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The West Coast Boom
by P. White, M. Michalowski and P. Cross*
In the early years of the new millennium, Canadians have come to recognize that the economic centre of gravity has shifted westward. With its trove of natural resources, Alberta has taken the leading role in this shift. Less prevalent is the realization that BC – the west beyond the west – has enjoyed a similar economic surge in the new century. Indeed, BC has been the only province to keep close to the pace of real output and job growth in Alberta in the last three years.1
This article looks at some of the reasons behind the recent rebound in the BC economy from its doldrums in the 1990s. It also examines how the current boom in BC differs from Alberta and what can be learned from Alberta’s experience.
The strengthening of the BC economy since 2001 has already driven its unemployment rate to a record low, with the prospect of continued job growth as metals prices soar and the 2010 Olympics approach. The strain created by these shortages can only be alleviated in three ways: population growth, higher labour force participation, or better labour productivity. This paper looks at the scope for each of these in turn.
The 1990s – a lost decade
After leading Canada’s economic growth from 1984 to 1990, BC fell behind in the 1990s. This was reflected in real GDP growth of only 2.9% per year from 1990 to 2001, down over a full point from the previous period. While BC continued to generate jobs in this decade, many of them were part-time.
The impact of the slowdown in BC is seen vividly in Figure 2. BC’s real GDP per capita fell from 8% above the average in the rest of Canada in 1992 to 8% below by 2001, after which it began to recover.
Much of the weakness in the 1990s originated in a prolonged slump in demand for housing. Residential construction fell nearly 25% during the 1990s. Housing starts tumbled from 38,000 units to 17,000 units, reducing their share of the Canada total from 25% in 1990 to 9.5% in 2000. The housing slump partly reflected a sharp slowdown in population growth after 1995, as well as a correction from sky-high housing prices. The price of residential construction fell by 10% between 1994 and 2000.
As well, business investment was little changed in the years following the Asian crisis in 1997, rising less than $1 billion (or under 10%) by 2002. The sluggish performance of investment reflects weakness in its non-energy resources, notably forestry-related industries and mining. The development of gas fields in northeastern BC helped offset these losses.
Not all sectors of demand slowed during the 1990s. Consumer spending growth was stable, rising about 3% a year in volume. And export earnings posted average annual gains of 12%, about equally split between higher prices and volume. Much of this growth reflected gas exports, which increased ten-fold in the 1990s to $2.6 billion.
Growth recovered after 2001
Growth in BC hit a low of 0.6% in 2001. Since 2001, real GDP growth in BC has averaged 3.4%. This recent pick-up marks a return to BC surpassing the national average.
The rebound was initially led by housing, which grew at a double-digit rate every year for a total increase of nearly 80% since 2000. This was the most in Canada, surpassing the nation-wide average that accompanied low interest rates. Housing prices have responded to the surge in demand by recovering their losses in the 1990s. The price of all residential construction has risen 20% since 2000, led by an 18% hike for new homes. While housing moderated to 9% growth in 2005, investment spending by firms has taken the lead in growth.
Investment began to take off in 2003 when trade with China and corporate profits began to rise rapidly (profits jumped from $12.6 billion to $20.1 billion in just two years). Investment spending has increased by $4 billion since 2003 to a projected $17.8 billion this year. Mining, including oil and gas, led the initial surge of investment, nearly doubling from $2.4 billion to $4.0 billion last year. While mining companies plan a drop to $3.5 billion this year, the slack will be picked up by transportation and utilities. Transportation alone projects a 37% gain in 2006 after a 34% hike last year, a measure of the need to expand the capacity to carry goods and people to and from Asia (this year’s increase was led by the expansion of Vancouver’s airport).
So far, little of the increase in investment can be directly attributed to the Olympics, where work has begun only on the Sea-to-Sky highway project. While construction will start on rinks and ski-hills this year, the bulk of Olympic construction is scheduled for 2007 and 2008, assuring strong investment demand will continue. This coincides with large infrastructure projects, particularly to ease traffic congestion in the Lower Mainland.
Fuelled by investment demand, capital goods industries have led manufacturing shipments growth in the last two years. After rising about 5% a year from 1999 to 2003, shipments of these goods jumped 33% between 2003 and 2005. This reflects the sudden surge in construction on the west coast. The increase in these industries (non-metallic minerals, machinery and metal fabricating) has been the second-fastest in Canada, after Alberta.
All three capital goods industries have shared about equally in the one-third advance in investment demand since 2003. Some sub-sectors have fared better than others. Ready-mix concrete has doubled in two years. Agricultural, construction and mining machinery has surpassed woodworking as the largest part of the machinery industry, after being only half as large at the start of this decade.
While BC’s exports have grown slowly so far this decade, their composition has changed markedly. For most of the 1990s, exports of forestry products dwarfed all others. Since then, forestry products have fallen to $13.8 billion last year, notably pulp and paper (lumber exports held up despite US duties on softwood lumber, partly because the pine beetle infestation requires firms to keep harvesting dead wood).
While forestry exports have softened, exports of other goods have risen 47% since 1999 to $21.5 billion. Starting in 2000, exports of other goods have surpassed forestry. Energy exports led the gain, driven by new natural gas fields shipping to the US.2 More recently, coal exports to China have increased sharply, and total coal shipments doubled to $3 billion last year from 2004. Industrial goods, mostly metals, have benefited from rising prices due to growing Chinese demand. Non-resource exports from BC remain relatively small: auto exports are negligible, while machinery and equipment has been stable at about 10% of all exports.
The shift in the commodity composition of BC exports parallels a switch in their destination. Since 2001, the US share has fallen from 70% to 64%, while Asia has jumped from 20.5% to 24%. As a result, BC is less dependent on the US market than the rest of Canada (64% versus 86%). Conversely, its orientation to Asia is nearly five times greater than the 5% in the rest of Canada. The drop in exports to the US would have been worse except for higher energy shipments. Forestry products are still the leading export to China, but metals and coal have strengthened recently.
Travel flows show BC serves a similar function as Canada’s gateway to Asia. Less than 80% of travellers to BC come from the US, versus almost 95% for Ontario. The number of overseas travellers to the province has almost tripled since 1986, led by China. As a result, only BC has a net inflow of travel flows. As well, BC visitors spend more per capita.
Many of BC’s other traditional exports outside of forestry have been in slow decline recently. These include seafood processing, reflecting the slump in the salmon run in recent years. As in the rest of Canada, shipments of computer and electronic products have declined sharply since 2000. In BC, the largest losses have been in computers and semiconductors.
Labour Markets Tighten
By 2004 and 2005, all sectors of demand were rising in unison. Consumer spending posted its best increases in 10 years. Housing continued to grow at a double-digit rate. Business investment accelerated, while exports snapped out of a 3-year slump with an 16% gain in earnings in 2004 and 2005. The broadly based nature of this growth helps explain the sudden tightening of the labour market over the last two years.
Employment growth picked up after 2001, especially in the last two years. Most of the ebb and flow in job growth has originated outside of Vancouver, which posted steady growth since 1990. Jobs in the rest of BC fell between 1996 and 2001. But since then, they have risen 10.4%, leading BCs revival.
The increase in jobs was dominated by construction and real estate, a reflection of the housing boom that raised starts from 12,000 units in 2000 to 31,000 in 2005. Business services and finance did well, as they have in most of Canada. More recently, rising trade with Asia lifted transportation and wholesale trade. Traditional areas in manufacturing and mining have lagged (notably lumber and pulp and paper), while forestry fell outright (even there, losses were less than in other provinces due to the need to keep cutting as the pine beetle infestation spread, a classic case of short-term gain at the expense of long-term pain). Conversely, in Alberta, mining contributed 25% of job growth.
The heavy reliance of growth on construction and housing is important for a number of reasons. It aggravates bottlenecks by requiring skills that only a small number of people have. This is especially true of jobs in construction and real estate. And relatively few immigrants work in these areas, the one area of the labour force expanding recently.
The combination of a sudden upturn in employment and lagging population and labour force growth has pushed the unemployment rate to a record low. This is most evident outside of Vancouver, where unemployment has fallen from near double-digits in 2002 to 6% last year, less than the previous lows in the early 1990s. In Vancouver itself, unemployment stood at 5.7% last year, comparable with its low in 2000 but still a marked improvement on its 8% rates during much of the 1990s.
The tightening of the labour market is reflected in labour shortages. Last year, 5% of manufacturers in the business conditions survey reported shortages of unskilled labour were hampering production (13% also cited shortages of skilled labour, but this is an ongoing problem less related to the business cycle). By comparison, 12% of firms in Alberta cited shortages of unskilled labour, versus only 2% in central Canada.
The developing shortage of labour can be addressed by population growth, increased labour force participation or better labour productivity.
Starting in 1997, BC’s population growth began to slow markedly. Average annual population growth was close to 3% a year from 1990 to 1996. It initially decelerated to a 1.5% increase in 1997, before slowing to an average of near 1% in the eight years since.
The reasons for this slowdown owe more to interprovincial than international movements of people. Certainly, the run-up to China’s takeover of Hong Kong did spur a small surge in immigration to BC in the period before 1997 (the British returned Hong Kong on July 1, 1997).3
But the easing of immigration flows accounts for only about one-tenth of BC’s population slowdown since 1997. The largest reason for the slowdown was fewer people in the rest of Canada migrating to BC (Figure 13). This net inflow slowed noticeably after 1994, turning to a net outflow in 1998, which continued until 2004. Instead, Canadians moved to Ontario during the late 1990s, and more recently to Alberta, attracted by its surging economy. (Alberta led all provinces with a 2% gain in population last year, partly as hourly wages passed BC for the highest in Canada). In the meantime, BC’s natural increase constantly went down over the whole period after 1990. The overall result was to actually increase BCs reliance on immigration for population growth over the past decade.
The slowdown in population growth was more pronounced outside Vancouver. Vancouver’s population growth totaled 23% from 1990 to 1997, versus 15% since. In the rest of BC, growth slumped from 21% before 1997 to 7% after (this includes some net out-migration from Vancouver, as people retired to Victoria or the Fraser Valley). Meanwhile, population growth accelerated in the rest of Canada from 8% to 11% over these two periods. Still, it remains less than in BC, largely due to continued strong immigration into Vancouver.
The reason for the pronounced slowdown in population growth outside of Vancouver coincides with a sharp drop in jobs. Employment in BC excluding Vancouver fell outright from 1997 to 2001. Vancouver’s growth remained positive, as it remained the preferred destination of immigrants (along with Toronto and Montreal).
A popular misconception about BC is that it has an elderly population. While true of areas like Victoria, on the whole the share of BC’s population over 65 years old is only slightly above the Canada average (16.0% versus 15.3%, according to the Labour Force Survey). Vancouver in particular has a relatively young population as a result of the inflow of immigrants.
Labour force participation
With population growth slowing, the only alternative for boosting the labour force is raising the participation rate. As Figure 14 shows, the opposite has happened over the last decade. After peaking in the early 1990s, the participation rate fell steadily until the recent tightening of the labour market sparked a partial recovery. Still, participation rates remain 2.2 points below their previous peak in Vancouver and 1.4 points lower in the rest of BC. More strikingly, the drop in participation rates in BC contrasts with an increase in the rest of Canada since 1995, including Alberta.
A number of demographic and economic developments appear to be behind the drop in labour force participation. The aging of the population dampened the participation rate, especially in the 1990s when there was a Canada-wide move to earlier retirement. Poor job prospects in the interior and coastal BC discouraged participation, especially as many traditional resource industries such as mining and forestry downsized (agriculture was an exception, as floriculture thrived).
As well, the participation rate among immigrants has dropped noticeably. According to Census data, it fell from 62.8% in 1991 to 58.6% in 2001, a reflection of the increased difficulty integrating new immigrants into the labour force. BC has brought aboriginals into the labour force, surpassing the participation rate of non-aboriginals.
The participation rate for adult women 25 to 44 years fell from 81.5% to 79.7% last year. This may just be a reaction to sharp increases over the previous two years. But if it marks the beginning of a long-term decline as occurred in Alberta after 1998, this will aggravate the shortfall of labour. Unlike Alberta (and much of the rest of the country), BC has been able to attract more youth participation in the labour force over the last two years.
With population and labour force growth in BC lagging behind their peak rates in the 1990s, another possible solution to labour shortages is to use labour more efficiently. Unlike Alberta, output per hour worked in BC lagged the rest of Canada in the 1990s, rising less than 1% a year. It has begun to recover recently as investment has picked up, but remains below the Canada average. This suggests ample room exists to improve the utilisation of labour.
Already, firms have moved to convert their part-time employees to full-time. Since peaking at 450,000 in 2002, part-time positions in BC have fallen almost 3%. Meanwhile, full-time jobs have risen 12%. This is a marked reversal from the 1990s, when part-time jobs grew 50%, twice the rate for full-time.
BC is ideally positioned to continue to grow. It has rightfully earned its reputation as Canada’s gateway to the booming Asian economy. Record commodity prices have triggered a revival of its traditional mining industries, notably metals and coal, even as forestry and fishing have slumped. Infrastructure projects to carry the increasing volume of trade in both directions with Asia is boosting construction, while work has only just begun on projects for the 2010 winter Olympics.
All these factors have fuelled widespread growth in BC. However, this boom is quickly creating shortages, notably of labour. To prevent these shortages from curtailing potential growth, BC will have to find the solution by attracting more people, encouraging more people to enter the labour force or using its workers more efficiently. Attracting workers to remote areas of BC will also be a challenge, especially with Alberta growing so rapidly next door.