An economic boom tied to the construction sector can’t go on forever; we need globally competitive export industries
Jock Finlayson
Sun
Construction cranes create their own skyline on False Creek. What happens when the boom finally ends? Photograph by : Glenn Baglo, Vancouver Sun
The latest economic forecasts point to another good year for British Columbia.
A hot job market and a thriving construction sector are visible signs that the economy remains on a solid growth track. Most forecasters expect real gross domestic product to expand by around three per cent in 2008 — broadly in line with this year’s showing, albeit below the 4.5 per cent recorded in 2005.
Yet a closer look at what’s driving our economy prompts a more cautious assessment. Today’s positive picture mainly reflects high levels of activity in sectors that cater to domestic demand. In contrast, most industries engaged in exporting are struggling with an increasingly harsh competitive landscape — as evidenced by the fact that B.C.’s exports have been trending down since the start of 2006.
of 40 per cent of the province’s exports. In tandem with the steep downturn in American housing starts, lumber prices have plummeted over the past two years. From $360 US per thousand board feet in early 2006, the benchmark price has slumped to $260 recently. There’s little prospect of a near-term turnaround, as housing in the U.S. remains weighed down by the subprime mortgage crisis and a huge overhang of unsold homes.
Apart from this, Canadian lumber producers — like other exporters — are being badly squeezed by the soaring dollar. As our currency has risen, both lumber and pulp and paper companies have been receiving fewer Canadian dollars in terms of their U.S.-dollar sales.
For every one-cent increase in the Canadian dollar, the B.C. forest industry takes a $170-million hit. The roughly 20-per-cent rise in the dollar against the U.S. greenback since the start of 2007 has cost our forest industry in the vicinity of $3 billion. So it’s hardly surprising to see some B.C. mills closing and others taking downtime.
Next, consider energy, B.C.’s second biggest export category. Oil and gas companies operating in the northeast have been slashing capital expenditures and scaling back drilling activity. The number of wells drilled this year is down sharply from 2006. Lower North American natural gas prices are the principal culprit, although escalating drilling and production costs are also an issue. Recent projections suggest little improvement in market conditions in 2008.
Metallurgical coal prices for B.C. miners have also fallen, from $125 US per tonne in 2005 to just $85 in 2007. Fortunately, the picture is better for the province’s metal miners, as global prices for gold and other key base metals have stayed high thanks to buoyant demand from China and other emerging markets. However, revenues for Canadian coal and metal miners have been eroded by the strong dollar.
Another vital export sector is tourism. The industry in B.C. has been buffeted by a multi-year fall-off in American visitors, with border delays, higher gas prices and the skyrocketing Canadian dollar all taking a toll. Year to date, the number of overnight U.S. visitors is down another two per cent from 2006, while same-day visitors are down almost 10 per cent. Overseas visitor numbers have held up better, but the hard reality is that the U.S. accounts for most of the province’s international tourism business.
Several other export-based industries with a significant presence in B.C. are also grappling with a worsening competitive situation, primarily because of the dollar’s record-breaking surge. Examples include film production, greenhouse growers, call centres, plastics manufacturers and parts of the high-tech sector.
With so many exporters suffering, how is it that B.C.’s overall economy continues to perform well?
The answer lies in unusually robust conditions in domestically oriented sectors — construction, real estate, retail and other consumer services, and much of the public sector.
Supported by steady employment gains and higher wages, retail sales are up seven per cent so far in 2007. Housing starts are running at more than 30,000 per year — a healthy pace by any standard. And the value of non-residential building permits has climbed by 11 per cent this year, on the heels of an even bigger jump in 2006.
Business council research shows that seven of the 10 fastest-growing industries in B.C. are part of or closely tied to the broad construction sector. While welcome, the present construction boom cannot be sustained.
As a small open economy, the province needs vibrant and globally competitive export industries — a point emphasized by the B.C. Competition Council in its June 2006 report to government.
Against the backdrop of $100 oil, a high Canadian dollar, tumbling U.S. housing starts, and intensifying global competition, the competition council’s advice is even more compelling than 18 months ago.
Among other things, the competition council urged the government to continue to focus on streamlining environmental and land use regulations, recommended an expanded sales tax exemption for investments in information and communication technologies, called for concerted action to lower property taxes on major industry, and highlighted the need to maintain B.C.’s traditional advantage of low-cost electricity.
As Finance Minister Carole Taylor and her colleagues work to flesh out a budget and define an economic policy agenda for 2008 and beyond, they would be well advised to revisit the competition council’s report and to renew the government’s efforts to improve the business climate for B.C.’s increasingly hard-pressed export industries.
Jock Finlayson is executive vice-president of the Business Council of British Columbia.
© The Vancouver Sun 2007