Following a disappointing year in 2013, B.C.'s economy is expected to expand at a modest pace this year as it transitions to a higher growth phase after 2015. We expect gross domestic product (GDP) growth to reach 2.4% this year, up from a tepid 1.4% last year.
Weak personal income growth, a tempered labour market, government spending restraint and federal tightening of mortgage insurance rules will limit gains in domestic demand. In contrast, the lower loonie and further improvements in the U.S. economy will drive stronger exports. Growth will gradually accelerate through 2015 as consumer demand picks up.
By 2016, growth is forecast to surge as the export-led rotation is joined by a rise in non-residential investment and business spending.
We expect B.C.'s dreams of a liquefied natural gas-led future to solidify and drive terminal and pipeline construction in the north. While the timing of LNG projects is uncertain, momentum and market conditions are on B.C.'s side – we expect several projects to proceed. The incremental impact of these projects pushes average economic growth above 4% from 2016 through 2018.
The future looks bright, but labour markets will continue to underperform over the next two years with below-average job gains. Stronger job creation follows economic growth and strengthening labour demand, pushing annual employment growth above 2% over the second half of the forecast. The unemployment rate will drop below 5% in 2017, despite rising labour-force participation rates.
Further improvement in the U.S. economy is a key assumption for our outlook. The U.S. economy is forecast to gain traction and expand at a pace above 3% per year, boosting demand for B.C. exports. Improvements in the U.S. housing market and consumer demand will be partially countered by restrictive fiscal policies in the short term. Nonetheless, a relatively long growth cycle is expected, given the severity of the 2008-'09 recession, the subpar recovery and substantial pent-up demand.
Interest rates will remain low and rise moderately later in the five-year forecast to near-normal levels in 2017.
The first Bank of Canada rate increase is expected in mid-2015, but before then bond yields will increase as improved growth prospects push up the cost of funds. •
Bryan Yu is an economist at Central 1 Credit Union.
