Business investment could drive B. C. growth: economist

It’s the only thing that can do it, he says, since consumer confidence, real estate and government spending will all be weak to moderate

Strong business investment could be the driver of the British Columbia economy this year and next as the real estate market and government spending weaken, and consumer demand stays modest, says Craig Alexander, chief economist at TD Bank Financial Group.

Consumers have already racked up enormous amounts of debt, employment growth is only about one per cent and average hourly wages across the country have only just kept up with inflation, said Alexander, who will be speaking to the Vancouver Board of Trade on Wednesday.

So consumer spending — which is the biggest component of the economy — will be modest.

“After racking up a lot of debt you can’t expect the Canadian consumer to be the big engine of economic growth,” he said. “Consumer finances are stretched.”

The B. C. real estate market, on the other hand, will slow, with both sales and prices down, Alexander said. He expects prices to drop about 3.5 per cent this year and four per cent next year, which isn’t bad “given the run- ups we’ve had in the past.”

The housing market could crash, though, if there was a catalyst like a big jump in unemployment or a sharp increase in interest rates, he said. But Alexander expects neither of those to happen. He’s predicting the Bank of Canada will not raise its overnight rate until the second half of 2013 and then will raise it slowly. He also expects employment to grow at about 0.6 per cent in 2012.

But interest rates will eventually go up, he said.

“People need to understand that the level of rates we have today is abnormal. It can’t last indefinitely,” he said.

“I feel like the little boy that cries wolf because I keep telling people to be careful because interest rates are going to go up and then another year goes by and interest rates don’t go up. But then I remind people that if you look at the story, the wolf does show up at the end.”

Government spending will also be low, as evidenced by the fiscal austerity budget released last month.

With modest consumer spending and weak government spending and real estate, it’s up to business investment to spur the B. C. economy.

“And B. C. businesses have every reason to invest right now,” Alexander said.

Corporate balance sheets are in good shape, profits have been rising and interest rates are low, he said. Also, government policy favours investment with low corporate tax rates and a federal government initiative to accelerate depreciation allowances on machinery and equipment, which means companies can write off the costs of new equipment quicker.

A large percentage of machinery is bought in U. S. dollars, so a strong Canadian dollar makes investment cheaper too, he said.

So even with the return to the provincial sales tax, “I still think B. C. has a very competitive tax environment,” Alexander said.

The B. C. government, in its budget, did announce a possible corporate tax increase in 2014, “but if the government had really wanted the additional revenue and was keen to raise corporate taxes, we would have had it happen earlier than that,” Alexander said.

Alexander believes the biggest factor that has been holding businesses back has been a lack of confidence.

“I think the economic environment has been so scary that businesses have been reticent to invest,” he said.

But as the risk in Europe diminishes and the U. S. economy looks better, companies will start to invest.

So the B. C. economy has one big positive, business investment; and two mild negatives, government spending and the real estate market. Coupled with modest consumer spending, “you end up with a gradual growth story,” he said.

As a result, Alexander predicts that growth in B. C. will be in line with the national average of around two per cent.

“How you feel about two per cent is whether you are a glass half- full or a glass half- empty person,” he. “It’s not a strong pace of economic growth but it’s also not extremely weak.”