The Economic Forecast Council, 2004

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 a requirement of the Budget Transparency and Accountability Act.

The Minister met with the Council on December 8, 2003 to discuss the economic outlook for 2004 and beyond.

Council members discussed their views on the international outlook as well as the Canadian dollar. This was followed by a discussion of the province's near-term economic outlook, as well as factors affecting the province's medium-term outlook. Finally, the Council discussed the impact of fiscal policy and other issues facing the BC economy. The underlying forecast details are summarized in the table at the end of the topic box.

Overview

Improving North American and global economic conditions are expected to contribute to stronger BC growth in 2004. In the medium-term, Council members expect infrastructure construction relating to the 2010 Olympics to result in stronger growth. The forecasters also acknowledged the impact of policies to attract investment, noting recent successes in the oil and gas sector. The average of participants' forecasts was that the British Columbia economy would post growth in 2004 of 2.9 per cent, up from 1.7 per cent in 2003, and then grow 3.2 per cent on average in 2005 through 2008.

All the participants agreed that the U.S. economy would post stronger growth in 2004; the average outlook was 4.4 per cent. Continued appreciation in the Canadian dollar was one of the main concerns of Council members and was their main forecast risk.

The Council's updated average forecast for British Columbia growth in 2003 of 1.7 per cent was lower than the 2.7 per cent anticipated a year ago. The weaker-than-expected growth resulted from a number of external shocks including the rapid appreciation of the Canadian dollar, the SARS outbreak, the war in Iraq and forest fires. Retail sales growth was weaker in 2003, while the housing sector soared due to record low interest rates.

International Outlook

Given the significant fiscal and monetary stimulus in the U.S., all the Council members expected the U.S. economy to post stronger growth in 2004. The economic recovery in the U.S. was also expected to improve Canada's growth prospects. However, the Council saw Canadian economic growth lagging behind the U.S. over the forecast period.

The Council was more mixed in terms of the durability of strong growth in the U.S. Some Council members felt that fiscal retrenchment would weaken growth in 2005 and 2006. Others expected U.S. growth at or above four per cent to continue in 2005. High levels of consumer debt and slow job creation in 2003 made consumers vulnerable, and a pick-up in business investment will be crucial to a sustained period of economic growth in the U.S.

Overall, the participants' forecasts on average point to U.S. growth of 4.4 per cent in 2004 and 3.7 per cent in 2005, before slowing to 3.2 per cent for the 2006 to 2008 period.

The Council recognized that Japan's economy performed well in 2003, but they did not see this growth as sustainable and expect a return to weaker growth over the medium-term. China was mentioned by the Council as the engine of economic growth in Asia, and it will be important for BC and Canada to gain access to this growing market.

The Canadian Economy

In 2003, the Canadian economy grew more slowly than the U.S. largely as a result of several external shocks. While the economic recovery in the U.S. is expected to boost Canadian growth, many Council members pointed out that the composition of growth in the U.S. also matters. The sectors that use Canadian exports heavily such as auto manufacturing and housing are not where some members of the Council expect to see strong growth.

The Canadian economy was forecast to grow 3.0 per cent in 2004, strengthening to 3.2 per cent in 2005 before returning to 3.0 per cent on average in 2006 through 2008.

The biggest concern expressed by Council members in terms of Canadian economic growth was the rapid appreciation of the Canadian dollar. Some members felt that the Canadian dollar would appreciate further and that the Canadian economy will continue to feel the impact of the appreciation that happened in 2003, as firms and consumers adjust to the higher dollar.

Financial Markets

Council members agreed that the record low interest rates in the U.S. were providing stimulus to the economy and supporting a booming housing market. The intended federal funds rate was projected to be 1.3 per cent on average in 2004, rising to 2.9 per cent in 2005 and 4.1 per cent on average over the 2006 to 2008 period.

In Canada, the Bank of Canada's overnight target rate was forecast to increase from 2.9 per cent in 2004 to 3.6 per cent in 2005. The interest rate spread with the U.S. will continue to narrow over the medium-term with the Bank of Canada's overnight target rate expected to average 4.4 per cent for 2006 to 2008.

The Canadian dollar was recognized by the Council as the most significant forecast risk. The impact of the rapid appreciation in the currency will continue to be felt this year. Exports and tourism are negatively affected by a higher Canadian dollar, while consumers and investors in communications equipment and capital benefit. Some Council members expressed concern that the Canadian dollar could overshoot into 80 cent US territory in 2004.

The Council debated the ability of the Bank of Canada to influence the level of the dollar. Some members pointed to the lack of success that the Bank of Canada has had in the past controlling the exchange rate. Some Council members felt that the Canadian dollar would appreciate further, in the range of another 10 per cent, while others see the dollar returning to the low 70's over the medium-term.

The Council had divergent views on the Canadian dollar outlook. For 2004, the range of participants' opinions was from a low of 73.9 cents up to a high of 80.0 cents US. By 2005 half of the Council members expect the Canadian dollar to rise vis-à-vis the U.S. dollar, while the other half see the dollar depreciating. For the 2006 to 2008 period the Council members outlook for the Canadian dollar ranged from 72.0 cents to 82.0 cents US.

British Columbia Forecast

On average, participants at the Economic Forecast Council meeting expected B.C.'s economy to grow 2.9 per cent in 2004 and 3.2 per cent per year in 2005 through 2008. Opinions for 2004 ranged from 2.4 per cent to 3.3 per cent. Forecasts of growth in 2004 were fairly concentrated with nine Council members predicting growth at or above 2.75 per cent. Several Council members had Canada showing stronger growth than British Columbia in 2004 and 2005, while others felt that British Columbia would do as well or outperform the country as a whole this year and next.

Economic Forecast Council Outlook for the British Columbia Economy

External Issues

The Council felt that the softwood lumber dispute was a significant factor affecting the outlook for the BC economy.

In addition, many Council members noted that BC is well positioned to benefit from China's emergence as an engine of global economic growth. Due to geographic and market positioning considerations, Council members were optimistic that BC can capitalize on the opportunities provided by China's large and growing markets.

Sectoral Issues

In terms of the domestic economy the Council focused on the outlook for the labour market, immigration and housing.

Some Council members saw a tightening of the labour market over the next few years with industries such as construction facing labour shortages. Promoting immigration was raised as a possible solution to labour shortages. However, Council members noted that BC must compete with other provinces for skilled immigrants and that several administrative barriers exist, resulting in Canadian immigration targets not being achieved and skilled immigrants being under utilized in the workforce. The Council expected BC's net migration to average 24,720 people in 2004, opinions ranged from a low of 12,700 people to a high of 33,000 people.

Economic Growth Forecasts, 2004

Economic Growth Forecasts, 2005

The housing sector has been an area of strength in the BC economy over the past year. Some Council members felt that housing construction is not sustainable at current levels and would undergo a correction, due to market saturation, pre-emptive building and affordability issues. For 2004, the Council's outlook for housing starts ranged from 20,000 to 29,000 units with an average of 25,565 units.

Several Council members noted that international security concerns have hindered the tourism sector in BC and Canada. It is difficult to isolate the impact of heightened security concerns in the U.S. as a number of other shocks experienced by the economy have also been detrimental to tourism, such as the SARS outbreak, the weak U.S. economy and the higher Canadian dollar.

Government

Council members commented on the government's three-year plan and recommended staying the course, in particular the legislated commitment to balance the budget starting in 2004/05.

In reference to the energy sector, the Council noted that BC's "open for business" climate had been well received. Energy was seen to be a bright spot in the BC economy and demand from the U.S. is expected to continue to strengthen. Council members expect U.S. demand for natural gas to rise as more industries and consumers move away from coal and other energy sources towards natural gas.

Most participants agreed that an increase in business investment was needed to put the province on a faster growth path.

Risks to the Outlook

The Council discussed the risks to the outlook for the British Columbia economy. The major risk was a further appreciation in the Canadian dollar, which could dampen growth prospects. On the upside, a possible resolution to the softwood lumber dispute would provide certainty for the forest industry and encourage investment, boosting economic growth in BC. The Kyoto Protocol was recognized as a potential issue in the outlook although the implications were unclear. The ability of BC to attract skilled immigrants and realize their full potential in the labour force will be a key issue in achieving the workforce skills required to sustain economic growth.