The Economic Forecast Council, 2003

Introduction

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 9, 2002 to discuss the economic outlook. Council members' forecasts were made public at that time. The underlying forecast details are summarized in the table at the end of the topic box.

Council members discussed their views on the province’s near-term economic outlook, as well as factors affecting the province’s medium-term outlook. This was followed by a discussion of the impact of fiscal policy and other issues facing the British Columbia economy.

Overview

British Columbia outperformed the Council's earlier forecast of 0.7 per cent for 2002, growing an estimated 1.9 per cent last year. The stronger-than-expected growth reflected the province's rapid turnaround early in 2002. The Council indicated that the increased economic activity was mainly due to a surge in home construction and sales, as well as other consumer spending fuelled by federal and provincial tax cuts and lower-than-expected interest rates.

The general view of the Council was that the British Columbia economy would post stronger growth in 2003 and 2004 then grow 3.1 per cent on average in the 2005 through 2007 period.

The Canadian economy was expected to continue to outpace the U.S. economy in 2003 but stronger U.S. growth in 2004 would close the gap between the two countries. The discussion focused on the strength of the recovery in the U.S., the lack of job growth in the U.S. and implications for consumer spending, as well as the risk of a "double dip" recession in the U.S. The Japanese economy was not expected to improve.

International Outlook

Most Council members expected the economic recovery in Canada, which began in early 2002, to continue. The Canadian economy was forecast to outpace the U.S. economy in 2003. Subsequently, stronger U.S. economic growth in 2004 through 2007 would result in the U.S. growing at a slightly faster pace than Canada.

The recovery in the U.S. economy, which was weak during 2002, was expected to gain strength in 2003 and beyond. In 2002, there had been a notable absence of business investment. As a result, economic growth was mainly due to consumer spending and residential investment. Changes in inventories also contributed to growth.

The majority of Council members agreed that there is considerable monetary stimulus in the U.S. economy to support a strong recovery. With interest rates at 40-year lows, the interest sensitive sectors of the economy, including housing and consumer spending, would continue to grow.

However, some Council members expressed concern about the risk of slower growth in the U.S. during 2003. In part, this was attributed to a lack of job growth putting at risk the ability of consumers to fuel further economic growth. Recent stock market declines, high consumer debt levels and lack of job growth could result in lower consumer spending and reduce overall economic growth.

Forecasts for the U.S. economy had a wider range than those for the Canadian economy in 2003, reflecting the divergent views about the strength of the U.S. recovery. Overall, the U.S. economy is forecast to grow on average 2.8 per cent in 2003 and 3.7 per cent in 2004, before slowing to 3.3 per cent during the 2005 to 2007 period.

Council members generally agreed that the Japanese economy continues to face structural problems and is not expected to improve substantially until these problems are addressed.

The Canadian Economy

Last year, the Canadian economy outpaced the U.S. economy in terms of job creation and overall growth. Canadian consumer spending reflected a greater degree of pent-up demand and stronger job creation than south of the border. This broad-based Canadian expansion was widely expected to continue in 2003. Some members of the Council suggested that the slower U.S. recovery would eventually have a dampening effect on economic growth in Canada as demand for Canadian goods could slow.

The Canadian economy was forecast to grow 3.4 per cent in 2003 and 3.6 per cent in 2004, before moderating to 3.1 per cent on average in 2005 through 2007.

Although Council members do not forecast real GDP for Europe, the Council discussed the European outlook. In general, the outlook for the region was for sluggish growth. One Council member noted that Europe was in need of labour market changes to boost economic growth. Another noted that the efforts by some European Union member countries to meet the EU required fiscal targets could be a drag on economic growth.

Financial Markets

In the U.S., the Federal Reserve Board was generally not expected to begin raising interest rates until mid-2003. Council opinions differed as to how fast interest rates would rise. For example, those who expected slower economic growth had interest rates staying lower for a longer period than those who predicted stronger economic growth.

Most Council members agreed that interest rates in the U.S. were low enough to support a relatively strong recovery by 2004. The intended federal funds rate was projected to be 1.9 per cent on average in 2003, rising to 3.5 per cent in 2004 and 4.3 per cent in the longer term.

In Canada, the Bank of Canada's overnight target rate was forecast to increase from 3.4 per cent in 2003 to 4.6 per cent in 2004. Some Council members suggested interest rates in Canada would rise sooner than in the U.S. given the stronger recovery north of the border.

The positive interest rate spread between Canada and the U.S. was expected to support a rising Canadian dollar. The value of the Canadian dollar was forecast at 65.2 cents US in 2003 and 66.7 cents US in 2004. For the 2005 to 2007 period, forecasts ranged from 62.0 to 73.8 cents US. The widening range of forecasts in the longer term reflects the divergent views among Council members on the ability of the Canadian dollar to appreciate against a strong U.S. currency.

British Columbia Forecast

On average, participants at the Economic Forecast Council meeting expected B.C.'s economy to grow 2.7 per cent in 2003, 3.3 per cent in 2004 and 3.1 per cent per year in 2005 through 2007. Opinions for 2003 ranged from 1.5 per cent to 3 per cent. Forecasts of growth in 2003 were highly concentrated with 12 Council members predicting growth at or above 2.5 per cent. There were two lower forecasts of 1.5 per cent and 2.1 per cent.

External Issues

Participants cited the softwood lumber dispute with the U.S. as the biggest factor affecting the outlook for the BC economy. Council members agreed that a resolution to the softwood lumber dispute would benefit the province.

Two Council members noted that British Columbia is uniquely positioned to expand trade into the non-Japanese Asian markets, particularly China.

Increasing geopolitical uncertainty, the risk of terrorist attacks and a possible war with Iraq were mentioned as external issues that could affect the British Columbia economic outlook.

Sectoral Issues

The Council discussed recent developments in the domestic economy then focused on the outlook for consumer spending, housing and net in-migration.

Most Council members agreed that consumer spending in British Columbia was one of the main engines of growth in 2002. The consumer sector was largely expected to continue to contribute to overall economic growth in the forecast period. Retail sales were predicted to increase 4.8 per cent in 2003, 5.5 per cent in 2004 and 5.3 per cent per year in 2005 through 2007. Retail sales growth was supported by low interest rates in the short-term and gains in employment and incomes over the medium to longer term.

Residential construction was generally forecast to grow during the forecast period reflecting pent-up demand for housing and relatively low interest rates.

Some Council members expected continued high international in-migration levels accompanied by a turnaround in net interprovincial in-migration. The return to positive net inflows of people from other provinces was due to improved employment prospects during the next few years, as well as the establishment of a more competitive tax environment. Others forecast a continued exodus from British Columbia to other provinces, despite improved economic growth.

The divergent views were reflected in the wide range of forecasts of net in-migration. Forecasts ranged from 13,000 to 40,500 people in 2003.

Several Council members noted an improved level of consumer and business confidence in the province since the provincial and federal government tax cuts in mid-2001, and that improved business confidence was key to increasing business investment.

Council members also commented that the absence of settled native land claims was a potential deterrent to investment in land-intensive sectors of the provincial economy. In particular, investments in mining may be held up because of uncertain access to land.

Government

Council members commented on the government's three-year plan. Several stressed the importance of maintaining the commitment to balance the budget beginning in 2004/05. Most participants agreed that an increase in business investment was needed to put the province on a faster growth path. Some stressed that the existing tax cuts were necessary to attract investment. As well, some Council members noted that plans to continue with further business tax reductions in Ontario and Alberta would put competitive pressure on British Columbia over the next two to three years. Other Council members noted that reduced government spending would be a drag on overall economic growth.

Risks to the Outlook

The Council discussed the major risks to the outlook for the British Columbia economy. On the upside, a possible resolution of the softwood lumber agreement would improve prospects for the BC economy. On the downside, a possible war with Iraq, and a continuation of the jobless recovery in the U.S. could jeopardize growth in BC. The Kyoto Protocol was recognized as a potential risk to the outlook although the implications were unclear.