====================================================================== Note: The electronic version of the following Appendix A is for informational purposes only. The printed version remains the official version. All tables have been placed at the end of the file. ====================================================================== APPENDIX A ECONOMIC REVIEW AND OUTLOOK SUMMARY AND HIGHLIGHTS The British Columbia economy grew an estimated 2.4 per cent in 1992 after recording no growth in 1991. Growth in 1992 was slightly lower than the 3.0 per cent forecast in last year's budget due to the sluggish recovery in the North American economy, slower than expected growth in consumer spending and a mid-year decline in exports caused by labour disputes in the province's forest and mining industry. The British Columbia economy remained the strongest provincial economy in Canada during 1992. British Columbia employment grew 1.9 per cent in 1992, representing 28,000 persons while employment in the rest of Canada fell 1.2 per cent, or 128,000 persons. Economic growth was fuelled by high levels of in-migration which helped sustain domestic demand, particularly residential investment. Net in-migration totalled 70,728 persons in 1992, breaking the previous record of 67,483 persons in 1990. In 1993, economic activity is expected to be more broadly based. While residential investment will remain a major source of growth, increases in consumer spending and business investment are expected to contribute to domestic demand growth. In addition, a strengthening United States economy is expected to translate into stronger export demand. Evidence of this has been seen in the rapid rise in wood product prices in January and February in response to the recovery in the U.S. housing market. The value of British Columbia merchandise exports to the United States was up 19.9 per cent in 1992. However, the impact of stronger growth in the North American economy will be partly offset by the economic downturns in Germany and Japan. Growth in the British Columbia economy is expected to improve to 3.2 per cent in 1993 and 3.4 per cent in 1994. THE EXTERNAL ENVIRONMENT The International Economy Overall growth in the major industrialized countries was less than expected in 1992. The Organization for Economic Co-operation and Development (OECD) estimates that the Group of Seven (G-7) major industrial economies expanded 1.5 per cent in 1992, compared to growth of 2.2 per cent predicted by the OECD in December 1991. Economic performance varied during 1992 with the North American economy showing signs of stronger growth while Germany and Japan entered slowdowns. The G-7 economies are expected to expand 2.0 per cent in 1993 with most of the growth occurring in the United States and Canada. Stronger growth in Europe and Japan should result in G-7 growth of 2.7 per cent in 1994. The United States economy was weak during the first half of 1992, but activity accelerated during the second half. While United States real GDP rose 2.1 per cent in 1992, the economy grew 3.3 per cent in the second half of the year due to rising consumer spending and residential investment, reflecting low interest rates and a recovery in consumer confidence and incomes. A major area of strength in the United States economy is residential construction, which has been spurred by declining interest rates and rebuilding activity following Hurricane Andrew. The increased demand for lumber, resulting from more housing construction, and limits on timber supply pushed lumber prices to record levels in early 1993. Employment growth has been very slow despite the recovery in the second half of 1992. Payroll employment rose only 0.1 per cent in 1992 and the unemployment rate increased from 6.7 per cent in 1991 to 7.4 per cent in 1992. Rising output and sluggish job growth generated a 2.7 per cent rise in labour productivity, helping to make U.S. exports more competitive. Led by a rebound in consumer spending and housing investment, the United States economy is forecast to grow 3.0 per cent in 1993 and 3.3 per cent in 1994. Japan's economy is undergoing a sharp slowdown as the "bubble" economy of the late 1980s unwinds. After contracting at an annual rate of 2.4 per cent in the third quarter of 1992, the economy grew only 0.5 per cent in the fourth quarter. As a result, it expanded 1.5 per cent for the year as a whole. Growth below 3 per cent is considered a recession by Japanese standards. Declines in consumer and business confidence have dampened Japanese domestic demand. However, one area of the Japanese economy that has shown some strength is residential construction, an important market for British Columbia lumber. Housing starts rose an estimated 2.2 per cent in 1992, reflecting underlying demand for better housing and falling land prices in the major cities. Despite recent easing of fiscal and monetary policies, the Japanese economy is expected to record growth of 2.0 per cent in 1993 with most of the pickup coming in the second half. Japan's economy is forecast to expand 3.0 per cent in 1994. The German economy also slid into recession in 1992 as it continued to struggle with the large fiscal costs associated with reunification. The west German economy grew quickly early in the year, but economic activity declined in the subsequent three quarters. In February and early March, the Bundesbank lowered its benchmark interest rates in response to the weakening domestic economy. However, fiscal policy is being tightened. As a result, the west German economy is expected to contract 0.7 per cent in 1993 before growing 2.0 per cent in 1994. Because of the German slowdown and Britain's weak recovery, Europe as a whole will grow slowly in 1993. The most recent consensus forecast is for growth in the European Community of about 0.5 per cent in 1993 and 2.0 per cent in 1994. THE CANADIAN ECONOMY After two years of declining economic activity, the Canadian economy grew 0.9 per cent in 1992. The Canadian economy has been growing at a sluggish pace since pulling out of the four-quarter downturn in early 1991. Growth has been dampened by low consumer and business confidence, due to high levels of unemployment and economic and political uncertainty. The low level of confidence has dampened the economy's response to lower interest rates. However, declines in the dollar have provided some stimulus to the economy's export sectors. Although output rose 0.9 per cent, employment declined 0.8 per cent in 1992, a loss of 100,000 jobs. The unemployment rate averaged 11.3 per cent, up a full percentage point from 1991. After stagnating through most of 1992, employment picked up in the fourth quarter, growing an annualized 1.6 per cent. The unemployment rate fell from a peak of 11.8 per cent in November 1992 to 10.8 per cent in February 1993, with about half the decline attributable to employment growth and half to a decline in the labour force. The weak economy pushed Canada's inflation rate down last year. The inflation rate averaged 1.5 per cent in 1992, down from 5.6 per cent in 1991. Inflation began to pick up in the second half of 1992 with the year-over-year inflation rate rising from 1.1 per cent in June to 2.3 per cent in February 1993. While the depreciation of the Canadian dollar has put some upward pressure on prices, the large gap between actual and potential output of the Canadian economy should keep inflation below 3 per cent in 1993. In 1993, the economy will benefit from the depreciation of the dollar in the fall of 1992 which, together with recent increases in labour productivity, will make Canadian exports more competitive in international markets. Stronger growth in the U.S. should generate increased demand for Canadian exports. In addition, rising employment and the recent decline in interest rates should bolster consumer and business confidence and rekindle domestic demand. As a result, the Canadian economy is expected to grow 2.7 per cent in 1993 and 3.5 per cent in 1994. Financial Markets Slow growth and declining inflation allowed interest rates to decline in the first three quarters of 1992. However, mounting tension in overseas markets and political uncertainty in Canada began to affect domestic financial markets and the economy in September. Speculative pressures against several major currencies resulted in a realignment of European exchange rates and forced some currencies to temporarily leave Europe's exchange rate system in late September. These events created turmoil in international financial markets just as Canada was embarking on a national referendum campaign on the Charlottetown Accord. In late September, market reaction to lack of support for the Charlottetown Accord caused a drop in the value of the Canadian dollar from 84 U.S. cents to 80 cents and a 2.5-percentage-point rise in short-term interest rates. However, long-term rates moved up only 0.4 percentage points. After the referendum, economic fundamentals re-asserted themselves and by year-end, short-term interest rates were approaching their previous lows while the Canadian dollar was trading in the 80 U.S. cent range. The focus on the financial health of the government sector and major corporations early in 1993 caused the dollar to decline and interest rates to rise once again. Since then, the dollar has stabilized and interest rates have drifted down so that monetary conditions are about where they were in late August and early September before the European exchange rate upheaval and Canada's referendum. However, real interest rates remain high by historical standards, despite the relatively weak economy. THE BRITISH COLUMBIA ECONOMY Economic Performance and Outlook British Columbia continued to have the strongest provincial economy in 1992. The province benefited from continuing high levels of net in-migration, which supported domestic demand. In addition, the 5.2 per cent decline in the dollar relative to its U.S. counterpart helped make the province's exports more competitive in international markets. Growth was slightly slower than expected, however, due to weak growth in consumer spending and labour disputes in the pulp and paper industry and coal mining, which reduced exports at mid-year. In-migration and continued increases in employment helped sustain growth in consumer spending in 1992. While the value of retail sales grew 3.6 per cent in 1992, this was mainly due to population growth as per capita sales grew only 0.9 per cent. Real consumer spending, after rising an estimated 2.1 per cent in 1992, is expected to grow 3.0 per cent in 1993 and 1994, reflecting continued population growth and the release of pent-up demand as consumer confidence strengthens. Total capital investment increased an estimated 3.1 per cent in real terms in 1992 and is expected to grow at a similar rate in 1993. Residential construction, fuelled by in-migration, supported investment in 1992. It is expected to continue to drive investment in 1993 before declining in 1994; housing starts are projected to rise from 40,621 in 1992 to 43,700 this year, before falling back to 41,400 units in 1994. Business non-residential investment, after declining in 1992, is expected to grow in 1993 and 1994. Current spending by all three levels of government, on an economic accounts basis, is expected to rise 1.2 per cent in real terms in 1993 after increasing an estimated 2.3 per cent in 1992. The provincial government is providing some stimulus to economic activity and job growth through the new BC 21 initiative. The federal government, on the other hand, expects to reduce its total spending by about 1.0 per cent in real terms during the 1993/94 fiscal year. Total government spending growth is expected to be just 0.8 per cent in 1994. About 80 per cent of British Columbia's goods exports consist of raw and processed resource products. Commodity prices on world markets, typically expressed in U.S. dollars, edged up slightly during 1992. Wood products showed the largest price increases during the year. Lumber prices continued to climb to record levels in early 1993, boosted by increased residential construction in the United States and timber supply constraints. The depreciation of the Canadian dollar over the last year raised prices received by the province's exporters. For example, while the British Columbia export commodity price index rose 1.8 per cent in U.S. dollar terms in 1992, the index rose 7.4 per cent in Canadian dollar terms. The accompanying box comments on the outlook for key resource exports. Labour disputes at two major coal mines and a five-week pulp and paper strike held growth in the volume of exports to only 0.5 per cent in 1992 while imports rose an estimated 0.8 per cent. The volume of exports is forecast to rise about 2.8 per cent in 1993 and 3.6 per cent in 1994, due to a gradual improvement in world economic growth and further declines in the Canadian dollar. The fall in the dollar will also hold down import growth, as has already been seen in the decline in cross-border shopping during 1992. Import volumes are forecast to grow 1.7 per cent in 1993 and 1.0 per cent in 1994. Developments in the labour market reflect the province's overall economic situation during 1992. While employment rose 1.9 per cent, in-migration pushed the labour force up 2.5 per cent. As a result, the unemployment rate rose from 9.9 per cent in 1991 to 10.4 per cent in 1992. The labour market situation is expected to improve in 1993 as increased economic activity generates employment growth of 2.3 per cent. This should offset labour force growth and keep the unemployment rate at 10.4 per cent in 1993. Employment data suggest economic growth during 1992 was broadly based across most of the province's regions. Employment in the Lower Mainland grew 1.3 per cent while the Vancouver Island/Coast region had growth of 3.0 per cent. Despite the lengthy shutdowns of two coal mines, the Kootenays had the largest increase among the province's regions with employment increasing 11.3 per cent. Employment rose 1.6 per cent in the Okanagan/Boundary region, 4.7 per cent in the Lillooet/Thompson region and 0.7 per cent in the Cariboo/Fort George region. The province's northern region experienced a decline in employment in 1992, partly due to the closure of the Cassiar asbestos mine (see Chart A2). Urban housing starts data show a similar pattern. While housing starts rose 26.5 per cent in Greater Vancouver and 13.7 per cent in Greater Victoria in 1992, housing starts in all other areas increased 30.3 per cent. Housing starts in Kamloops rose 73.8 per cent in 1992 while Kelowna and Prince George had increases of 17.8 and 55.4 per cent, respectively (see Chart A3). The British Columbia Consumer Price Index (CPI) rose 2.7 per cent in 1992 compared to a 1.5 per cent increase in Canada as a whole. However, in January and February the CPI was 4.0 per cent higher than a year earlier. Therefore, the province's annual inflation rate is expected to average 3.7 per cent in 1993. Inflation should drop to 3.2 per cent in 1994. Wage settlements declined in 1992, reflecting lower inflation and the rise in unemployment. New collective agreements provided wage increases averaging 3.3 per cent over the life of contracts. Public sector settlements averaged 3.8 per cent while private sector settlements averaged 2.6 per cent. By year end, public and private sector settlements were identical at 2.8 per cent. Labour disputes in the forest and mining industry resulted in 760,800 worker-days being lost due to work stoppages, up from 284,000 in 1991. The 1993 bargaining calendar is relatively light, involving only 101,447 workers, compared to 131,179 employees in 1992. The heaviest volume of contract expiries is in the transportation and communications sector and in the months of March and December. RISKS TO THE OUTLOOK There are numerous risks to this forecast. Interest rates and the value of the Canadian dollar could turn out to be much different in 1993 than is assumed here. The dollar could be lower than forecast, providing greater stimulus to export growth and dampening imports. However, declines in the dollar could result in sharply rising import prices, higher domestic inflation and higher interest rates. Alternatively, an appreciation of the dollar would mean the province's export growth would not be as strong as predicted, but inflation could be lower. The forecast also assumes a pickup in domestic spending and investment in 1993. This could be postponed if consumer and business uncertainty persists and there is no release of pent-up demand. Spending growth could also be dampened by an unexpected rebound in interest rates. Similarly, the modest but improved pace of growth expected for the province's major trading partners to some extent depends on a stable international political environment. Economic growth could be reduced if political events cause instability in financial markets. British Columbia depends on relatively free access to the markets of the major industrial countries. The failure of the current Uruguay Round of trade negotiations could threaten the province's ability to export. In addition, the rise in protectionist sentiment in the United States could derail multilateral trade liberalization and cause a proliferation of regional trade blocs. The forecast takes into account the recent rise in wood product prices. While these prices are expected to decline from their current high levels over the coming months, continued high prices would be a positive development for the outlook. Finally, the forecast assumes that in-migration will continue to support consumer spending and residential investment. However, as the severe recession in California indicates, in-migration can quickly go into reverse and, therefore, is no guarantee of permanent prosperity. -------------------------------------------------------------------------------- TABLE A1 BRITISH COLUMBIA ECONOMIC OUTLOOK -------------------------------------------------------------------------------- Forecast ---------------- 1992* 1993 1994 -------------------------------------------------------------------------------- Gross Domestic Product (percentage change in current dollars) ............................ 5.6 7.1 5.9 Real Gross Domestic Product (percentage change in 1986 dollars) ............................... 2.4 3.2 3.4 Consumer Expenditure ........................ 2.1 3.0 3.0 Government Expenditure ...................... 2.3 1.2 0.8 Capital Investment .......................... 3.1 2.9 2.0 Exports ..................................... 0.5 2.8 3.6 Import ...................................... 0.8 1.7 1.0 Labour Force (thousands) ......................... 1,693 1,733 1,773 (percentage change) ......................... 2.5 2.4 2.3 Employment (thousands) ........................... 1,517 1,552 1,588 (percentage change) ......................... 1.9 2.3 2.3 Unemployment Rate (per cent) ..................... 10.4 10.4 10.4 Retail Sales (millions of current dollars) ....... 24,390 25,878 27,353 (percentage change) ......................... 3.6 6.1 5.7 Housing Starts (units) ........................... 40,621 43,700 41,400 (percentage change) ......................... 27.4 7.6 -5.3 Consumer Price Index (1986=100) .................. 127.2 131.9 136.1 (percentage change) ......................... 2.7 3.7 3.2 * GDP data for 1992 are Ministry of Finance and Corporate Relations estimates. --------------------------------------------------------------------------------