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The Shifting Economic Landscape in Canada and British Columbia

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Jock Finlayson's presentation to the 2018 COFI convention.

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The Shifting Economic Landscape in Canada and British Columbia

  1. 1. www.bcbc.com | @bizcouncilbc T H E S H I F T I N G E C O N O M I C L A N D S C A P E I N C A N A D A A N D B R I T I S H C O L U M B I A APRIL 5, 2018 PRESENTED TO 2 0 1 8 C O F I C O N V E N T I O N JOCK FINLAYSON, Executive VP and Chief Policy Officer (Jock.Finlayson@bcbc.com)
  2. 2. A BRI G HTE R I NTE RN ATI O N AL E CO NO M I C BAC KD RO P 2 “US added 313,000 jobs in February”(Bloomberg News, March 9, 2018) “The US non-manufacturing sector continues to expand at a brisk clip…with 15 of 18 industries…reporting solid growth” (BMO Economics, February 5, 2018) “Euro-area economic boom spurs fastest job creation in a decade” (Bloomberg News, January 29, 2018) “Japan’s economy posts decades-best growth streak” (Marketwatch, February 13, 2018) “China continues to enjoy strong growth…” (IMF, “China’s Economic Outlook in Six Charts,” January 2018)
  3. 3. P E RCE NTAG E S O F TO TAL WO RLD M ARKE T CAP I TALI Z ATI O N AND G LO BAL G DP 3 Source: Capital Group, January 2018. 52.1% 3.5% 21.5% 7.6% 11.6% 25.3% 2.1% 21.4% 6.4% 35.2% U.S. Canada Europe Japan Emerging Markets MARKET CAPITALIZATION GROSS DOMESTIC PRODUCT U.S. market cap near all-time high 12-Month Forward P/E Ratios 9/30/17 17.9 15.4 14.9 14.3 12.4 10-Year Average 14.4 14.0 12.3 14.8 11.0
  4. 4. THE G LO BAL E CO NO M I C UP S WI NG S TI LL HAS LE G S 4 e=estimate f=Forecast. Source: IMF World Economic Outlook, January 2018. -1 0 1 2 3 4 5 08 09 10 11 12 13 14 15 16 17 18f 19f Avg growth 2000-2015
  5. 5. US I S O N A S O LI D E CO NO M I C FO O TI NG 5 • Underlying pace of economic growth accelerated over 2017; 34 consecutive quarters of positive GDP growth • Employment continues to climb…as ‘full employment’ approaches o Unemployment rate is near a 30 year low – heading for 3.5% by 2019 • Housing starts grinding higher, should reach 1.3 million this year • Business investment is rising, with the US continuing to outperform Canada • US economy is forecast to expand by 2.5-2.8% in 2018 • However, monetary and fiscal policy are at loggerheads. Tax cuts, fiscal stimulus and shifts in immigration policy…all could push inflation higher, and thus accelerate rate hikes • Federal Reserve is expected to increase its policy rate 5-7 times over 2018-19
  6. 6. US HAS PAS S E D P E AK O F THE E M P LO Y M E NT CY CLE 6 Source: Statistics Canada. latest: Jan. 2018 -5 -4 -3 -2 -1 0 1 2 08 09 10 11 12 13 14 15 16 17 US non-farm payroll growth, % 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2013 2014 2015 2016 2017 2018 US non-farm payroll growth, y/y %
  7. 7. 7 US HO M E O WNE RS HI P I NCHE S UP, BUT HAS RO O M TO RI S E Source: http://eyeonhousing.org/2017/homeownership-rate-approaches-64/
  8. 8. 8 Source: http://www.calculatedriskblog.com/2018/03/ demographics-renting-vs-owning.html. US P O P UL ATI O N FO R S E LE CTE D AG E G RO UP S , BLS ACTU AL AND P RO J E CTI O NS
  9. 9. C AN A D A LE D TH E G 7 I N E C O N O M I C G R O W TH I N TH E D E C AD E TO 2 0 1 6 9 Source: OECD, February 2018. 15.5% 13.7% 12.9% 11.6% 7.5% 5.2% -5.4% 3.0% 2.2% 2.5% 1.5% 1.8% 1.5% 1.6% -2% -1% 0% 1% 2% 3% 4% -10% -5% 0% 5% 10% 15% 20% Canada United States Germany United Kingdom France Japan Italy 2017GDPGrowthForecast Cumulative10YrGDPGrowth 2007-2016 Cumulative GDP Growth 2017 Growth Forecast
  10. 10. CAN A D A’ S E CO NO M Y HAS BE E N FLY I NG HI G H – BUT I S P O I S E D TO LO S E ALTI TUD E I N 2 0 1 8 - 1 9 10 • Growth advanced last year, with Canada leading the G7 (+3.0%). Why? 1) rebound in energy sector after deep slump in 2015-16 2) lagged benefits of a more competitive exchange rate 3) some pick-up in exports, bolstered by higher commodity prices 4) high levels of home-building/home renovation 5) robust consumer spending…supported by job gains (and more debt) 6) demographic growth…in urban areas • Most of these growth drivers are poised to lose momentum in 2018-19 • Risks for Canada include NAFTA, the impact of other US policy developments, high household debt burdens, and potential downward adjustments in housing markets
  11. 11. UP D AT E D CAN ADI AN FO RE C AS T ( AN N U A L % C H AN G E U N L E S S N O T E D ) 11 Source: BMO. Economics 2016 2017 2018 2019 Real GDP 1.5 3.0 2.0 1.8 Real consumer outlays 2.4 3.5 2.4 1.8 Real business fixed investment -9.4 2.6 4.3 2.4 Employment growth 0.7 1.9 1.5 1.0 3 month T-bill rate (%), Q4 0.48 0.92 1.60 2.30 10 yr bond yield (%), Q4 1.45 1.96 2.45 3.00 CPI all items % change 1.4 1.6 2.2 2.1
  12. 12. RE CO RD HO US E HO LD DE BT ACC UM UL ATI O N 12 Source: Statistics Canada, CANSIM table 378-0123 Latest Q4 2017 80 90 100 110 120 130 140 150 160 170 180 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Canadian household debt to disposable income, %
  13. 13. CAN A D A ( I NCLUDI NG BC) HAS LO S T G RO UND O N CO M P E TI TI V E NE S S I N M O S T TRADE D - G O O DS I NDUS TRI E S 13 • Energy, other natural resource industries plus almost all segments of manufacturing • These industries dominate Canada’s exports • Key factors in the erosion of competitiveness in traded-goods industries… o Complex, costly, & time-insensitive regulatory regimes facing natural resource and manufacturing firms…driven by both federal and provincial governments o Impact of US corporate tax cuts and business tax reforms o Thickening of the US-Canada border…with the prospect of more to come o Canada’s commitment to aggressive carbon pricing and climate policy targets…at a time when the US is largely standing still o Particularly in manufacturing, generous US state and local government financial incentives/inducements have affected firm location decisions and capital deployment o Escalating electricity costs (Ontario and BC)
  14. 14. United States 75.2% EU* 8.0% China 4.3% Japan 2.1% Mexico 1.7% Other markets 8.7% C AN A D A’ S M E R C H AN D I S E E X P O R TS , 2 0 1 6 B Y D E S TI N ATI O N M AR K E T 14 *EU 28, including the UK. Source: Global Affairs Canada, Canada’s State of Trade, 2017.
  15. 15. CAN A D A HAS LO S T ‘ M ARKE T S HAR E ’ I N THE US 15 Source: Desjardins Economic Studies, Economic News, February 17, 2016. 0 5 10 15 20 25 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2015 2016 Country share of total US merchandise imports, per cent Canada Mexico China Canada down 6.0 percentage points since 2000
  16. 16. Automotive Products 19.1% Advanced technology products 3.7% Other manufactured goods* 24.4% Others 1.2% Energy 16.4% Ores and metals 15.2% Agri-food 13.2% Forestry 6.8% Natural Resource Products 51.6% CAN A D A’ S M E RCHANDI S E E X P O RTS , 2 0 1 6 BY BRO AD P RO DUCT CAT E G O RY 16 *Includes industrial machinery and equipment, aerospace, chemicals, plastics, fertilizers, and consumer goods. Source: Export Development Canada, Global Export Forecast, Spring 2017.
  17. 17. C AN A D I A N B U S I N E S S I N V E S TM E N T P LU N G E S 17 Source: Statistics Canada, CANSIM 380-0064. current prices, seasonally adjusted annual rates. 5 6 7 8 9 10 11 12 13 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Canadian capital investment as a share of GDP, % residential non-residential
  18. 18. CAN A DI AN I NV E S TM E NT P E R WO RKE R V E RS US O E CD AN D US 18 Source: C.D. Howe Institute Intelligence Memo, Let’s Get You The Tools You Need to Succeed, March 12, 2018.
  19. 19. 19 Investment dollars are already flowing out of Canada in ‘real time’, RBC CEO warns (Vancouver Sun, April 1, 2018)
  20. 20. C AN A D I A N O U TB O U N D V S . I N B O U N D FO R E I G N D I R E C T I N V E S TM E N T ( $ M I L L I O N S ) 20 Source: Statistics Canada, CANSIM Table 376-0122. 0 20,000 40,000 60,000 80,000 100,000 120,000 2013 2014 2015 2016 2017 Canadian Inbound FDI Canadian Outbound FDI
  21. 21. E FFE C TI V E TAX R ATE S O N N E W B U S I N E S S I N V E S TM E N T: A C AN A D I A N C O M P E TI TI V E AD VA N TA G E S U D D E N LY D I S AP P E A R S 21 *Oil and gas is not included in aggregate result. Source: School of Public Policy, University of Calgary. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Forestry Electric Power, Gas & Water Manufacturing Oil & Gas* Aggregate 2017 US Tax Rates US Tax Cut & Jobs Act Canada
  22. 22. FO R CAN AD A, THE RE G ULATO RY E NV I RO NME NT HAS BE CO M E A M AJ O R CO M P E TI TI V E DI S AD VAN TAG E 22 • In a 2017 survey of large companies by the Business Council of Canada, the regulatory environment was cited as the most important public policy factor shaping investment decisions o only 13% of large companies have a positive view of the regulatory environment • Canada’s global ranking, according to the World Economic Forum: o 14th in overall competitiveness…but o 38th in the “burden of government regulation”
  23. 23. P O LI CY CHANG E S / RE V I E WS AFFE CTI NG BUS I NE S S – FE DE R AL G O V E RNM E NT 23 • New legislation governing project reviews, environmental assessment • Fisheries Act changes (restores the Act to pre-2012) • Navigable waters legislation • Mandate and governance reforms at the National Energy Board • Development of increasingly stringent ambient air quality standards • Business tax reforms affecting Canadian-controlled private corporations o accompanied by a lower small business income tax rate • Federal-provincial plan to boost CPP premiums • Proposed increase in EI premiums, coupled with more generous provisions for accessing EI benefits going forward – signalling higher costs for premium-payers over time
  24. 24. P O LI CY CHANG E S / RE V I E WS AFFE CTI NG BUS I NE S S – FE DE R AL G O V E RNM E NT 24 • Federal government climate policy: o Schedule for future carbon price hikes and federal backstop o Revised pan-Canadian aggregate GHG reduction goals o Clean Fuel Standard o Sector-specific emissions reduction targets and mandated obligations o New energy efficiency regulations for buildings, boilers/heaters, vehicles, etc. • UNDRIP and the acceptance of “free, prior and informed consent” of Indigenous peoples – with little indication of what this means in practice
  25. 25. BC E CO NO M I C P I CTURE • Growth has been running above the province’s long run potential since 2014 • BC #1 or #2 among the provinces in the growth of GDP, employment and consumer spending in four of the last five years • Demographic growth, buoyant consumer spending, and strong housing-related activity have been the key factors underpinning the economic expansion • Plus, some recovery in exports, supported by higher commodity prices, in the last two years • Business (non-residential) investment, and capital formation generally, are weak spots 25
  26. 26. S T R O N G E M P L O Y M E N T G AI N S I N 2 0 1 6 AN D 2 0 1 7 26 Source: Statistics Canada, Labour Force Survey. Monthly data seasonally adjusted, latest February 2018 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 10 11 12 13 14 15 16 17 BC employment growth, % 2250 2300 2350 2400 2450 2500 2550 Jan 15 Jan 16 Jan 17 Jan 18 BC employment, SA, 000s
  27. 27. RE TAI L S P E NDI NG RE M AI NS E LE VATE D 27 Source: Statistics Canada. 0 2 4 6 8 10 12 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 BC retail sales annual growth, % -5 0 5 10 15 20 25 30 35 autos furniture stores building materials food stores clothing stores Annual growth by retail segment, % Q2 2017 Q3 2017 Q4 2017
  28. 28. BC HO US I NG S TART S UP S I G NI FI CAN TLY S I NCE 2 0 1 4 28 Source: Statistics Canada. Seasonally adjusted annual rates. latest Q4 2017 5 10 15 20 25 30 35 40 45 50 55 05 06 07 08 09 10 11 12 13 14 15 16 17 BC housing starts, quarterly SAAR, thousands Total Multiples
  29. 29. LUM BE R I S THE P RO V I NCE ’ S # 1 E X P O RT Source: BC Stats. 0 1 2 3 4 5 6 7 8 lumber metallic mineral products machinery & equip coal pulp & paper other wood products agriculture natural gas fish products fabricated metal products BC exports by major commodity, billions $ 2016 2017 29
  30. 30. I N FO RE S TRY, I NV E S TM E NT UP FRO M P O S T RE CE S S I O N LO WS 30 Source: CANSIM Table 029-0045 * Logging and forestry, wood product mfg and paper mfg. 0 500 1,000 1,500 2,000 2006 2008 2010 2012 2014 2016 2018 BC capital investment in forestry*, millions $ BC forestry sector Rest of Canada forestry sector
  31. 31. A CLO S E R LO O K AT CAP I TAL S P E NDI NG I N BC’ S FO RE S T S E CTO R 31 Source: CANSIM Table 029-0045 0 100 200 300 400 500 600 700 2006 2008 2010 2012 2014 2016 2018 BC capital investment by sector, millions $ Forestry and logging Wood product manufacturing Paper manufacturing
  32. 32. S O M E FACTS O N O V E R ALL B US I NE S S I NV E S TM E NT I N BC • On average, BC firms invest less than 60% as much as their US counterparts, on a per worker basis, in ‘tangible capital’ (machinery, equipment, plants/factories, mines, mills, R&D facilities, advanced technology products, digital and engineering infrastructure, etc.), according to the C.D. Howe Institute • From 2014 to 2016, business investment adjusted for inflation fell by more than 15% (Fraser Institute study) • Business investment per worker in BC is lower than the Canadian average, which itself is well below the US benchmark • Private sector (non-residential) fixed investment barely matches depreciation…which suggests the capital stock is not improving or expanding – and may well be declining (similar story for Canada ex Alberta) • The tax structure and mix make the province uncompetitive for new investment in a number of important sectors – including most traded industries 32
  33. 33. BC E CO NO M I C O UTLO O K ( BCBC FO RE CAS T) ( AN N U A L % C H AN G E U N L E S S O T H E R W I S E I N D I C AT E D ) e – estimate f – forecast Source: Statistics Canada and BC Stats; Business Council for forecasts. 2016 2017e 2018f 2019f Real GDP 3.7 3.1 2.3 2.4 Employment 3.1 3.7 2.2 2.0 Unemployment rate (%) 6.0 5.1 5.0 4.9 Housing starts (000 units) 41.8 40.1 37.0 38.0 Retail sales 7.4 9.6 6.5 5.5 BC CPI 1.8 1.7 1.9 1.9 33
  34. 34. P O LI CY CHANG E S / RE V I E WS AFFE CTI NG BUS I NE S S - – BC G O V E RNM E NT 34 • Elimination of HST and return to the PST in 2013 (added ~$2 billion in costs for business) • Two-point jump in BC’s general corporate tax rate since 2013 • BC carbon tax (highest in North America, up to $35/ton as of April 1, 2018) • New Employers’ Health Tax (2019) – equating to billions of additional payroll costs • Commitment to move to a $15/hr minimum wage by 2021 • Review of the BC Labour Code (currently under way) • Internal review of WorkSafeBC benefits and services for injured workers…potentially leading to higher premiums for employers post-2018 • Looming changes to Employment Standards legislation and regulations • A positive step: phase out provincial sales tax on business purchases of electricity
  35. 35. P O LI CY CHANG E S / RE V I E WS AFFE CTI NG BUS I NE S S – BC G O V E RNM E NT ( CO N’ T ) 35 • Review of BC Environmental Assessment Act and process (under way) • Promise of new BC legislation for species at risk • Review of natural gas fracking • Development of the next phase of BC climate policy: o Higher carbon tax (with possible measures to mitigate the impact on trade-exposed industries) o Revised GHG reduction targets – both overall, and by broad sector (industry, buildings, transport, agriculture) o Methane emissions etc. • UNDRIP and the acceptance of “free, prior and informed consent” of Indigenous peoples – with little indication of what this means in practice • Rising fees for businesses in many policy domains
  36. 36. RE C AP • Global economic momentum continues, even with ongoing political/policy risks • US economy is on a solid growth footing • Canada’s economy rebounded last year, with firmer energy prices helping. But growth is poised to downshift in 2018-19 • Key risks for Canada are around high household debt, housing markets, US protectionism, and the impact of other US policy developments • BC’s economic expansion looks set to continue over the next two years, barring an external shock • Both Canada and BC have experienced an erosion in competitiveness across traded-goods industries in the last five years, partly for policy-related reasons. The cumulative impact of multiple regulatory and taxation measures demands greater attention from government officials 36

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