BCâ€™s Unusual Expansion
Some notes by yours truly on the BC economy, based on a presentation I gave this past weekend:
As a provincial economy, BC is relatively small and resource-dependent. Over past decades, there has been a growing divide between the â€œtwo economiesâ€ of Greater Vancouver (plus the provincial capitol in Victoria), with a more diversified and service-oriented economy, and the rest of the province, which remains heavily dependent on the export of basic commodities.
While the province has diversified its economy in recent decades, including success stories such as the film industry and software/gaming, there is much more that could be done. Most of this new activity is in Vancouver, increasing the regional divide. However, the regional gap has been recently masked by a boom in resource industries fuelled by high commodity prices plus accelerated cutting activity associated with the mountain pine beetle.
According to the Commodity Price Index, in 2006, overall commodity prices had nearly doubled relative to 2002. Energy has led the way, but mining and mineral products have also seen very strong price increases that have spurred new investment and interest in the sector. Thus far, the gains due to commodity prices have more than offset the rise in the Canadian dollar vis-Ã -vis the US.
A second factor driving the BC economy has been low interest rates. Although low interest rates are not unique to BC, price increases in the real estate market and new housing starts have been impressive. This begs the question of what happens next. With the US market leading Canadaâ€™s by about a year, trends there are worth watching. There has been some downward movement in housing prices and the collapse of extremely favourable mortgage lending, though it is not clear whether the market has yet to hit bottom. In Vancouver, the end of 2006 saw (modest) price declines for the first time since the boom began in 2001.
Economic growth has been steady in the range of 3-4% growth of real GDP over the 2002 to 2005 period (no data for 2006 yet but it is likely in the same range), exceeding the national average. While central Canada has been confronting a crisis in the manufacturing sector, with more that a quarter-million jobs lost since 2002, BC has remained strong on the basis of housing, construction and resources. BCâ€™s starting point was a manufacturing sector much smaller than Ontario, and much of the manufacturing sector is related to processing the output of the resource sector.
BCâ€™s unemployment rate overall tracks the Canadian rate, but fell below the Canadian rate in 2005 and 2006. It hit a 30-year low in 2006 (because the labour force statistics only go back to 1976, it is possible that the margin holds over an even longer stretch of time).
On the other hand, despite a tight labour market, real wage growth has been weak. Average weekly wages have been slightly outpacing inflation most years since 2002, with a large real drop in 2004 of 1.5%, but a real gain of 1.3% in 2006. A concern is the pressure to address labour shortages through imported foreign labour rather than letting wages rise (this is evident anecdotally in some sectors, though harder to pin down statistically).
A similar paradox is that in spite of decent economic growth rates, productivity (real GDP per hour of work) has been flat over the current expansion. Capital investment has seen the most growth in the residential sector. Outside of residential investment, capital investment has improved but not by nearly as much as the spectacular growth of corporate profits. Because productivity figures adjust for hours of work, this points to an economy where economic growth has largely been spurred by additional hours of work rather than greater income per hour of work.
A final paradox of the BC economy is the persistence of poverty and growing homelessness amidst a strong labour market. Greater Vancouver saw a doubling of homelessness between 2002 and 2005, and one estimate, based on losses of affordable housing units for the poorest, was that homelessness could triple between now and the 2010 Olympics. Homelessness in BC is intertwined with addictions and mental health issues, both of which have been long neglected, and with the general lack of availability of affordable/social/supportive housing.
In terms of broader poverty, BC poverty rates exceed national in every demographic category in spite of both stronger economic growth rates and lower unemployment rates. The situation is most acute for lone mothers, with half living in poverty. One in ten workers is poor, double the national rate. Provincial policy has exacerbated the situation through regressive changes to social assistance policies (in particular, to eligibility requirements) between 2002 and 2004 (with a minor improvement in the 2007 budget).
Meanwhile the provincial government is running annual surpluses in the $3 billion range (BCâ€™s GDP is estimated at $188 billion in 2007). The government clearly has much fiscal room to address pressing issues but to date has been reluctant to do so. The pressure of the 2010 Olympics, and what the world will see, seems to having some traction among the BC policy elite, but measures to date have been sparse. The government, as might be expected, is taking credit for the strong economy, even though external prices and demand are much bigger drivers of BCâ€™s fortunes.
BC’s economy is still a boom/bust economy. Both sides of the regional gap have ridden the global liquidity fuelled housing driven boom of the the last few years. But one wonders if that boom isn’t entering a new phase as lenders start to melt down in the states. With of course implications for both a) resources for the regional economies and b) Vancouver’s predominantly housing and construction driven economy.
The gap between wages and housing prices in Van really points to (over) reliance on leverage and the wealth effect of spectacular home equity gains. Hard to see how sustainable that is in the long run. The party continues, and everyone expects it will until 2010. After that? Well, who thinks that long term anyway?