accompanied by a 3.3% retreat in average house prices.

Not surprisingly, urban housing starts in the province are down by 10.1% year-to-date in April primarily on account of a 12.4% year-to-date (March) decline in starts of multiple units which have more than offset a modest 1% year-to-date gain in starts of single units.

Unfortunately, the investment climate in B.C. is almost as challenged as the housing market. Largely on account of a significant softening in resource prices which has contributed to a significant erosion in mining and oil and gas investment, total non-residential investment is expected to shrink by 0.4% year-over-year in 2013 following a very solid 7.8% gain in 2012.

This weak outlook is reinforced by the significant year-to-date weakness in applications to build industrial projects (-71.7%); in commercial building intentions (-22.9%); and in institutional building plans (-7.1%).

Looking forward, the recent firming in natural gas prices together with stronger demand for forest products should contribute to a stronger pattern of investment in 2014, a prospect that is reinforced by the recently re-elected Liberal government’s conditional backing of the Gateway pipeline as well as its endorsement of a number of proposals for natural gas pipelines and terminals in the province.

Although the near prospects for all three major components of domestic demand in British Columbia are rather somber, the outlook for external demand is quite promising.

This view is based in part on the 15.9% growth of merchandise exports in March stemming primarily from very strong month-over-month gains in metal ores and non-metallic minerals, energy products and forestry products.

Looking forward, a steady strengthening in U.S. housing demand together with a gradual increase in demand for the province’s non-metallic minerals in Asia should underpin B.C.’s economy through the remainder of 2013 and throughout 2014.

Gross Domestic Product (GDP) Growth – British Columbia vs Total Canada

Gross Domestic Product (GDP) Growth – British Columbia vs Total Canada
Data Source (actuals): Statistics Canada; Forecasts and Chart: CanaData – Reed Construction Data.