Part 3: British Columbia Economic Review and Outlook¹

Summary

• British Columbia's economy is estimated to have grown 3.9 per cent in 2006, following growth of 3.7 per cent in 2005. The Ministry of Finance forecasts BC economic growth of 3.1 per cent in 2007 and 3.0 per cent in 2008 (see Chart 3.1).
• In the medium-term, growth is expected to remain solid throughout the forecast period due to continued expansion of the domestic economy and improved trade sector growth.

The main risks to the economic outlook are:

• Further weakness in the US economy, particularly in the US housing market
• The Canadian dollar rises significantly above the current forecast
• Slower than anticipated global demand results in lower demand for British Columbia's exports
• Skilled labour shortages and inter-provincial migration pressures
• The Mountain Pine Beetle epidemic

The Economic Forecast Council's average estimate of economic growth was 4.0 per cent for 2006, 3.4 per cent for 2007 and 3.3  per cent for 2008. Over the medium-term (2009 to 2011), the Council's average forecast called for British Columbia's economic growth to be 3.2 per cent per year. Consistent with prudent forecast assumptions, the Ministry of Finance outlook is lower than the Economic Forecast Council forecast average (see Chart 3.1). A topic box at the end of Part 3 reports on the Minister of Finance's consultation with the Economic Forecast Council.

Recent Developments

BC's economy showed considerable strength in 2006, with solid growth in retail sales, housing starts and non-residential building permits, indicating robust domestic demand. On the trade side, the current value of merchandise exports declined from high levels earlier in the year, partly due to a higher Canadian dollar, declining prices for natural gas and lumber, and weaker demand for BC wood exports due to a slowdown in the US housing market.

The performance of key BC economic indicators in recent quarters is presented in Table 3.1.

In 2006, total employment in BC posted annual growth of 3.1 per cent, or 65,000 new jobs. The unemployment rate continued to reach lows not seen in over thirty years, falling to 4.3 per cent in June, before rising to 5.2 per cent in December. For the year 2006, the unemployment rate averaged 4.8 per cent. Sectors that saw the largest employment gains (in terms of growth rates) were: health and social services, retail and wholesale trade, education, mining and construction. In January 2007, employment increased by 31,700 jobs (or 1.4 per cent), resulting in the unemployment rate dropping back down to 4.3 per cent.

The housing sector was a source of economic strength in 2006, with housing starts for the year increasing by 5.1 per cent over 2005 levels and reaching 36,443 units. The growth in housing starts has largely been in single units, which increased 12.5 per cent, while multiple units increased by only 0.3 per cent. In January 2007, housing starts rose to an annualized rate of 39,200 units, an increase of 15.0 per cent over December levels. Demand in the housing sector continues to be supported by positive inter-provincial migration and solid income growth.

Retail sales continued to post robust growth in the first 11 months of 2006, with retail sales in BC rising 6.3 per cent on a year-to-date basis to November. Retail sales growth has been broad based with categories such as used and recreational motor vehicle sales, home furnishings stores, home centres and hardware stores seeing the highest growth. Retail sales have been driven by robust income growth, positive consumer confidence and the additional demand for household goods from an active housing market. Retail sales in BC declined for three consecutive months from September to November 2006. According to Statistics Canada, severe storms at the end of November are thought to have played a role in dampening November retail sales.

The value of manufacturing shipments rose 2.7 per cent in the first 11 months of 2006, largely due to increases in non-forestry manufacturing. Manufacturing of primary and fabricated metal, computer and electronic, and transportation equipment all saw gains in 2006. However, the value of wood products manufacturing declined 12.0 per cent year-to-date to November compared to the same period the prior year, due to declining prices and a slowing US housing market.

The value of merchandise exports declined 1.4 per cent in the first 11 months of 2006 mainly due to a 14.2 per cent drop in energy exports and a 3.3 per cent decline in forestry exports. Excess supply of natural gas led to declines in prices from the high levels seen in 2005, which were caused by North American supply disruptions resulting from Hurricanes Katrina and Rita. Meanwhile, forestry exports declined due to lower prices and weaker demand from the US.

The value of non-residential building permits grew 21.9 per cent in 2006. Commercial permits led all categories, rising by 32.1 per cent in 2006 as all three categories of non-residential permits (industrial, commercial and institutional and government) saw gains.

The Outlook for the External Environment

United States

According to advance estimates, US economic growth accelerated in the fourth quarter of 2006, reaching an annualized rate of 3.5 per cent. This followed weaker growth of 2.6 per cent in the second quarter and 2.0 per cent in the third quarter. The solid growth in the fourth quarter was due to a number of factors, including robust growth of consumption, government spending and exports, as well as a decline in imports. Residential investment continued to be a significant drag on quarterly growth, posting an annualized decline of 19.2 per cent in the fourth quarter. This was the fifth consecutive quarterly decline in residential investment. Based on the advance estimate, annual 2006 US economic growth was 3.4 per cent, although it should be noted that the fourth quarter estimate was the first of three estimates to be made by the US Bureau of Economic Analysis.

The US labour market, a lagging indicator of economic activity, was healthy in 2006. Annual average non-farm employment increased by 2,468,000 persons (or 1.8 per cent), while the unemployment rate declined to an annual average of 4.6 per cent, down from 5.1 per cent in 2005. US consumer price inflation was 3.2 per cent in 2006, while core inflation (which excludes food and energy) was 2.5 per cent. Sustained higher core inflation has raised concerns that the US Federal Reserve may be forced to hold interest rates steady or even raise rates to combat inflationary pressures, even though economic growth remains weak.

The US housing market peaked in January 2006, with annualized housing starts reaching 2.265 million units, and declined throughout the rest of the year, reaching a low of 1.478 million annualized starts in October. This decline in housing was a drag on economic growth throughout the year. The US National Association of Home Builders' (NAHB) housing market index, a measure of present and future housing market conditions, fell to levels not seen since early 1991. The index has moved up in recent months, although in January 2007 it still remained at levels considered unfavourable (see Chart 3.2). Additionally, December median home prices of sales of existing homes remained flat in year-over-year terms and inventories of unsold existing homes have remained at high levels, although they have dropped in recent months. Foreclosures and mortgage default risk have risen, partly due to previous interest rate increases by the Federal Reserve, and the impact of flattening/declining house prices coupled with the increased prevalence of interest-only and adjustable rate mortgages.

According to the January Consensus Economics survey of private sector economists, US real GDP is expected to grow by 2.4 per cent in 2007 and 3.0 per cent in 2008. The 2007 outlook for the US increased slightly in January, due to improved data for retail sales, the labour market and consumer confidence, as well as waning price pressures. The 2007 economic outlook had been deteriorating throughout 2006 as the US housing market cooled dramatically, resulting in slowing real GDP growth. The evolution of the Consensus Economics survey forecast for the US can be seen in Chart 3.3.

In order to reflect the risks surrounding the US economic outlook, the Ministry of Finance's growth assumptions are somewhat lower than the consensus. The Ministry of Finance is assuming that the US economy will grow by 2.1 per cent in 2007, compared to the current 2.4 per cent Consensus Economics survey average. US growth is expected to accelerate to 2.8 per cent in the Ministry of Finance forecast for 2008, while the January Consensus Economics survey predicts growth of 3.0 per cent. Over the medium-term, the Ministry of Finance assumes that the US economy will grow at a rate of about 3.0 per cent per year. This medium-term outlook is slightly below analysts' general view that annual potential economic growth (the rate at which the economy can grow without causing inflation to accelerate) for the US is approximately 3¼ per cent.

Canada

The Canadian economy grew at an annualized rate of 3.8 per cent in the first quarter, but slowed to 2.0 per cent growth in the second quarter and 1.7 per cent in the third quarter of 2006. The slower growth in the second and third quarters was due to a decline in real residential construction investment, weaker export growth and robust import growth, due in part to a higher Canadian dollar and weakening US demand. Nationally, employment grew by 314,600 jobs (or 1.9 per cent) in 2006, while the unemployment rate averaged 6.3 per cent. Employment gains were seen in several sectors including: natural resources, business, building and other support services, finance, insurance, real estate and leasing, health care and social assistance, other services and construction.

The appreciating Canadian dollar and weakened demand from the US contributed to slower (current value) merchandise exports growth of 1.1 per cent through the first 11 months of 2006. The weak growth was led by lower exports to the US, which fell 1.7 per cent year-to-date to November, largely the result of falling energy prices and lower exports of lumber and automobiles.

The value of manufacturing shipments declined 0.5 per cent year-to-date to November 2006, and according to Statistics Canada, once the impact of price changes are taken into account, the volume of manufacturing shipments declined by 1.6 per cent over this period.

Domestic demand continued to be a source of strength for the Canadian economy in 2006. Retail sales grew 6.2 per cent through the first 11 months of 2006 and average consumer confidence in 2006 was 3.2 per cent higher than 2005 levels. Canadian housing starts grew 0.8 per cent in 2006. According to the Canada Mortgage and Housing Corporation (CMHC), housing growth was driven by low mortgage rates, solid employment and income growth, and a high level of consumer confidence. Some provinces, notably Alberta and BC, saw significant growth in housing starts, while others such as Ontario, Quebec, PEI and Newfoundland saw declines. National housing starts had seen robust growth from 2001 to 2004 and 2006 housing starts remained at high levels. In January 2007, national housing starts increased to an annualized rate of 249,300 units, up 17.3 per cent over December, driven by continued gains in western Canada.

The Consensus Economics survey average forecast for 2007 Canadian real GDP growth has deteriorated in recent months, averaging 2.3 per cent in January, down from October's average of 2.6 per cent. The decline in expectations was due to weakness in recent indicators such as flat industrial production, weak exports and falling commodity and oil prices. The Consensus Economics January participants' survey average indicates that Canadian economic growth will accelerate in 2008 to 2.9 per cent. The Ministry of Finance economic forecast assumptions are more prudent, with Canadian real GDP growth expected to be 2.0 per cent in 2007, 2.7 per cent in 2008 and 2.8 per cent over the medium-term. The evolution of the Consensus Economics survey average forecast for Canada can be seen in Chart 3.4.

Japan

According to the January Consensus Economics survey, the Japanese economy is estimated to have grown 2.2 per cent in 2006. The survey noted strong growth in business investment and industrial production as well as housing starts as positive indicators for Japanese economic growth. Consumer spending was a source of weakness, and was expected to have grown only 1.0 per cent in 2006. The January Consensus Economics survey predicts Japan's real economic growth will reach 1.8 per cent in 2007 and 2.3 per cent in 2008. The Ministry of Finance is assuming lower growth of 1.7 per cent in 2007 and 1.9 per cent in 2008. The Ministry of Finance economic forecast assumes growth of 1.5 per cent over the medium-term. These prudent assumptions reflect the continued uncertainty regarding the Japanese economic outlook both in the short and medium-term.

Other Economies

In Europe, 2006 saw an acceleration in economic growth from 2005 for the thirteen countries that share the common Euro currency (EMU). According to the January Consensus Economics survey, the EMU economies are estimated to have grown by 2.7 per cent compared to 1.4 per cent growth in 2005. Germany's economy saw improved industrial production and investment, while France's saw robust household consumption and business investment. In the January Consensus Economics survey, expectations call for slower growth in Europe going forward, with survey participants forecasting average growth of 2.0 per cent for 2007 and 2.1 per cent for 2008. The Ministry of Finance assumes slightly lower growth for Europe of 1.8 per cent in 2007 and 1.9 per cent in 2008.

China continued its rapid pace of economic growth in 2006, maintaining double digit growth of 10.7 per cent according to the February Blue Chip Economic Indicators, a monthly survey of about 50 leading business economists. The survey participants' average forecast calls for continued rapid growth in 2007 and 2008, with forecast growth of 9.5 and 9.1 per cent respectively. China's growth in recent years has been fueled in part by growth in exports, investment and manufacturing, which has in turn led to higher global demand and prices for commodities. According to the Economist magazine, between 1993 and 2003 China doubled its share of world manufacturing output and, since 2000, China's contribution to global growth has been larger than that of the US. The government of China in recent years has taken several steps to reform its economy, including financial institution reforms, loosening state control of companies, joining the World Trade Organization (WTO) in 2001 and partially de-linking its currency from the US dollar. The Chinese Yuan now floats within a very narrow band against a basket of currencies from the country's major trading partners, allowing the Yuan to appreciate moderately against other currencies, such as the US dollar.

Financial Markets

Interest Rates

The US Federal Reserve Board has left the intended federal funds rate unchanged at 5.25 per cent since last raising rates midway through the year. In their latest announcement on January 31st, the Fed noted that indicators suggested US economic growth had firmed somewhat and there were tentative signs of stabilization in the housing market. The Fed indicated that the economy is expected to grow at a moderate pace in the near term. The announcement also indicated that readings of core inflation improved in recent months and that inflationary pressures were expected to ease going forward, although a high level of resource utilization has the potential to sustain inflation. Chart 3.5 shows the average of private sector forecasts for US and Canadian administered rates.

The Bank of Canada (BoC) has left its key interest rate (the target for the overnight rate) unchanged at 4.25 per cent since last raising rates on May 24, 2006. In their January 16, 2007 announcement, the Bank noted that while global demand remained robust in 2006, the US economy slowed resulting in reduced demand for Canadian exports (particularly of building materials and motor vehicles). Inflation has largely evolved in line with BoC expectations and the BoC projects CPI inflation rising to the targeted level by the second half of 2007. The statement concluded that inflation risks remain roughly balanced and the current level for the target rate was judged, at that time, to be consistent with achieving the inflation target of 2 per cent over the medium-term.

Outlook

Based on the average of six private sector forecasts as of January 4, 2007, the Ministry of Finance interest rate outlook assumes that the US Federal Reserve will begin lowering interest rates in the second quarter of 2007, with the Fed Funds rate falling to 4.5 per cent by the end of the year. On average the forecasters assume that the Fed will remain on hold until the third quarter of 2008, when they are expected to raise their targeted rate by 25 basis points to 4.75 per cent.

The average of private sector forecasters' views on the Bank of Canada's 3-month T-bill interest rates as of January 4th (see Table 3.3) indicates that interest rates will average 4.0 per cent in 2007 and 4.1 per cent in 2008.

Ten-year government of Canada bonds are forecast to average 4.1 per cent in 2007 and 4.5 per cent in 2008, indicating that the spreads between long-run and short-run rates will turn positive.

Exchange Rate

The Canadian dollar continued its recent trend of appreciation against the US dollar in 2006, due in part to general weakening of the US dollar and high prices for commodities such as oil and metals. The loonie peaked at just under 91 US cents on June 12, 2006 as commodity prices spiked higher due to strong demand and tight supplies. Since then, the Canadian dollar has declined somewhat, ending the year at 85.8 US cents. For the year the dollar averaged 88.2 US cents, appreciating 5.6 cents over the 82.5 cents average in 2005. More recently, the Canadian dollar continued its slide reaching 85.2 US cents on February 9th.

Outlook

Continued weakness in the US dollar (weighed down by the twin fiscal and trade deficits) and high commodity prices are expected to support the Canadian dollar in 2007, although the Canadian dollar is expected to depreciate from 2006 levels due to softening commodity prices and declining interest rates.

Average private sector forecasts as of January 4, 2007 expect the Canadian dollar will average 86.9 cents US in 2007, rising to 88.1 cents US in 2008. The Ministry of Finance exchange rate outlook is based on these private sector averages (see Table 3.5). The Ministry of Finance assumes that the Canadian dollar will level off at 88.5 cents US for the 2009 to 2011 period.

The British Columbia Economic Outlook

BC's economy continued to post strong growth through 2006, as domestic demand indicators such as housing starts, non-residential building permits and retail sales saw strong growth. Robust income growth, a low unemployment rate and positive consumer confidence contributed to solid growth in consumer spending. However, BC's merchandise exports were hit by lower demand from the US and falling lumber and energy prices. The Ministry of Finance estimates that the BC economy posted growth of 3.9 per cent in 2006, ahead of last year's February 21, 2006 budget forecast of 3.3 per cent and the subsequent first Quarterly Report forecast of 3.6 per cent.

The Ministry of Finance forecasts BC's economy to grow 3.1 per cent in 2007 and 3.0 per cent in 2008. Over the medium-term, the Ministry of Finance forecasts growth of 3.1 per cent in 2009, 3.3 per cent in 2010 and 3.0 per cent in 2011, averaging 3.1 per cent over the 2009 to 2011 period. This outlook is consistent with the Ministry of Finance's prudent assumptions and is slightly lower than the Economic Forecast Council's outlook (see Table 3.6 for a comparison of MoF and the EFC economic outlooks).

Table 3.7 summarizes the Ministry of Finance's outlook for key economic indicators, while Tables 3.9.1 to 3.9.4 at the end of Part 3 provide additional detail on the economic forecast.

The Labour Market

Employment in British Columbia grew 3.1 per cent in 2006, following growth of 3.3 per cent in 2005 (see Chart 3.7). This translated to average total employment of 2,195,500 persons employed, an increase of 65,000 jobs. Full-time employment increased by 56,300, while part-time employment increased by 8,600 jobs.

Growth in employment outweighed growth in the labour force resulting in British Columbia's unemployment rate averaging 4.8 per cent in 2006. The unemployment rate in June 2006 reached a low not seen in over 30 years, as it fell to 4.3 per cent before rising to 5.2 per cent in December.

In January 2007, employment increased by 31,700 jobs, or 1.4 per cent. The employment gains outpaced the increase of 0.5 per cent in the labour force, resulting in the unemployment rate falling to 4.3 per cent. Full-time employment grew by 21,100 jobs (1.2 per cent), while part-time employment increased by 10,600 jobs (2.4 per cent).

Outlook

The Ministry of Finance outlook is for employment in British Columbia to increase by 1.9 per cent in 2007, or approximately 42,000 jobs. In 2008 and 2009 employment is forecast to grow by 1.9 per cent each year and by 2.0 per cent per year in each of 2010 and 2011. Labour force growth in BC is forecast to grow at a similar pace as employment, resulting in the unemployment rate remaining stable at 4.8 per cent from 2007 to 2011.

Domestic Demand

Consumer Spending and Housing

Retail sales saw robust growth through the first 11 months of 2006, compared to the same period the previous year. Sectors that put in a solid year-to-date performance through September 2006 were: used and recreational motor vehicle sales (+23.1 per cent), home furnishings stores (+18.1 per cent), and home centres and hardware stores (+22.7 per cent). High levels of housing activity in 2006 continued to support retail categories that sell durable and semi-durable household goods. Monthly retail sales declined from September 2006 through November 2006, although weaker November retail sales are thought to have been influenced by the severe storms BC experienced at the end of that month.

British Columbia housing starts totaled 36,443 units in 2006, a 5.1 per cent increase compared to 2005. Seasonally adjusted housing starts at annual rates peaked in June, hitting 41,800 units, slowing to 34,100 units by December. The robust growth in housing starts in 2006 was supported by solid income growth. It should be noted that while Western Canada's housing market remained buoyant due to robust economic growth, national housing starts cooled in 2006, rising only 0.8 per cent. BC housing activity started strongly in 2007, with January starts rising to an annualized 39,200 units, 15.0 per cent higher than December's levels.

Leading indicators for non-residential investment were also quite strong in 2006 with the total value of non-residential building permits rising 21.9 per cent. In 2006, the value of commercial permits saw the largest gains (+32.1 per cent), followed by institutional and government (+9.0 per cent) and industrial (+3.5 per cent). Total non-residential building permits had slowed in the second and third quarters, but rebounded sharply in the fourth quarter, largely due to an increase in the value of commercial permits.

Outlook

The Ministry of Finance estimates that real (inflation-adjusted) consumer spending on goods and services grew by 4.2 per cent in 2006 and forecast growth of 3.2 per cent in 2007 (see Table 3.9.1 at the end of Part 3). A robust labour market and continued growth in personal income is expected to support consumer demand for goods and services this year. Real consumer spending is forecast to grow by 3.1 per cent in 2008 and 2009, with growth rising slightly to 3.2 per cent in 2010 and slowing to 3.1 per cent in 2011. Retail sales are estimated to have increased 6.4 per cent in 2006, and are forecast to grow 5.4 per cent in 2007, 5.2 per cent in 2008 and 2009, and 5.3 per cent in 2010 and 2011.

Housing starts in British Columbia are forecast to ease from the high levels observed in 2006. The lagged impact of previous Bank of Canada interest rate increases, slowing demand and higher house prices are expected to cool housing starts over the forecast period. Housing starts are forecast to total approximately 33,600 units in 2007 and 31,600 units in 2008. Over the medium-term BC housing starts are forecast to level out, averaging just under 31,000 units through 2009 to 2011.

Business and Government

Real business investment (including residential) is estimated to have increased by 7.6 per cent in 2006, after growing by 7.4 per cent in 2005. The main sources of strength behind business investment growth in 2006 are estimated to have been robust non-residential investment and machinery and equipment investment.

Real business machinery and equipment investment (adjusted for inflation) continued to benefit from the appreciation of the Canadian dollar in 2006. Following growth of 17.4 per cent in 2005, machinery and equipment investment is estimated to have grown 11.9 per cent in 2006.

Real business non-residential investment (adjusted for inflation) is estimated to have increased by 9.1 per cent in 2006, following a 0.8 per cent decline in 2005. This measure represents inflation-adjusted spending by businesses for construction of industrial, commercial and institutional buildings, highways, bridges, sewage systems and various other projects.

Real residential investment (adjusted for inflation), which includes new housing investment as well as renovations and improvements, is estimated to have grown 4.1 per cent in 2006, following growth of 6.5 per cent in 2005. Nominal residential investment (not adjusted for inflation) is expected to have grown 9.1 per cent in 2006, following growth of 12.7 per cent in 2005.

Continued strength in both residential and non-residential investment has raised concern that the construction industry may be facing rising labour costs due to a skilled worker shortage. The unemployment rate among British Columbia construction workers fell from 4.8 per cent in 2005 to 3.9 per cent in 2006, the lowest rate of all provinces for the second consecutive year. If the current tight labour market in the construction sector is not alleviated, there may be a shortage of skilled workers resulting in upward pressure on construction sector wages. There is also some speculation that Alberta's strong economic growth and continued demand for construction workers will put additional pressure on BC's labour market.

The rising cost of material inputs in the construction sector has also been of concern in recent years. Several material input prices continued to rise through 2006, including petroleum and coal products, diesel fuel, asphalt, and concrete.

According to the BTY Group, a construction industry consulting company, lower mainland construction cost inflation (including residential) was estimated to be 11.0 per cent in 2006. Construction cost inflation is expected to slow due to a number of factors including the shifting scope and timing of projects due to high costs, a slowing BC housing market and the downturn in the US housing market reducing demand for materials (particularly lumber). BTY forecasts construction cost inflation to slow to 6.0 per cent in 2007, 5.0 per cent in 2008 and 3.0 per cent in 2009 and 2010.

The Vancouver non-residential building construction price index, a measure of costs facing the construction industry in Vancouver that includes both labour, building material costs and profits, rose 9.3 per cent through the first nine months of 2006, compared to the same period in 2005. This follows growth of 7.3 per cent in 2005.

Real (inflation adjusted) local, provincial and federal government combined spending on goods and services in BC is estimated to have increased 4.2 per cent in 2006 in inflation-adjusted terms, following growth of 1.5 per cent in 2005.

Outlook

Total real (inflation adjusted) investment in British Columbia is forecast to grow by 3.8 per cent in 2007, slowing to 3.1 per cent in 2008. This growth reflects public sector investment in capital projects as well as strength in machinery and equipment investment and non-residential investment. Over the medium-term, total investment in British Columbia is expected to grow approximately 4.7 per cent per year on average. Growth in non-residential investment and machinery and equipment investment are expected to continue to be significant sources of growth over the medium-term.

On average, real non-residential investment is forecast to grow at 6.6 per cent from 2009 to 2011, while machinery and equipment investment is forecast to average 8.8 per cent as firms continue to take advantage of the high Canadian dollar to import equipment from the US at a lower cost.

Combined real spending (adjusted for inflation) by the three levels of government (federal, provincial and municipal) on goods and services is expected to grow 4.1 per cent in 2007, slowing to 1.8 per cent in 2008. Over the medium-term, real government spending from all three levels of government is forecast to grow 2.2 per cent on average per year.

External Trade and Commodity Markets

The value of BC's merchandise exports declined throughout 2006, and year-to-date to November were down 1.4 per cent compared to the same period the previous year. The decline in the value of exports was due in part to weaker demand from the US, as well as lower prices for some key commodities such as lumber and energy, and a higher Canadian dollar.

The value of forestry exports declined 3.3 per cent year-to-date to November, due to a slowing US housing market, lower western spruce-pine-fir prices, and the continued effect of a higher Canadian dollar. Western spruce-pine-fir prices averaged US$296 in 2006, a 16.6 per cent decline from the US$355 average in 2005. The price of hemlock baby squares, a key price for the coastal forest industry, averaged US$584 in 2006, up 8.1 per cent compared to the 2005 average price of US$540.

The value of energy exports declined 14.2 per cent through the first 11 months of 2006, as natural gas prices declined due to higher storage levels, a mild hurricane season in the US and relatively milder temperatures in North America. Canadian natural gas prices were generally lower in 2006 compared to 2005 and continued to be volatile. BC Plant inlet prices ranged from $8.58 C/GJ in January to an estimated low of $4.18 C/GJ in September. For the year, natural gas prices at plant inlet averaged an estimated $5.53 C/GJ, or 23.8 per cent lower than the 2005 average price of $7.26 C/GJ.

Metallic mineral prices soared in the middle part of 2006. In early May weekly copper prices peaked at $3.75 US/lb, while zinc averaged $2.04 US/lb in early November. Other commodities, such as gold, silver, lead and molybdenum also saw similar strength. Higher prices were largely driven by tight world supplies and robust global demand, particularly from China. Prices have generally fallen from these highs, but remain well above 2005 levels.

Outlook

Real exports of goods and services are forecast to increase 2.7 per cent in 2007. The high Canadian dollar, weak demand by the US housing market for BC forest products, weaker demand from Japan and weakening commodity prices are among the reasons for the relatively soft performance. Real export growth is forecast to improve over the medium-term as the US and Canadian economies accelerate, resulting in growth of 3.6 per cent in 2008 and average growth of 3.7 per cent over the 2009 to 2011 period.

Western spruce-pine-fir prices are expected to remain below trend through 2007, mainly due to the weak US housing market. As the US housing market improves in 2008, prices are expected to return to US$300 over the medium-term (see Chart 3.12).

Based on private sector forecasts, natural gas prices are expected to improve from 2006/07 levels over the forecast period but remain below the highs seen in 2005/06. Between 2007/08 and 2010/2011, natural gas prices are expected to average between $6.47 and $6.70 C/GJ (see Chart 3.13). A topic box at the end of Part 1 provides further information on natural gas prices.

The British Columbia goods and services export price deflator (the average price of BC goods and services exports) is forecast to rise 2.1 per cent in 2007, following an estimated decline of 1.8 per cent in 2006. The Ministry of Finance forecasts that the price of BC's exports will grow 0.1 per cent in 2008 and the average export price growth is expected to be 0.7 per cent over the 2009 to 2011 period as commodity prices stabilize and the Canadian dollar remains at 88.5 US cents.

Inflation

Consumer price inflation (CPI) in British Columbia averaged 1.8 per cent in 2006, as higher consumer inflation in non-durables and services was offset by weaker inflation in durable and semi-durable goods. BC's CPI inflation was slightly below the Canadian average rate of inflation of 2.0 per cent in 2006. High gasoline prices were partly responsible for the strength of non-durable inflation, while higher mortgage costs and price inflation for education, health care and restaurants were responsible for higher services CPI inflation. CPI inflation picked up in May 2006 as gasoline prices jumped, but by September gasoline prices fell below September 2005 levels and year-over-year monthly inflation dipped to 1.0 per cent in September 2006. BC CPI inflation accelerated to 2.1 per cent in December (compared to December 2005), as fuel prices jumped higher.

Outlook

Consumer price inflation in British Columbia is forecast to average 2.0 per cent per year in 2007 and 2008. Over the medium-term, CPI inflation is forecast to average 2.1 per cent. The Canadian rate of inflation is expected to average 1.9 per cent in 2007. Over the medium-term, national CPI inflation is expected to be 2.0 per cent, in line with the Bank of Canada's inflation target.

Risks to the Economic Outlook

The most significant risks to the British Columbia outlook remain the volatility of the Canadian dollar and the US economic slowdown.

The British Columbia economy could grow faster than forecast if:

• The Canadian dollar falls significantly below the current forecast.
• The US housing market rebounds.
• The new Softwood Lumber Agreement 2006 export taxes result in industry rationalization and higher than anticipated lumber prices.
• The US economy performs better than anticipated.
• British Columbia business confidence and investment strengthen further; this would provide a base for stronger economic growth in the province.
• Interprovincial net in-migration strengthens further; this would generate additional demand for goods and services and boost economic growth.
• Visitors to BC increase more than expected, as Vancouver gains further international recognition as a tourist destination through promotion of the 2010 Winter Olympics.

Alternatively, the British Columbia economy could grow slower than forecast if:

• There is a slowdown in world economic activity or a US recession.
• The Canadian dollar movements become increasingly volatile or the dollar appreciates rapidly above the current forecast.
• Oil prices rise and remain at a high level, dampening global growth prospects.
• The new Softwood Lumber Agreement 2006 export taxes combined with the weak US housing market result in net lumber prices that are below BC lumber firm production costs, resulting in shut-downs and layoffs.
• Skilled labour shortages lead to increased wage inflation.
• BC interprovincial migration weakens and skilled labour shortages occur.
• Lumber damaged due to the Mountain Pine Beetle epidemic becomes increasingly unsalvageable.
• Interest rates in the US and Canada rise more quickly than forecast.
• Commodity prices decline more sharply than forecast or become more volatile.
• Geopolitical uncertainty accelerates due to events in the Middle East or further terrorist attacks.
• Tourism in BC could slow if US travel to BC declines due to fears of an avian flu pandemic or influenza pandemic outbreak, or due to US passport requirements.