Royal Bank foresees risks for BC economy

Downside risks are emerging for British Columbia's otherwise healthy economy, according to a provincial economic outlook released Friday by Royal Bank.

After a robust decade, the vital softwood lumber industry may be at a turning point with sawn lumber production down almost nine per cent in the last year and weaker softwood lumber prices.

And while housing markets are still hot, price gains running at "a respectable" 10 per cent are half the pace of a year ago.

Nevertheless, the report says B.C. should still see expected growth of about 3.25 per cent this year and next.

"B.C. has enough diversified sources of strength to keep growth humming along this year but the shine on the province's economy has become somewhat duller," Craig Wright, chief economist at RBC, said in a release.

"Of particular concern is the forestry sector which is experiencing a cooling trend in response to weaker U.S. housing markets."

The report says manufacturing shipments are slipping in line with weaker U.S. markets, and exporters are being hurt by the steep appreciation of the Canadian dollar.

It also says B.C.'s non-residential construction has cooled from the hot pace of the past three years, although that puzzled Jock Finlayson, executive vice-president of the Business Council of B.C., who sees non-residential construction as one of the strong drivers of B.C.'s economic growth through to the 2010 Olympics.

On the plus side, RBC says natural gas production in the northeast is running higher than a year ago and consumer spending continues at a healthy pace thanks to strong labour markets. As well, government finances are healthy.

Finlayson agreed that the lumber industry is B.C.'s primary concern and said its woes are being exacerbated by the 15-per-cent export tax payable under the softwood lumber agreement when prices are low.

Another weak spot is tourism which is being hurt by declining U.S. visitor numbers.

However, the RBC report makes little mention of mining which Finlayson described as "one of the pillars of strength in B.C." because of high metal prices, solid exploration spending and new mine development.

Nor does it mention the potential for new power development driven by the focus on renewable sources and carbon-neutral electricity.

On housing, Finlayson said B.C. would be better off with a five-year period of flat prices to allow incomes the time to catch up a little bit.

"I think we're reaching the outer limits of affordability," he said. "High prices are becoming a real issue in keeping young families here."

On a national level, Wright says the economy should grow by 2.6 per cent over 2007 and 2.9 per cent in 2008. Rising interest rates are expected to slow consumer spending next year, but strong balance sheets should lead to more capital spending on the corporate side.

Across Canada, RBC says Newfoundland and Labrador will be the provincial growth leader this year at 7.5 per cent before experiencing a dramatic pull back next year, shifting the spotlight back to more sustainable growth in Western Canada.

Ontario and Prince Edward Island will trail the pack, each with growth rates just shy of two per cent this year.

(prepared by Michael Kane/Vancouver Sun)