It's the time of the year when business and government decision-makers are tempted to throw caution to the wind and ask economic soothsayers to forecast what lies ahead. Below we take up the challenge, knowing that we may miss the mark in one or two areas but confident that our overall assessment will stand up to scrutiny.
• Ongoing Canadian dollar weakness. Because it’s risky to try to catch a falling knife, we aren’t ready to call a bottom for the enfeebled loonie. Plunging prices for oil, natural gas, coal and other commodities have battered the currency. In 2016 we see the loonie under additional pressure that could push it down to between US$0.66 and US$0.67. Apart from dismal commodity markets, the U.S. Federal Reserve’s decision to increase interest rates while the Bank of Canada remains on hold, and the fact that America’s economy is set to outperform Canada’s both this year and next, will also weigh on the sad-sack Canadian buck.
• Federal budget deficit balloons. The victorious Liberal Party campaigned with a platform that called for a federal budget deficit of $10 billion for the fiscal year that begins on April 1, 2016. However, some of the commitments in the Liberal platform were not costed (e.g., a new health accord with the provinces, more money for First Nations), while the fiscal impact of other promises will have to be reassessed (e.g., the amount of extra revenue to be raised from a new higher tax bracket on top earners). In addition, Canada’s economy is in worse shape than the various political parties assumed during the recent federal election. For these reasons, we expect that the budget tabled by Finance Minister Bill Morneau in February or March to feature an operating deficit in the range of between $20 billion and $25 billion for 2016-17.
• B.C. leads the country in economic growth. This will be another subdued year for the beleaguered Canadian economy: growth is unlikely to exceed 1.5% after inflation. But when the final figures are tallied, British Columbia should lead the pack, with real gross domestic product expanding by at least 2.5% (similar to 2015). B.C.’s increasingly diverse economic and industrial base is helping to sustain decent growth, despite the headwinds stemming from slumping commodity prices. Key areas of strength in our economy include tourism, advanced technology, retail sales, some parts of non-resource manufacturing, film production and the gateway sector. Economic activity is also being buoyed by a population that is expanding faster than the Canadian average, low interest rates and a still-robust housing market.
• With slower growth in emerging markets, the U.S. will drive B.C.’s export gains in the near term. The slowdown in China and many other emerging markets and the continued economic expansion in the U.S. suggest that B.C.’s export sector will see a further realignment toward the United States. Over the past dozen or so years, the rise of China and other emerging Asian economies meant that the share of the province’s exports destined for the Asia-Pacific rose steadily, while the proportion shipped to the U.S. fell from 66% in 2004 to 45% by 2013. This pattern is now shifting. There has been a modest reorientation back to the U.S., which now accounts for half of the value of the province’s merchandise exports. The U.S. share is poised to climb further to 55% in 2016.
• Rising inflows of people to B.C. A couple of years ago, B.C. returned to having a positive net inflow of interprovincial migrants. We see the numbers increasing in 2016. In part this reflects B.C.’s relatively healthy economy, but it is also being driven by the mounting difficulties facing Alberta amid an epic and sustained downturn in oil and natural gas prices. For many years, Alberta has been attracting vast numbers of economic migrants from other parts of Canada. The situation is changing, to B.C.’s advantage. The trend is already apparent: the net inflow to B.C. from the rest of Canada jumped to 6,300 in 2015’s third quarter, the biggest Q3 gain in two decades. We believe that out-migration from Alberta is poised to accelerate. Overall, B.C. is likely to see between 15,000 and 20,000 net interprovincial migrants this year. •
Jock Finlayson is executive vice-president of the Business Council of British Columbia; Ken Peacock is the council’s vice-president and chief economist.
