Weighing in: Is your industry vulnerable?

Recent economic numbers out of the United States, especially concerning a possible housing bubble, have some sectors worried about a recession. But if a dramatic slowdown were to hit, how bad would it be for British Columbia? The answer: It depends on the industry.

LUMBER

Lumber is already suffering from the slowdown in housing starts in the United States, and that situation is likely to get worse, according to Jock Finlayson, executive vice-president of the BC Business Council.

The value of softwood lumber exports to the U.S. was down 17 per cent in June compared to the same month in 2005. Plywood exports were down 12 per cent, and other panel products fell by 11 per cent.

The concern now is not the stronger dollar, which local producers have already adjusted for.

"It's more the weakness in markets [and] demand falling off south of the border, which will lead to lower U.S. dollar prices," Finlayson said. "And that's definitely what we're seeing at the moment."

The proposed softwood lumber agreement would be an "aggravating factor," Finlayson said. The deal, if ratified, would levy an export tax on B.C. lumber whenever the price falls below $355 US per thousand board feet. A maximum levy of 15 per cent would be added when the prices were at or below $315 US, a number that has already been reached, Finlayson said.

TOURISM

British Columbia's cruise ship industry brings in about $500 million a year and is already in trouble, with an 11-per-cent drop in passengers through the first half of 2006. With 85 per cent of passengers coming from the U.S., a recession in that country would not be good news.

"In any recession, people tend to cut back on their discretionary spending, often through vacations," said John Hansen, president of the North West CruiseShip Association.

But as cruise vacations are still a good value for the money, Hansen doesn't think the effect will be felt unless any downturn is significant.

To avoid the effects of a U.S. recession, tour companies should look for clients in other parts of the world, said Brad Davies a director of Global Travel.

"A lot of companies in Canada relied on a very weak Canadian dollar and a strong American dollar, and their marketing program really wasn't all that sophisticated," Davies said. "So now it involves significantly more effort generating new markets and going back to previous markets that lay dormant."

Canada getting approved destination status from China, which would increase the number of Chinese visitors from about 50,000 to 500,000 a year, could also go a long way to easing the effects of a U.S. recession.

ENERGY

High energy prices may be partly responsible for the economic slowdown in the U.S., yet high energy prices are good news for British Columbia, says James Brander, a professor at UBC's Sauder School of Business.

B.C. sells a lot of energy-related products, and when energy prices go up, it encourages more activity in the energy sector, Brander said. That affects hydro, coal, oil and natural gas, as well as related products, he said.

So the net effect on the industry could be positive, even if demand from American customers fell due to a recession.

But BC Hydro doesn't even expect that demand for its electricity will fall. A recession may slow the rate of growth in demand, but it's unlikely to cause a shrinking in an absolute sense, Hydro spokesperson Elisha Moreno said.

The company doesn't foresee a U.S. recession having a significant impact on BC Hydro's business in the immediate future, she added.

FOOD

Almost seven per cent of British Columbia's exports to the U.S. are food. But industry representatives don't expect to be affected by a U.S. economic slowdown.

B.C. salmon farmers ship 80 per cent of their product to the U.S. and right now farmers can't keep up with demand, the B.C. Salmon Farmers Association's executive director Mary Ellen Walling said.

"So I can't see that we would be affected [by a recession in the U.S.]," Walling said.

With the medical community recommending people eat fish to reduce the risk of coronary heart disease, more people are eating salmon, she said.

"What we're seeing in the U.S. is a growing affluent aging population [who] are looking for healthy protein choices," Walling said. "Our current challenge is we can't grow enough fish to meet the demand now and I can't expect that will change."

Bill Zylmans, president of the B.C. Seed Potato Growers is also confident that demand for potatoes won't fall because of a U.S. recession.

The last thing to be affected by a recession is food, Zylmans pointed out.

And a U.S. recession is "the least of our worries," Zylmans said. What the industry doesn't need is another Atkins low-carb diet, which had people turn away from potatoes. That hurt the local potato industry in a "dramatic way," Zylmans said.

MANUFACTURING

The B.C. manufacturing industry may also be a loser in any recession, as demand by Americans for finished products decreases.

Werner Knittel, vice-president of the Canadian Manufacturers and Exporters, believes the effect of a U.S. recession would be "fairly significant."

"Everybody is very cognizant of it. They're watching it very closely," Knittel said.

One saving grace, though, is that many of B.C.'s manufacturers serve industrial markets, making products used by American companies, not consumers. That's important, because the U.S. slowdown is consumer-driven, affecting the demand for finished products, not intermediary goods. Spending by U.S. companies is expected to remain healthy.

About 80 per cent of finished goods -- such as furniture or doors and windows -- that are manufactured in this province are exported to the U.S., Knittel said.

Manufacturers that make products used in the housing sector will also definitely feel the effects of a slowdown. But some of the slack may be filled by strong demand from both B.C. and Alberta, which would "dampen the blow," he said.

TRANSPORTATION

Slowdown in goods going south welcome Trade and transportation go hand in hand, so a recession in the U.S. would definitely affect the amount of goods being transported south, Garland Chow, professor of logistics and supply chain management at UBC's Sauder School of Business, says.

But with transportation already stretched beyond capacity, that might be a good thing

The amount of goods being shipped to the U.S. would decrease, but shipments coming north shouldn't change, Chow said. That may imbalance the system, but it is just as likely to redress an existing imbalance, as Canadians export bulky products that take more room than the finished products that move in the opposite direction.

As trucks and rail have already been working to capacity, less demand may not have much of an impact on the transportation industry.

"If there is a capacity crunch now, a recession that reduces transport demand may be welcome by some people," Chow said.

FILM

When times get tough, people want to be entertained. So if a recession hits, it's unlikely to affect B.C.'s film industry.

Generally, during recessions in the U.S. the entertainment industry has done pretty well, said Warren Franklin, CEO of Rainmaker, Canada's largest animation and visual effects house. People are watching more television and going to movies because it's not that expensive.

Nor would a recession affect where the films were made.

"We're continuing to see more and more work based just on the talent pool and the tax incentives," Franklin said.

So, provided the tax incentives stay in place, and B.C. can still match U.S. talent, there is no reason to see movie-making move south.

"We found even as the dollar has crept up this year we've almost tripled our revenues over last year," Franklin said.

Shawn Williamson, producer at Brightlight Pictures, agrees the entertainment industry seems almost recession-proof.

"When times are tough, people are looking for escape and we can provide that," Williamson said.

But he is worried that the Canadian dollar may get too strong.

"Recession or not . . . if the Canadian dollar were to get to par or higher, I think we would see a significant change in the volume of American production here," Williamson said.

But at the current exchange rate, the industry is still thriving, he said.

"As long as our dollar maintains where it is now, or ideally weakens against the U.S. [dollar], the industry will be just fine."

REAL ESTATE

A U.S. recession may stop Americans coming to B.C. and snapping up recreational property, but the effect on the overall real estate market will likely be minimal.

Vancouver Island has some American buyers, "but it's not enough that if they quit coming up tomorrow we would see a big effect," said Darrell Paysen, president of the Vancouver Island Real Estate Board.

There were more American buyers a few years ago, when prices were lower and the U.S. dollar stronger, Paysen said. But with both the Canadian dollar and the real estate market strengthening, B.C. real estate
isn't such a deal for Americans anymore.

But while there may not be a direct impact on local real estate from a U.S. recession, there will be indirect effects, said Cameron Muir, senior market analyst with Canada Mortgage and Housing Corp.

A slowdown in the U.S. economy could impact B.C.'s forestry industry as exports fall, as well as the province's tourism business as fewer Americans visit. That in turn would affect jobs in those sectors and may spill over into others, Muir said.

Job instability erodes consumer confidence and the ability of a household to buy a home, he said.

"And consumer confidence is quite important for households who are making typically the largest purchase they are going to make in their lifetime," Muir said.

"The overwhelming majority of homes that are built and sold are being purchased by local people . . . and so it's their economic situation that is more critical to the overall health of the housing market. So their ability to afford to buy a home is a very significant factor in housing demand."

(prepared Vancouver Sun)