Will BC still grow if the US slows down?

Reports of a real estate bubble in the United States, with housing starts and sales dropping fast, has Canadians worried that a U.S. recession may be inevitable. And it is no secret that when the U.S. goes down, so do most other economies, including in B.C.

Local economists believe that a recession in America is unlikely. But if there is a sharp downturn south of the border, several sectors of British Columbia's economy would definitely feel the brunt, while others would survive virtually unscathed, perhaps even benefit.

James Brander, a professor at UBC's Sauder School of Business, says if there is a recession in the U.S., which he is not convinced will occur, the immediate impact is that people will have less money to spend. That means less demand for Canadian and B.C. goods. A recorded drop in Canadian exports so far this year has already been blamed on the slowing U.S. economy and a stronger Canadian dollar.

"It's a well-known fact that the Canadian economy, which includes the B.C. economy, is very closely integrated with the U.S. economy, and the changes in the U.S. economic situation have a big impact on us," Brander said.

But that impact will differ across the country. While over half of B.C.'s exports go to the U.S., the province does have other trading partners, especially in Asia. For the rest of the country, however, the U.S. is the only game in town.

The auto industry would take the biggest hit from a U.S. recession, but that would hurt Ontario, not B.C., Brander said.

And to the extent that the recession is caused by volatile energy prices, B.C. could actually be better off, because the benefits from higher energy prices would more than offset any slowdown in demand, Brander said.

"For B.C., high energy prices . . . are not necessarily a bad thing," he said.

The drop in the housing market in the U.S. also hasn't convinced Brander that there is a recession on the horizon.

The housing market and the general economy tend to move in the same direction, but that doesn't mean one is necessarily driving the other, Brander said.

More often, a recession is caused by rising interest rates. During the recession of 1980-1981, central banks around the world cut back money supplies, raising interest rates, in an effort to dampen runaway inflation, but causing a fairly severe recession in the process, Brander said.

In 1990-1991, economies were becoming overheated, so interest rates were raised and the economy slowed down more than would have been ideal, he said.

The most recent recession in 2000-2001 -- which some economists argue was not a real recession -- was caused largely by the stock market crash when the tech bubble burst, followed by the energy price shocks after 9/11.

"When interest rates rise, that cools down the housing market in a hurry, and it cools down the whole economy. And that's partly what the increase in interest rates is supposed to do," Brander said. "So the normal pattern we see is rising interest rates, a decline in the housing sector, and a slowdown in the overall economy.

"So those things do seem to happen together. Now, that doesn't mean the decline in the housing market is actually causing the slowdown of the economy. I'm not saying it's impossible to have a housing crash cause a general economic recession, but my judgment is that's not a good description of what's happened in the last several recessions."

Terry Power, a professor of strategic and international studies at Royal Roads University, agrees a recession is unlikely, provided that the U.S. economy continues growing. But there are a number of factors that the U.S. can't control, like another terrorist attack or a disruption to its oil supply, that could skew what happens.

If there is a U.S. recession, the effect on B.C. and Canada, as well as other countries in the world, wouldn't be as devastating as during past downturns.

"There was a time when the American economy was the world economic engine, and if the American economy were to collapse the world economy would collapse," Power said.

But as China and the European Union grow stronger, there are cushions built into the world economy, he said.

"The impact would still be significant, but not to the same devastating impact we would have had if this had taken place five years ago."

Power agrees that B.C. would not be as adversely affected as provinces in eastern Canada. But he worries that in the case of a recession the federal government might step in to put downward pressure on the Canadian dollar so that Ontario's manufacturing and auto sectors could still compete.

That would affect the profits B.C.'s commodities producers could otherwise earn. They would still do well, as there is sufficient demand from India and China to offset any decrease in demand from the U.S., but they would simply do less well, Power said.

Jock Finlayson, executive vice-president of the BC Business Council, is less optimistic about the effects a recession would have on B.C.

"It seems to me [the U.S.] is poised on a tipping point between what I would call a modest slowdown in growth and a sharper decline, and some of the recent indicators, particularly in the housing sector, are a little worrying," Finlayson said.

Even if there is a slowdown that doesn't meet the technical definition of a recession, which is two consecutive quarters of negative growth in gross domestic product, "we will feel that," Finlayson said.

The latest figures for the U.S. shows GDP growth of 2.9 per cent in the second quarter, well above recession levels, but significantly less than the 5.6-per-cent GDP growth recorded earlier in the year.

(prepared by Fiona Anderson/Vancouver Sun)