British Columbia Budget 2002 |
Prior to the annual budget, the Minister of Finance seeks the advice of the Economic Forecast Council (the Council) on the outlook for the provincial economy and presents their forecasts with the budget. This consultation process is laid out in the Budget Transparency and Accountability Act.
The Minister met with the Council on December 11, 2001, to discuss the economic outlook. Council members were asked to submit a forecast prior to the meeting. These forecasts were publicly released December 11, 2001. Subsequently, several participants submitted new forecasts in mid-January. The detailed results are summarized in the table at the end of the topic box.
As with previous Council meetings, Council members presented their views on the
province's near-term economic outlook, as well as factors affecting the
province's medium-term outlook. Council members were also briefed on the
government's economic policy including the provincial tax cuts already in place
and the reductions in provincial government spending planned over the next three
years. This was followed by a discussion of the impact of fiscal policy and
other issues facing the British Columbia economy.
The general view of the Council was that the British Columbia economy would continue to post modest growth in 2002 then pick up in 2003 through 2005. The Canadian economy would outpace the United States in the next four years.
An emerging North American economic recovery in 2002 was evident in most participants' forecasts and the discussion. Growth in Europe was expected to lag the U.S. recovery. The Asian economies were expected to continue growing although participants expressed doubts about the prospect of an economic recovery in Japan, a key market for British Columbia. Japan is not expected to improve until it restructures key sectors and this could take another three to five years.
Council members expected the U.S. and Canadian economies to enter a recovery in mid-2002 and post stronger growth in 2003, 2004 and 2005. On average, the U.S. economy was expected to grow 1.1 per cent in 2002 and 3.5 per cent in 2003. By 2004 and 20051 real GDP was projected to increase 3.3 per cent annually. Council discussions focused on the timing and strength of the U.S. economic recovery.
Although there was consensus that the U.S. economy would pull out of recession in 2002, there were two views about the timing and strength of the recovery. Most Council members expected the U.S. economy to recover gradually beginning in the second quarter of 2002, but this was conditional on monetary and fiscal stimulus in the U.S. The pace of recovery could be slower than in past recoveries because consumer spending has remained relatively strong through the slowdown, particularly in auto sales and housing starts. This means that consumer spending would not provide as much of a lift when the economy turns the corner. In addition, capital spending could be slow to rebound because of low corporate profits in the near term and current high levels of unused production capacity.
However, a minority believed the economy would come back more quickly and sooner. U.S. inventories were very low and rebuilding them would add to growth. A rebound in consumer and business confidence would contribute to a strong recovery in economic growth.
Council members generally agreed that economic growth in Europe and Asia would lag the U.S. recovery, although the Japanese outlook remains highly uncertain.
The Council expected that the Canadian economy would grow at a faster pace than the U.S. in the next two years. Business and consumer confidence in Canada were not affected to the same extent by the events of September 11th. In addition, tax cuts were in place earlier in Canada than in the U.S. The average forecast of economic growth was 1.3 per cent in 2002 and 3.6 per cent in 2003. The Canadian economy was expected to grow 3.4 per cent in 2004 and 2005.
Some participants said that lower interest rates, as well as federal and provincial tax cuts, would encourage consumer spending and business investment in Canada. Others pointed out that provincial governments were heading towards deficits and this would limit their ability to reduce taxes further to encourage economic growth.
Most participants expected the U.S. Federal Reserve (the Fed) to cut short-term interest rates one more time in early 2002. (Subsequent to the EFC meeting, the U.S. Federal Reserve did not cut short-term interest rates.) With low capacity utilization levels in the manufacturing sector and mild inflationary pressures, the Fed was then expected to keep rates unchanged until mid-2002. Over the medium-term, interest rates would rise as economic growth picked up, but remain below pre-easing levels.
The Bank of Canada would likely follow the Fed moves as economic conditions in Canada were expected to follow the U.S. recovery. Canadian short-term interest rates would be higher, on average, than those in the U.S. in the next four years.
In addition, most participants felt the Canadian dollar would be weak in 2002 due to soft commodity prices stemming from a weak global economy. The value of the Canadian dollar would rise over the forecast period but would remain low by historical standards, averaging 66.8 cents U.S. in 2004 and 2005. One Council participant noted that another view on the currency outlook was that the Canadian dollar would continue to fall with respect to the U.S. dollar reaching 59 cents U.S. by 2004/05.
On average, participants expected British Columbia's economy to grow 0.7 per cent in 2002 and 3.0 per cent in 2003, based on the latest survey results2. Opinions for 2002 real GDP growth ranged from minus 0.5 to plus 2.0 per cent. Two participants believed that provincial growth would be less than zero in 2002, due in part to restructuring in the province's forest sector and reduced activity in the tourism sector, or spending cuts by the provincial government.
While most participants were positive about the province's economic outlook, Council members believed that the British Columbia economy would underperform the national average due to restructuring in the forest sector (and more immediately, the impact of the softwood lumber dispute), reduced tourism activity and provincial fiscal restraint during the next two years.
Most Council members cited the softwood lumber dispute with the U.S. as the biggest factor affecting the outlook for the British Columbia economy. The countervailing and anti-dumping duties, combined with lower lumber prices, have devastated the forest industry in the province. Several suggested that the softwood lumber dispute would be difficult to resolve favourably for British Columbia.
A number of participants forecast a broad-based commodity price rise in 2003,
2004 and 2005, alongside a rebound in global industrial production. This could
lead to rising profits for resource companies in the province. Participants
noted that resource industries remain an important contributor to British
Columbia's economy and a significant driver of provincial revenue.
Most participants believed that provincial employment would be flat in 2002 as a result of restructuring in the forestry sector, and slow growth in high tech and tourism-related industries. In 2003, employment growth would pick up and the unemployment rate would decline to average 8.0 per cent. Personal disposable income was expected to rise faster than labour income due to tax cuts, leading to higher consumer spending. Others thought the continued job losses would delay a recovery in consumer confidence.
Most Council members expected a turnaround in net interprovincial migration by 2003. As a result, the pace of population growth was expected to pick up. Demand for housing in the province should improve significantly in 2003, 2004 and 2005. Many noted that the information technology sector would be a source of strength for the provincial economy.
A few participants were skeptical that faster growth in population and housing starts would occur. They also felt that consumer debt levels would constrain growth in consumer spending.
Most Council members agreed that to meet the legislated balanced budget target by 2004/05 without a strong recovery of the provincial economy, substantial cuts to government spending would be required. While reduced government spending will have an impact across the province, this would set the British Columbia economy up for stronger growth later on. Some Council members noted that cutting government spending during a recession could exacerbate the effects of an economic downturn. In addition, some participants noted the federal and provincial tax cuts would benefit the economy over the medium-term.
The Council generally believed that although a turnaround in the U.S. economy, low interest rates and recent tax cuts would contribute to economic growth in the province during the next four years, risks to the outlook remain. British Columbia's economy is more linked to the U.S. economy than a decade ago, so a delayed pick up there is more likely to affect the province. There is also a risk that the U.S. Federal Reserve may raise interest rates too quickly, choking off growth.
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| 1 | Council members provided an average forecast for 2004 and 2005. |
| 2 | The average of the December council meeting was 0.9 per cent in 2002 and 3.2 per cent in 2003. |