With average real GDP growth above the national average in 2010, B.C. has remained one of Canada’s strongest provincial economies.
Craig Alexander, senior vice-president and chief economist for TD Bank Financial Group, notes the province’s strength has resulted from its diversified economy. But he forecasts “average” economic growth for B.C. over the next few years, in part because of the many provincial and global challenges that remain.
Business in Vancouver spoke with Alexander during his visit to Vancouver last week.
We need to be prepared for relatively modest-to-moderate economic growth in Canada. I don’t think we’re going to be seeing a strong economic rebound over the next couple of years. I think something closer to 2% is a reasonable expectation. It’s not really strong, but it’s not terribly weak. It’s average.
Business investment represents only a small part of the economy, but I think it’s going to deliver really strong growth rates. The reason is, business balance sheets in Canada, including those in B.C., are quite good. Profits are likely to rise between 6% and 7%, so there’s going to be more funds available to invest. Interest rates are going to nudge higher, but that leaves rates at unbelievably low levels by historical standards. Canada imports 80% of its machinery and equipment, and most of it’s priced in U.S. dollars. So, a Canadian dollar at par or better makes it really attractive to invest. Now is a great time for businesses to invest, and you hope the business community responds and you end up with quite strong capital investment in Canada.
I think the U.S. is the big question mark for Canada. If you look at my forecast and compare it to the Bank of Canada’s, you’ll find our forecast is more conservative than the [BoC’s]. But if you break it down to where we differ, the big one is the assumption of how strong the U.S. economy is going to be.
U.S. housing is going to take a long time to recover. The unemployment rate is really high, and it’s going to stay high for a really long time. Even though my forecast for economic growth in Canada is not that different than in the U.S. – my forecast for B.C. is basically in line with our U.S. forecast of growth around 2% – it’s going to feel very different in Canada than in the U.S. because conditions in Canada are so much better.
The unemployment level in the U.S. [is] currently at 9.5%. But that grossly under-estimates what unemployment truly is. To be counted as unemployed, you have to not only not have a job, you also have to be looking for work, and a lot of Americans gave up. And a lot of people who have taken part-time jobs are looking for full-time employment. So, if we adjusted the unemployment rate in the U.S. for those factors, the rate is closer to 16%.
If we think about the B.C. economy, the unemployment rate is under 8% and it’s likely to edge lower. Our forecast is to get down to 7% in the next year or so. If we added discouraged workers in B.C., it would have a limited impact on raising the unemployment rate, so the unemployment rate in B.C. is half of what true unemployment is in the U.S., and, boy, does that make economic conditions feel different.
In general, services will perform OK. Retail trade and wholesale trade will increase. I think the transportation sector, which suffered badly in the recession, will rebound. Manufacturing is one of those stories that’s hard to tell people, because manufacturing is probably going to post one of the strongest growth rates in pure numbers. But the gains will pale in comparison to the contraction we had. Nevertheless, in the glass-half-full category, manufacturing is going to grow, because, over time, conditions are improving, demand is increasing and the good news from a business point of view is that input costs are not going to be as problematic as they were.
In the long run, the HST raises inflation. When it’s introduced, it causes a significant increase in prices as measured by the CPI [consumer price index]. But it also creates savings on the business side, which, over time, will get fed through to households.
Now, no one is going to believe me when I say it, but if you look at what happened in Atlantic Canada, when they introduced the harmonized sales tax, nobody believed that the cost savings on the business side would be passed along. But what we found over two years is … it did happen. Of course, consumers never see it. What tends to happen is, businesses delay normal increases in pricing because of the savings from the HST. So, you don’t see prices fall, but you don’t see the increases that otherwise would have occurred. So, the problem here is really around optics.
Now, on a net basis, there’s no question it does raise the cost of living, because HST is being applied on some goods and services that weren’t previously covered. But [HST] is a more efficient tax system to the extent that it lowers the costs of businesses to invest in capital. It’s very positive from a business perspective as the cost of investment, and the cost of growth is lowered, which translates into jobs.
Work done in other jurisdictions that introduced the HST shows very clearly that a harmonized sales tax does provide a boost to employment, to economic growth and to the economy.
A little bit, in the sense that the introduction of the HST pulled forward sales into the pre-HST period, boosting activity and contributing to growth this year. You lose the sales next year [that] you pulled forward. But, keep in mind, the effect is transitory. All you’re doing is affecting the timing of when the money is spent, so I wouldn’t portray this as the HST leading to slower growth in B.C.
I’m a little worried that the uncertainty that’s been created by the discussion that the HST might be repealed cancels out the near-term benefit of the HST to businesses. Because, if the uncertainty is high enough that the HST is not going to stand, then businesses are not going to do any investment. So, you won’t get the job creation and you won’t get the benefit.
I think we need clarity over what is going to happen in terms of the HST in B.C. When there’s greater clarity, businesses will respond to it.
Toronto
CEO: Ed Clark
Employees: 65,930
Market cap: $65.9b
P/E ratio: 15.40
EPS: $5.18
Sources: Stockwatch, TSX, globe investor