As the new year beckons, it’s a good time to reflect on the major economic and business stories of the year that’s about to end. To keep the task manageable, the focus here is limited to Canada and B.C.
One surprising development in 2019 was the return to a period of falling interest rates.
When the year began, most economic forecasters were expecting both the Bank of Canada’s policy rate and market-based interest rates to continue creeping higher, on the heels of earlier rate increases in 2018.
Instead, the interest rates facing savers and borrowers dropped over the last half of 2019 – not just in Canada, but in the U.S. too.
As of late November, the market yield on 10-year bonds issued by the federal government stood at a paltry 1.6 per cent.
With inflation running around two per cent, this means buyers of 10-year government bonds are locking in a negative return after inflation. That would appear to be an unappetizing investment. Yet there is no shortage of demand for government bonds yielding microscopic returns.
Another notable story in 2019 was the continued troubles afflicting the Western Canadian energy sector, above all the oil and gas industry that accounts for up to one-fifth of Canada’s exports in a typical year.
While the Canadian industry has been innovating and cutting costs in an environment of lower prices, escalating government-imposed regulatory burdens, stalled pipeline development, and rising oil and gas production in the United States mean the overall energy landscape has shifted in ways that disadvantage Canada.
The result is tens of billions of dollars of foregone economic value because of persistent price discounts on Western Canadian oil vis-à-vis oil produced in the U.S., significant job losses in the Alberta energy patch, investment outflows to the U.S., and the departure from Canada of at least one major energy company head office – Encana – with more likely to follow.
All in all, energy policy and recent energy investment patterns show Canada in an unflattering light.
For B.C., the crisis gripping the forest industry is clearly top of mind.
More than a dozen lumber manufacturing plants in the interior and north have stopped operating – some permanently. Thousands of well-paying jobs have disappeared, and more are at risk. Lumber production and export shipments are down significantly compared to 2018 levels, helping to drive a decline in B.C.’s total exports.
The NDP government has responded by providing some assistance to some laid-off forest workers and forestry-dependent communities. But it seems curiously indifferent to the long-term economic health of the province’s most important export industry.
Policy-makers are overlooking the fact that a viable B.C. forest industry depends on the presence of strong companies with the size and scale to withstand market cycles and invest in developing new markets and in keeping existing mills efficient.
It is troubling to watch the leading firms redeploying capital and shifting management attention to other provinces and the U.S.
Finally, there is housing. The past year brought a sharp decline followed by a jump in home sales, as the market adjusted to an onslaught of new and higher provincial taxes, the mortgage “stress test” introduced by the federal government, and other policy measures designed to cool demand and dampen speculation in the Lower Mainland, Greater Victoria, and the Kelowna area.
Housing prices have dropped markedly at the expensive end of the market, but much less so for the average property.
Homebuilding and housing starts in 2019 have been surprisingly resilient, considering the contemporaneous unwinding of froth in the market.
Some industry experts are forecasting a sizable decline in housing starts in 2020, as developers shelve or delay projects against the backdrop of recent policy measures. If starts do plunge, that will detract from economic growth in B.C. in 2020 and beyond.
But with rock-bottom interest rates and a rapidly growing population fueled by record levels of immigration, the demand for housing in “urban B.C.” is expected to remain elevated – a situation that should continue to support the development of new housing supply over the medium-term.
Jock Finlayson is executive vice president and chief policy officer of the Business Council of British Columbia