BC's economic prospects look bright in 2014 as long as U.S. politicians don't find a new way to derail the economy south of the border.
Douglas Porter, BMO Capital Markets chief economist, expects U.S. economic growth to hit close to 3% in 2014 following growth of only 1.6% in 2013.
Overall, the U.S. economy has continued to show signs of strength with growth in the U.S. housing market and increasing consumer spending and confidence. But the impact of automatic federal spending cuts that came into effect this year has created a serious drag on the overall economy after Congress failed to produce a bipartisan bill to cut the federal deficit in 2011.
And the economy in the U.S. may slow even further this year. The negative effect of the federal government shutdown that started October 1 will continue to increase the longer it lasts. Reports suggested last week that the shutdown was costing the economy between $200 million and $300 million a day. If the federal government is also unable to extend the government debt ceiling by October 17, the economy could face unprecedented uncertainty because of a technical default in the government's financial obligations.
"Not all of the hurdles have been knocked out of the economy's way," said Porter. "There are all kinds of ways politicians can screw up a pretty good outlook. But once we get beyond that, we do think the solid underlying pace of the U.S. economy will become a bit more obvious as we go through 2014."
Porter spoke with Business in Vancouver about B.C.'s 2014 economic prospects during a recent visit to the West Coast.
Q&A
Q: What's your forecast for B.C. next year?
A: We've seen sub-par growth in both Canada and B.C. B.C. has grown almost exactly in line with the Canadian average over the last year and a half or so, and we think that's likely the case in 2014.
Q: What are some of the strengths in the U.S. economy that bode well for Canada?
A: This year we had serious tax increases at the start of the year in the U.S. and the sequestration spending cuts. Those had a serious drag on the U.S. economy this year. But the good news is, because of those cutbacks, we've had tremendous improvement in a very short period of time with the U.S. budget deficit. That's not to say they don't have more work to do on that front, but they are not going to face the same austerity that Europe is going to go through over the next few years, so it's just less risk looking ahead for the U.S. economy. And the housing market continues to come back quite nicely in the U.S. As I like to say, what took six years to undo is not going to get put together in six months.
The consumer is also slowly but surely healing itself. U.S. household wealth has almost worked its way back where it was before the recession began. Provided the politicians don't get in the way, we think the U.S. has turned a corner and is poised for better growth. We think that will spill over to somewhat better growth for Canada.
Frankly, we don't have a lot of room for the consumer, public sector or housing sector to really lead the economy [in Canada]. We do need exports at this point to be the big driver, so we do need U.S. economic performance. But we think that's what we are going to get next year, and we think that will lead to a little over 2% growth for Canada and B.C. in 2014.
Q: Where do you see the biggest opportunities for B.C. growth?
A: One of the big cyclical bounces will come from the forest products sector. It obviously got hit very hard during the downturn. But we've seen lumber prices come back. We're seeing mills reopen.
Another important factor at play is still solid growth in Asia. We are seeing B.C. benefit from its close ties to Asia. Even though there has been a lot of attention paid to the fact that China has slowed to 7% growth, 7% growth now is as important to the global economy as Chinese growth of 10% a decade ago, because the economy, in absolute terms, has grown so much.
Q: What are the prospects for other sectors, like mining?
A: The story of the last couple years is a slow but steady softening in a wide variety of base metals, and we are seeing a variety of slowdowns on that side, and frankly I don't see that turning a corner in the next year or two.
Over the medium to longer term, B.C. has very positive growth fundamentals. I think B.C. will grow faster than the national average over the medium to long term. But over the near term, the two big blocks to B.C. growth are the slowdown in the mining side and the fact that the housing market is largely tapped out now.
Q: Where do you see the loonie going?
A: Obviously, the dollar doesn't go in one direction for long. But the big story is that the dollar is losing some of its momentum. As the U.S. economy gets back on its feet, global investors will gain more confidence in the U.S. dollar. Some of the strength of the Canadian dollar has been weakness in the U.S., so that's part of the reason we are a little less positive about the dollar over the next couple of years. [email protected]
