Interest rate hikes on hold as Bank of Canada cuts growth forecast
But forestry, mining should boost B. C.’ s fortunes, credit union analyst says
We should see greater demand for sawn lumber products and greater demand for softwood lumber.
BRYAN YU
CENTRAL 1 CREDIT UNION ECONOMIST
The Bank of Canada cut its 2013 growth forecast Wednesday to 1.5 per cent and said it now thinks the economy won’t get back up to full speed until mid- 2015 — about six months later than predicted earlier this year.
British Columbia could be facing a similar fate, according to Central 1 Credit Union, which also downgraded its provincial growth forecast for this year to 1.5 per cent.
Central 1 Credit Union economist Bryan Yu cited forestry and mining as industries that will keep the B. C. economy growing, with forestry picking up as the U. S. housing market gains momentum, and mining slated for growth in 2015 and beyond.
Ken Peacock, vice- president and economist with the Business Council of B. C., said the outlook for the province has softened since the beginning of the year, consistent with the Bank of Canada forecast.
“The Bank of Canada continues to anticipate that you will see a gradual and slow recovery ... the grinding improvement in the U. S. is expected to continue, which is a positive for B. C.,” Peacock said.
As expected, outgoing Bank of Canada governor Mark Carney kept the overnight trendsetting rate — which influences borrowing costs in the country — at one per cent, where it has been since September 2010. It was Carney’s last Ottawa news conference before he leaves to head up the Bank of England.
The central bank’s quarterly report suggests it will need to keep interest rates in Canada at historically low levels well into 2014, if not beyond. Yu expects interest rates to remain low through at least October 2014, when Central 1 is forecasting a 25- basis- point increase ( one quarter of one per cent).
Growing U. S. housing demand should boost B. C.’ s forest- products sector, Yu said.
“We should see greater demand for sawn lumber products and greater demand for softwood lumber. That should help boost our economy,” Yu said.
“There is some risk there as well because of the mountain pine beetle epidemic and whether there is going to be enough fibre. There are some areas that will probably do very well, provided the demand continues to remain relatively strong. It’s going to be a highprice, high- demand cycle.”
Both Yu and Peacock cautioned that weakness in Europe and a slowing of Chinese economic growth would temper growth in Canada.
“( The Bank of Canada) sees a little bit of tempering and slowdown in 2013 in the overall global economy compared to what was expected a few months back, so that’s a little bit of a downside for B. C.,” Peacock said. “China is our secondlargest export market; we export a fair amount to China and we export as much to the Pacific Rim now as we do to the United States.”
Most of the exports to Asia are lumber, coal and minerals, Peacock said.
“Part of the underlying good news story for B. C.’ s export sector is the diversification, because you can get some strength in the U. S. offsetting some weaker outlooks in Asia,” Peacock said. “The opposite happened when the U. S. housing sector was in terrible shape, our wood exports to China soared.”
B. C. exports are still heavily weighted toward commodities and natural resources, Peacock said.
“There’s a little bit of softening in some commodity prices,” Peacock said. “It’s a little bit of an uncertain time right now, I think. You saw some turmoil in the gold market and equity markets fell sharply early this week.”
Both Yu and Peacock cited the Lower Mainland’s sluggish housing market as a drag on the economy.
Relatively high levels of unsold new home inventory in the B. C. housing market coupled with low sales levels will negatively impact economic growth, Yu said.
“The negative impacts of that are that it will limit construction employment ... and also the flow through of the residential sales side,” Yu said. “Every time you have a sale, you typically have commissions and some type of sales fee. When you have a sale, other parts of the economy also rise, such as sales of appliances or sales of housing- related goods and services.”
As well as forest product companies, transportation and logistics through B. C.’ s ports and Vancouver International Airport are doing well, Peacock said.
“The whole Asia- Pacific Gateway theme and story is doing well — that has been the case for a number of years. It is continuing to expand and grow and that is one area that has consistently stood out as a growth sector,” Peacock said.
He also cited export services such as engineering, architectural, high- tech and environmental as a sector that has done well, but one that is difficult to get data on.
Yu expects better growth — of perhaps 3.5 per cent — in 2015 to 2017, due to planned LNG and mining projects.
“There are a lot of projects on stream right now, but the economic impacts aren’t going to happen tomorrow,” Yu said. “( In) 2015 or so, ... we will start to see a boost in the mining sector. There are lot of projects announced and proposed, but they take time and delays are typical.”
The Bank of Canada is calling for growth of 2.8 per cent in 2014 and 2.7 per cent in 2015.