Canada’s West Coast Provinces Prepared for Changes
Interview by Rachel Duran
Editor’s Note: This interview was conducted in March. For the latest information in regard to the forecast for the Canadian economy, visit www.conferenceboard.ca.
Canada’s economy is expected to grow moderately in 2013. On the West Coast, the economies of British Columbia and Alberta are expected to hold steady. British Columbia’s forestry sector is expected to get a boost as the U.S. housing economy continues to expand its demand for the province’s softwoods. The mining sector is also gaining steam.
In Alberta, the oil industry is the one to watch, where lower prices for the resource mean lower collections on royalties and corporate taxes. However, there is promise as a large amount of investment is on the books for the industry; with the expectation of the addition of pipelines to move oil out of the province.
Global Corporate Xpansion: Provide an overview of Canada’s economy at the federal level so far in 2013.
Marie-Christine Bernard: The federal budget will be released on March 21. It has been difficult at the federal level in terms of revenue collections. Although the government has succeeded in maintaining the target date for balancing its books, the situation has deteriorated substantially over the medium term. At $24.9 billion for 2012–13, it is almost $7 billion worse than projected in last year’s budget. And in this coming fiscal year, the deficit is expected to improve to $15.7 billion—but that is still much worse than the $7.2 billion projected for 2013–14 in last year’s budget.
Overall in 2012, the Canadian economy grew moderately and it will be much the same in 2013. There are still fiscal restraints from the federal government and the provinces as well. The fiscal restraints were spread over a few years. There will be lower infrastructure spending by the public sector.
That is one element that will hold back the forecast for Canada, as well as weaker job creation.
What’s more, consumers will not be increasing their spending at a rapid pace.
We should see stronger growth coming out of the United States, most likely in the second half of 2013 and in 2014, which should help Canada’s export numbers. So we should see stronger economic growth in Canada later in the year and in 2014.
GCX: Detail what the status of Canada’s oil industry means to the country.
Bernard: In terms of corporate income tax collections, what is hurting is the weakness in commodity prices. For Canada compared to the global oil price benchmark, there is not enough pipeline capacity to bring the oil out. At the same time, the United States is increasing its oil production, so there is not as much of a demand for Canadian oil in the United States.
There were also problems moving the oil out of Cushing [Okla.] to refineries in the southern United States, and the lack of pipeline, for instance with the Keystone XL pipeline. The Canadian portion has been approved but we are still waiting to see what will happen in the United States.
GCX: Tell us about the economic situation in Alberta.
Bernard: It is not easy to talk about Alberta’s economy. Right now the key economic indicators have been quite positive. There has been a lot of job creation in the province and the energy sector is still expanding. The province is still attracting workers from other provinces.
In the domestic economy, if you look at retail sales, they are advancing by nearly 10 percent.
Year over year housing starts have been rising. Real GDP growth of nearly 3 percent is expected for 2013 and a bit stronger in 2014.
But there is a lot of risk in the forecast for Alberta. On the fiscal side the province is raising less royalty revenues because of the deep discounts on oil prices. Also, natural gas prices remain depressed, and Alberta is a major producer of natural gas.
With the deep discounts in prices, it is coming to the point where some projects may not be as economical to develop. There could be cancellations, or they could decide to develop later.
There haven’t been too many projects that have been cancelled, however, some companies have said they will not move as fast with phase II or phase III.
We have made the assumptions that this is temporary and there will be some new pipeline capacity. There are also other pipelines that have been proposed to move the oil either west to British Columbia, or east and process it in Québec or the Maritime Provinces.
Alberta’s unemployment rate is in the 4 percent to 5 percent range. The economy isn’t doing badly but we have to keep a close eye on it because there is more risk than usual for Alberta.
GCX: Highlight Alberta’s neighbor to the west. How is the forecast for British Columbia shaping up?
Bernard: There are a few elements affecting the forecast for British Columbia.
The economy was weak in 2012. There wasn’t a lot of consumer demand. There was a weaker demand for new homes, as well as the resale market. In Vancouver housing is quite expensive. There are $1 million to $2 million homes, where high-end housing resales came down and prices retreated. However, inventory that was more affordable did relatively well. The correction should not be much more than what we have seen so far, with the market stabilizing in 2013 for British Columbia.
British Columbia is also a major producer of softwood lumber. Now that the U.S. housing market is improving we are seeing strong starts that will help the forestry sector in British Columbia. Lumber mills that shut down a few years ago are operating again.
Also, British Columbia’s mining sector is expanding, with new mines coming online in 2013. The province is a major producer of metals. British Columbia also produces shale gas, an industry that is expanding, even though the price of natural gas is low.
In terms of the province’s domestic economy, it wasn’t strong last year. Employment did not do well in the second half of 2012. We see a weak handoff into this year. We don’t think household spending will improve that much in 2013. That will hold back growth in this economy.
Additionally, the provincial government is committed to balancing the books by the next fiscal year, so we see restraints from the fiscal side. Our forecast for growth in British Columbia is 2.3 percent this year. It will accelerate to 2.8 percent in 2014.
GCX:What concepts should businesses take away from a discussion on Canada’s business environment?
Bernard: Canada hasn’t really had a stellar track record in terms of productivity growth, which really matters to business. In Canada, unlike the United States, we are feeling the aging of our population. For certain provinces, it is already underway. People are retiring in large numbers. We have seen participation rates that have probably peaked in the labor market.
Additionally, in some provinces, the younger population is moving elsewhere in Canada where labor opportunities are better. [For example, Alberta’s oil sands and Saskatchewan’s expanding potash mining sector.] These provinces also attract fewer international immigrants, so the population is aging faster.
Also, even if consumers are still actively using credit to purchase automobiles and other durable goods, real estate markets are softening. Tighter mortgage rules introduced last summer have limited the number of potential new homeowners despite the fact that mortgage rates remain at record low levels. Since lowering the allowable amortization period to just 25 years (from 30 years) sales of existing homes have eased, followed, more recently, by lower levels of new home construction. Our expectation is that the real estate market is headed for a relatively soft landing — housing starts are expected to average 191,000 in 2013, down from 215,000 in 2012.
Marie-Christine Bernard is the associate director, provincial forecast, for the Conference Board of Canada. She can be reached by e-mailing firstname.lastname@example.org. The Conference Board of Canada is the foremost independent, not-for-profit, applied research organization in Canada. Visit the organization at www.conferenceboard.ca.
Illustration by renjith krishnan at Free Digital Photos.net