Strong growth seen for BC in 2007

British Columbia will enjoy its sixth consecutive year of solid economic growth in 2007, underpinned by a strong job market, robust commodity prices, healthy balance sheets, low interest rates, and blistering non-residential construction to offset a housing market heading for a soft landing.

That was the upbeat consensus of five speakers Wednesday at the Vancouver Board of Trade's annual economic outlook forum.

While rising protectionist sentiment in the U.S. means uncertainty for both cross-border and Chinese trade, and a strong Canadian dollar will continue to hamper exporters, economists remain bullish on the North American economy.

"Corporate balance sheets in Canada and the United States have never been better," said Rick Egelton, chief economist with BMO Financial Group.

"Household balance sheets are in good shape. Despite the significant debt that consumers have accumulated, they have accumulated even more assets.

"And, in Canada, governments are in phenomenal fiscal shape. In fact, of the industrial countries, there is no country in a better fiscal position than the Canadian government."

Egelton said the U.S. is deflating a significant housing bubble, particularly in the sunbelt states, but real estate prices are holding up on a national basis and consumer spending remains strong because Americans are employed.

He expects the U.S. Federal Reserve to cut interest rates by 75 basis points (three-quarters of a percentage point) over the coming months but expects rates in Canada to remain steady because core inflation remains slightly above the Bank of Canada's target and the country enjoys a 35-year low in unemployment.

While he is very optimistic that B.C. will enjoy another good year with 3.8 per cent GDP growth in 2007, Helmut Pastrick, chief economist with the Credit Union Central of B.C., said growth from the consumer sector and residential side of the economy is giving way to more business investment, which is good for long-term productivity.

Pastrick expects forestry to have a relatively weak year as a result of fewer U.S. housing starts and sharply reduced lumber prices. Tourism will also continue to be a source of weakness with all-important American visitors deterred by the stronger Canadian dollar, higher energy costs and tougher ID requirements at the border.

However, he listed many more positive indicators, including a strengthening mining sector, the growth of transportation as an export industry, and the outlook for another solid year of growth in construction, retail trade, and the finance, insurance and real estate sector.

While a tighter labour market in B.C. means higher cost pressures for business, it also means higher hourly earnings, which Pastrick expects to climb by about 3.4 per cent this year, up from 3.0 per cent in 2006.

"I expect almost a six-per-cent increase in personal disposable income for 2007, or four per cent after inflation," he said. "This income performance is quite good. We've had very solid positive gains since 2004 and that helps underpin consumer spending, of course."

Pastrick said the housing market is heading for a soft landing, a gradual market adjustment, which is unusual in that it is not accompanied by substantially higher interest rates that typically have driven past corrections.

"Rather this time it is more of a price-driven, affordability squeeze," he said. "As a result, the adjustment phase will be long, it will be gradual, and unlike past times where we have seen very substantial corrections in volumes followed by prices."

While Pastrick expects sales volumes and housing starts to decline in 2007, he said prices will show a small increase for the year.

"It is conceivable that in the second half of 2007 we could see that rate of increase fall to zero or perhaps even dip below zero on a month-to-month basis. That is entirely possible. I think this will extend into 2008 as well.

"Perhaps later than that, in 2009, we could see a resurgence in housing demand and housing activity. So it is really not a serious correction. We weren't in a bubble to begin with, so we are not going to see a substantial exodus of speculators causing prices to decline."

Dave Park, chief economist at the Vancouver Board of Trade, reminded his audience that B.C.'s economy has enjoyed a remarkable turnaround since the start of the decade, with positive economic growth and significant increases in government spending in key areas like health and education.

At the same time, he said the province has reduced debt to GDP and lowered taxes to a competitive level while affording "substantial relief" to low-income groups and leading the country in employment growth.

"Finally, private sector investment which reached a low point around the beginning of the decade has increased very substantially and in a healthy way," Park said. "It is a very, very healthy situation in terms of the economy and provincial finances."

(prepared by Michael Kane/Vancouver Sun)