FEBRUARY 2, 2017 BRITISH COLUMBIA’S ECONOMIC PROSPECTS IN AN UNCERTAIN ... · BRITISH...

B R I T I S H C O L U M B I A’ S E C O N O M I C P R O S P E C T S

I N A N U N C E R TA I N W O R L D

FEBRUARY 2, 2017

PRESENTED TO

P F M E X E C U T I V E S E A R C H C L I E N T S

V I C T O R I A , B C

JOCK FINLAYSON,

Executive Vice President and Chief Policy Officer

jock.finlayson@bcbc.com

E X T E R N A L E C O N O M I C S E T T I N G

2

• The global economy remains on a slow-growth path...however, it may gain some added traction

over the course of 2017-18

• Most forecasters expect growth in the United States to pick up, but the arrival of a new and very

unorthodox President presents significant uncertainties

• Oil prices appear to be finding a new medium-term equilibrium (US$50-60/bbl)

• Economic indicators point to a firmer growth profile in the EU, despite continued problems in some

countries and sectors

• China’s economy should expand by 6.0-6.5% over the next two years, but there are downside risks

linked to rising debt levels and the prospect of conflict with the US over trade and security issues

• Canada looks to be poised for somewhat stronger growth in 2017-18, after two disappointing years

G L O B A L E C O N O M I C G R O W T H H O V E R I N G N E AR 3 % S I N C E 2 0 1 2

3

Source: IMF World Economic Outlook, October 2016 and Historical Database.

0

1

2

3

4

5

6

7

8

2010 2011 2012 2013 2014 2015 2016 2017

World Growth Outlook, real GDP % changeWorld

Advanced Economies

Emerging Economies

Average

Global

Growth

1995-

2007

W O R L D T R AD E * H AS L O S T M O M E N T U M( R A T I O O F W O R L D T R A D E G R O W T H T O W O R L D G D P G R O W T H )

4

* trade in goods and services measured at market exchange rates in US dollars. Source: OECD.

.

• 2015-16 slowdown partly reflects weaker demand in China

• Recent fall-off in trade growth also due to shifts in global value chains, protectionist policies,

re-shoring, and currency mis-alignments & manipulation

0.0

0.5

1.0

1.5

2.0

2.5

Avg 1975-1985 Avg 1986-2007 Avg 2011-2015 2015 2016 (f)

G L O B A L D E M O G R AP H I C S W E I G H O N P O T E N T I A L E C O N O M I C G R O W T H ( W O R K I N G A G E P O P U L A T I O N S , A N N U A L G R O W T H R A T E S , % )

5

Source: IMF, World Economic Outlook, October 2016.

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

"Old" advancedeconomies

"New" advancedeconomies

Emerging marketsex-China

China

1995-2004 2005-2015 2015-2021

T H E U S E C O N O M Y C O N T I N U E S T O S T R E N G T H E N

6

• Real GDP increased by just 1.6% last year, vs 2.6% in 2015

• But positive momentum was evident over the second half of the year

• Overall, the current multi-year US economic expansion cycle continues…

79 consecutive months of employment gains, with real wages now climbing

consumer spending is trending up

housing starts grinding higher, should reach ~1.2 million this year

Trump’s promised tax cuts and extra infrastructure/military spending should add to growth

by late 2017 and into 2018-19

• Recent forecasts suggest the US economy will grow by 2.2%-2.5% (after-inflation) in 2017

• Will the Trump/Republican agenda pave the way to faster growth over the medium term?

• US Federal Reserve hiked its policy rate in December… and more increases are coming

AM E R I C A’ S J O B M AR K E T H AS B E E N O N A T E AR

7

Latest: December 2016

Source: US Bureau of Economic Analysis. seasonally adjusted data

128

130

132

134

136

138

140

142

144

146

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

US Non-Farm Payrolls, millions

US payrolls increased by 2.2

million jobs in 2016, down from

2.7 million in 2015

S O M E E C O N O M I C I M P L I C AT I O N S O F T H E T R U M P

( AN D R E P U B L I C A N ) V I C T O RY … F O R C AN A D A

8

Positive

• Faster US economic growth from stepped-up infrastructure and defense spending plus big tax

cuts should bolster the demand for Canadian exports…and boost our tourism sector

• More skilled immigrants may be attracted to Canada if the US is less welcoming

• Revival of the Keystone pipeline = improved access for Canadian oil; plus, under President

Trump, America may come to favour oil imports from ‘friendly’ nations

Negative

• Renegotiation of NAFTA – a number of downside risks for Canada

• Trend to global protectionism if the US slaps tariffs on China/Mexico – who then retaliate

• Canada is at risk from a potential US ‘border tax’ adjustment measure

• A decline in Canadian competitiveness under Trump’s tax plan (US federal corporate tax rate

drops from 35% to 15-20%, top personal tax rate goes from 39.6% to 33%)

• US rejection of Paris climate accord and carbon pricing will put Canada at an ever increasing

disadvantage in energy costs

C U M U L AT I V E C H AN G E I N M AN U FA C T U R I N G E M P L O Y M E N T S I N C E 2 0 0 0

( I N P E R C E N T )

9

Source: Conference Board of Canada.

-26%

-24%

-22%

-20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

US Canada

C AN A D A M O R E R E L I AN T O N B O T H B I L AT E R A L

AN D T O TA L T R AD E T H AN T H E U N I T E D S TAT E S

10

Source: TD Economics, January 2017.

0%

10%

20%

30%

40%

50%

60%

70%

United States Canada

Exports plus Imports as % of GDP, 2015

Total trade ex-bilateral Bilateral trade

I N C AN A D A , B C & O N TA R I O L E D I N J O B C R E AT I O N L AS T Y E AR ,

W I T H E M P L O Y M E N T D O W N I N M O S T O T H E R P R O V I N C E S

11

Source: Statistics Canada, Labour Force Survey.

-3

-2

-1

0

1

2

3

4

BC Alta Sask Man Ont Que NB NS PEI Nfld

Employment growth by province, 2016

C AN A D I A N I N T E R E S T R AT E S R E M AI N N E AR R E C O R D L O W S

12

Source: OECD Economic Surveys.

0

1

2

3

4

5

6

7Bank of Canada overnight policy rate

Effective household rate

Effective business rate

%

O U T L O O K F O R T H E C A N A D I A N D O L L A R

13

Latest: December 2016

Source: Bank of Canada, noon rate.

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

US$ per Cdn$, monthly averages with quarterly forecasts

history

Scotiabank

RBC

CIBC

OECD PPP estimate

40-yr average

C AN A D I A N H O U S E H O L D D E B T T O D I S P O S A B L E I N C O M E

14

Source: OECD Economic Surveys.

80

90

100

110

120

130

140

150

160

170

1990 1995 2000 2005 2010 2015

%

H O U S E H O L D I N D E B T E D N E S S R AT I O , C AN A D A V S O T H E R O E C D

C O U N T R I E S , Q 4 2 0 1 5 1

15

1 Total household outstanding debt as a percentage of household gross disposable income.

Q4 2014 for Denmark and Q1 2015 for Japan.

Source: OECD Economic Surveys.

0

50

100

150

200

250

SVN CHL CZE ITA DEU GRC FRA BEL USA ESP FIN JPN PRT GBR CAN IRL SWE AUS NOR NLD DNK

%

C AN A D I A N H O U S E P R I C E S H I S T O R I C A L LY H I G H R E L AT I V E T O

I N C O M E S , Q 1 2 0 1 6 1

16

1 Deviation of the ratio of nominal house prices/nominal disposable income per capita over the long-term average. The long-term average

starts in Q1 1980 for most countries, with a few exceptions. The price-to-income ratio starts in Q1 1981 for Denmark, Q1 1986 for Korea and

New Zealand, Q1 1987 for the United Kingdom, Q1 1995 for Portugal and Q1 1997 for Greece. The latest observation is Q4 2015/Q 1 2016.

Source: OECD Economic Surveys.

-40

-20

0

20

40

60

KOR JPN PRT GRC DEU USA FIN CHE IRL ITA ESP DNK NLD FRA GBR NOR CAN BEL AUS NZL SWE

%

R E S I D E N T I A L I N V E S T M E N T H AS L O O M E D L AR G E I N C AN A D A

17

1 Excluding Canada.

Source: OECD Economic Surveys.

0

4

8

12

16

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

OECD Range Canada

Ireland United States

% of GDP

1

C AN A D A H AS L O S T C O M P E T I T I V E N E S S I N T H E U S M AR K E T

18

Source: Desjardins Economic Studies, Economic News, February 17, 2016.

0

5

10

15

20

25

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2015

Country share of total US merchandise imports, per cent

Canada Mexico ChinaCanada

down

5.5

percentage

points

since

2000

E C O N O M I C F O R E C A S T F O R C AN A D A ( A N N U A L % C H A N G E U N L E S S N O T E D )

19

Source: BMO Economics, January 2017

2015 2016 2017 2018

Real GDP 0.9 1.3 2.0 1.8

Real business investment -11.5 -7.4 -0.1 2.7

Employment growth 0.9 0.7 1.0 0.7

Unemployment rate (%) 6.9 7.0 6.8 6.7

3 month T-bill rate, Q4 (%) 0.45 0.48 0.45 0.70

10-year Gov’t Bond yield, Q4 (%) 1.20 1.45 1.85 2.25

B C ’ S R E L AT I V E E C O N O M I C P O S I T I O N D E P E N D S I N PAR T O N

H O W O T H E R P R O V I N C E S P E R F O R M

20

Source: Statistics Canada, Provincial Economic Accounts

-4

-2

0

2

4

6

BC Alta Sask Man Ont Que NB NS PEI Nfld

Real GDP growth by province, %

2013 2015BC

ranks

5th in

2013

BC jumps to “1st spot” in

2015, as the previous growth

leaders fall into recession

B C ’ S J O B M AR K E T H AS S U R G E D S I N C E 2 0 1 4

21

Latest: December 2016

Source: Statistics Canada, LFS.

2190

2240

2290

2340

2390

2010 2011 2012 2013 2014 2015 2016

BC employment, SA, thousands

employment

trend

J O B G R O W T H C O N C E N T R AT E D I N T H E L O W E R M AI N L A N D

22

Source: Statistics Canada, LFS.

Unemployment rates are annual averages

90

95

100

105

110

115

120

10 11 12 13 14 15 16

Employment, indexed Jan 2010=100

Vancouver

Victoria

Kelowna

rest of BC

0

2

4

6

8

10

12

Van Island

LowerMain.

Thom.Ok

Koot-enay

Cariboo NC / Nechako

North-east

Unemployment rate by region, %

2015 2016

C H AN G E I N B C E M P L O Y M E N T, B Y B R O AD O C C U PAT I O N A L G R O U P AN D

E M P L O Y M E N T S TAT U S , 2 0 1 4 T O 2 0 1 6 ( %)

23

* Education, law, social, community and government

** Includes agriculture

Source: BC Stats.

-10% -5% 0% 5% 10% 15%

All occupations

Part time job status

Full time job status

Natural resource occupations**

Health occupations

Finance + administrative occupations

ELSCG* occupations

Management occupations

Trades, transport and equipment operators

Natural and applied sciences occupations

Arts, culture and recreation occupations

Sales and service occupations

Manufacturing and utlities occupations

S W I T C H I N U N E M P L O Y M E N T R AT E S

24

Latest: December 2016 Source: Statistics Canada LFS.

0

2

4

6

8

10

12

14

16

76 79 82 85 88 91 94 97 00 03 06 09 12 15

Unemployment rates, %

Alberta

BC

N E T P O P U L AT I O N I N F L O W F R O M AL B E R TA P I C K S U P

25

Latest: Q3 2016

Source: Statistics Canada.

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Net BC-Alberta migration, SA

3000

4000

5000

6000

7000

8000

9000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

BC-Alberta migration, SA

BC to Alta Alta to BC

B C C O N S U M E R S H AV E B E E N B U S Y S P E N D I N G

26

Latest: October 2016

Source: Statistics Canada.

-10

-5

0

5

10

15

2010 2011 2012 2013 2014 2015 2016

Retail sales growth, y/y % change

BC

Alberta

H O U S I N G S TAR T S S T I L L AT E L E VAT E D L E V E L S

27

Latest: December 2016 data are 3 month moving averages

Source: Statistics Canada.

0

5

10

15

20

25

30

10 11 12 13 14 15 16

Metro Van housing starts, SAAR, 000s

singles

multiples

1

2

3

4

5

6

7

8

10 11 12 13 14 15 16

Rest of BC housing starts, SAAR, 000s

singles

multiples

S I G N S T H E M AR K E T I S C O O L I N G I N M E T R O VAN C O U V E R

Source: Greater Vancouver Real Estate Board.

300

600

900

1200

1500

1800

2100

Jan Mar May July Sept Nov

Detached housing sales, GVREB

2016

2015

200

500

800

1100

1400

1700

2000

2300

Jan Mar May July Sept Nov

Attached & Apartment sales, GVREB

Attached 2016

Attached 2015

Apart. 2016

Apart. 2015

28

H O U S I N G H A S P R O V I D E D A B I G E C O N O M I C L I F T F O R B C

29

* Includes residential construction, offices of real estate agents and related, and imputed rent.

Source: Source: Statistics Canada, CANSIM table 384-0038, data released November 10, 2015.

-4

-2

0

2

4

6

08 09 10 11 12 13 14 15

residential housing & related activity

all other industries

BC GDP growth – housing complex* and all other industries, %

E M P L O Y M E N T G R O W T H P I C K S U P I N V I C T O R I A

30

Source: Statistics Canada, LFS.

170

175

180

185

190

10 11 12 13 14 15 16

Victoria CMA employment, monthly 000s

120

130

140

150

160

170

180

190

200

2002 2004 2006 2008 2010 2012 2014 2016

Victoria CMA employment annual, 000s

H O U S I N G S TAR T S T R E N D I N G H I G H E R I N V I C T O R I A

31

Latest: December 2016 monthly data are 3 month moving averages

Source: Statistics Canada.

0

500

1000

1500

2000

2500

3000

3500

10 11 12 13 14 15 16

Metro Victoria housing starts, SAAR, 000s

singlesmultiples

0

500

1000

1500

2000

2500

2000 2002 2004 2006 2008 2010 2012 2014 2016

Metro Victoria housing starts, annual, 000s

singles

H O U S I N G M AR K E T S T R O N G E R I N T H E C AP I TA L R E G I O N

Source: Victoria Real Estate Board.

0

200

400

600

800

1000

Jan Mar May July Sept Nov

Detached housing sales, VREB

2016

2015

0

100

200

300

400

500

Jan Mar May July Sept Nov

Condo & townhome sales, VREB

2016 condos2015 condos2016 townhomes2015 townhomes

32

B C E X P O R T S T O AS I A R E B O U N D E D L AS T Y E AR

33

Latest: November 2016

Source: BC Stats.

900

1100

1300

1500

1700

1900

2100

10 11 12 13 14 15 16

Th

ou

san

ds

BC int. merchandise exports, millions $

US

rest of world

0 5 10 15

China

Japan

South Korea

US

India

total

Export growth (Jan-Nov) by country, annual % chng

L U M B E R P R O D U C T I O N H A S G R A D U A L LY R I S E N

Source: Statistics Canada.

1000

1500

2000

2500

3000

3500

4000

03 04 05 06 07 08 09 10 11 12 13 14 15 16

BC Softwood Lumber Production, 000s cubic metres

34

B C ’ S M AI N T R A D E D I N D U S T R I E S – VAL U E O F E X P O R T S 2 0 1 5

35

Source: BC Stats * merchandise exports

Forestry Others (cont’d)

Wood products $8.5 billion Natural gas $1.4 billion

Pulp and paper $4.4 billion Agrifood products $2.7 billion

Total forestry $12.9 billion Fabricated metals $1.1 billion

Forestry as % of total exports* 36% Fish products $1.1 billion

Others Chemical products $1.1 billion

Metallic minerals $4.4 billion Plastics $426 million

Machinery and equipment $4.8 billion Apparel etc. $124 million

Coal $3.1 billion Total BC goods exports: $35.8 billion

BC also has service industry clusters that engage in international trade, of which the most important

are tourism (~$4 billion of exports), transportation, communications (incl. software), education,

engineering, and technical/scientific/environmental services

T H E B U S I N E S S C O U N C I L’ S B C E C O N O M I C F O R E C A S T( A N N U A L % C H A N G E U N L E S S O T H E R W I S E I N D I C A T E D )

36

f – forecast

Source: Statistics Canada and BC Stats; Business Council for forecasts.

2015 2016e 2017f 2018f

Real GDP 3.2 2.9 2.2 2.2

Employment 1.2 3.1 1.3 1.4

Unemployment rate (%) 6.1 6.0 5.8 5.7

Housing starts (000 units) 31.4 41.0 36.5 35.0

Retail sales 6.0 6.0 4.5 4.5

BC CPI 1.1 1.7 2.0 1.8

O V E R A L L B C C AP I TA L S P E N D I N G I S S I M I L AR T O N AT I O N A L P I C T U R E

37

Source: CANSIM Table 032-0002 Public and private investment

*includes structures and machinery and equipment

10

11

12

13

14

15

16

17

18

19

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Private capital expenditures* as a share of GDP, %

Canada BC

… B U T W E D O L E S S W E L L W H E N H O U S I N G I S E X C L U D E D

38

Source: CANSIM Table 032-0002 Public and private investment

7

8

9

10

11

12

13

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Private capital expenditures excluding housing as a share of GDP, %

Canada BC

… AN D B C I S P E R F O R M I N G V E RY P O O R LY O N M & E I N V E S T M E N T

39

Source: CANSIM Table 032-0002 Public and private investment

3

4

5

6

7

8

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Private capital expenditures machinery & equipment, as share of GDP, %

Canada BC

S I M P LY P U T … O U R F I R M S J U S T D O N ’ T I N V E S T E N O U G H 40

Source: C.D. Howe Institute.

0

20

40

60

80

100

% of US % of OECD average

Tangible investment per worker as a share of US and OECD average 2014, %

Canada BC

B C ’ S B U S I N E S S TAX R E G I M E F O R N E W I N V E S T M E N T I S N O T

C O M P E T I T I V E

41

Source: “The 2014 Global Tax Competitiveness Report,” D. Chen and J. Mintz, School of

Public Policy, University of Calgary, SPP Research Papers, Volume 8, Issue 4, February

2015.

Marginal Effective Tax Rates,

Average of all Industry Sectors Combined, %

2014 2011

Canada 18.8% 18.8%

BC 27.5% 19.0%

Alberta 17.0% 18.2%

Ontario 18.2% 19.3%

Quebec 15.2% 17.5%

USA 35.3% 35.3%

Japan 29.3% 31.5%

Australia 25.9% 25.9%

UK 23.7% 27.2%

Germany 24.4% 24.0%

France 36.0% 35.1%

Sweden 16.1% 19.5%

BC now has the

6th highest average

METR among the

ten provinces and

34 OECD

countries

combined, as well

as the 2nd highest

average METR

in Canada

B C AL S O H AS T H E H I G H E S T ‘ C AR B O N P R I C E ’ I N N O R T H

AM E R I C A ( C A N A D A / U S / M E X I C O C A R B O N P R I C E S , 2 0 1 6 )

42

Notes:

1. RGGI is made up of 9 states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. RGGI

market applies to electricity only.

2. Alberta Specified Gas Emitters Regulation only applies to facilities who emit more than 100,000 tonnes per year. Payment is only for incremental

emissions.

3. California protects 47 sectors and 94 related industrial activities.

4. Quebec protects the following industries: Aluminium, lime, cement, chemical and petrochemical industry, metallurgy, mining and pelletizing, pulp and

paper, petroleum refining, glass containers, electrodes, gypsum products, some agri-food establishments.

Carbon price = $0

CA

D$

6.8

0

CA

D$

15

.00

CA

D$

16

.43

CA

D$

16

.43 CA

D$

30

.00

CA

D$

3.8

8 (

up

per

)

BC as of 2016 was:

100 x rest of Canada (ex AB)

8 x Mexico

4.5 x RGGI (north east states)

2 x Quebec/California

2 x Alberta

A L O O K B AC K : B C ’ S L E AD I N G G R O W T H I N D U S T R I E S C O M E

F R O M A D I V E R S E M I X O F S E C T O R S

43

Source: Statistics Canada.

5.1

5.2

5.3

5.3

5.5

5.9

6.4

6.7

6.8

7.5

7.7

8.9

15.7

0 10

Other wood mfg…

Aquaculture

Miscellaneous mfg.

Oil & gas extraction

Veneer, plywood and…

Design, R&D, technical…

Equip. repair, houshold…

Other misc. mfg

Gambling industries

Pharmaceutical & med. mfg

Cmpt systems design serv.

Waste man. / remediation

Software publishers

BC top growth industries 1997-14average annual % change

2.7

2.8

2.8

2.8

3.3

3.5

3.6

3.7

3.8

4.2

4.5

4.6

0 10

Warehousing & storage

Couriers & messengers

Pipeline transport. of natural gas

Other furniture-related prod. mfg.

Truck transportation

Motion picture prod. & dist.

Municipal public admin.

Tech, & trades schools,…

Residential construction

Investigation & security serv.

Rail transportation

Cmpt & related equip. mfg

BC top growth industries 1997-14average annual % change

R E S O U R C E S S T I L L I M P O R TA N T

44

Source: Statistics Canada

* includes forestry, mining, oil and gas and related support activities and processing.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1997-2015 excl 2009

BC real GDP growth, avg. 1997-2015 % change

resource sector* rest of economy

0

2

4

6

8

10

12

14

97 99 01 03 05 07 09 11 13 15

Resources* share of BC real GDP, %

resource sector

mining

R E C AP

45

• The current choppy, risk-prone global economic environment is expected to persist through 2017

– and perhaps beyond

• A fairly muted economic outlook for Canada, with hopes largely riding on the US. Firmer oil prices

are helping

• Heightened global uncertainty with Trump as President, national elections coming in Europe, fall-out

from BREXIT, and the risk of China-US trade and geopolitical conflict

• The current economic expansion in BC will continue, but at a slower pace…after three years of

above-average growth. This reflects a drop in housing market activity (mainly in the lower mainland),

difficulties in the forest industry, and a modest fall-off in the growth of consumer spending

• BC’s increasingly diversified economy is a source of strength and resilience

• Over the medium term, BC needs to address a number of structural weaknesses – sub-par business

investment, waning competitiveness in most traded industry sectors, and lagging productivity