Economic Analysis of British Columbia

Transcription

1 Economic Analysis of British Columbia Volume 36 Issue 6 December 216 ISSN: B.C. Regional Economic Outlooks HIGHLIGHTS B.C. economic growth moderates in 217 but uneven regional trends persist Large urban centres remain core growth driver areas through 218 due to population growth, consumer demand and diversified exports Macro-prudential housing policies to curb housing demand and new housing construction Northern interior and resource-oriented markets face ongoing uncertainty related to volatile commodity prices and softwood lumber dispute with U.S. Population levels stagnate outside south coast and Kelowna areas Summary: British Columbia has found itself as one of the few bright spots in Canada s economic landscape. After leading the country in economic growth in 215 with a 3.3 per cent expansion in gross domestic product (GDP), compared to national growth of.9 per cent, provincial growth is projected to have led the country again in 216. Growth for 216 is projected at 3.5 per cent, driven by consumer demand, population inflows, a strong housing construction cycle and an increase in goods and service exports, which have been lifted by the low Canadian dollar. Service exports capture upward tourism momentum, technology services, TV and film and other sectors. In contrast, business investment has underperformed, reflecting weak corporate profits in 215 and relatively low commodity prices, which have impeded investment in energy and mining exploration activity. Average employment growth will exceed three per cent in 216 year with an unemployment rate near six per cent. Going forward, the economy remains on solid footing. GDP growth is forecast to fall to a modest 2.3 per cent in 217 with a rebound thereafter. Employment growth will ease to about one per cent after a 216 surge. Economic activity will continue to be underpinned by solid consumer spending, but growth Average Annual Employment Growth Province Lower Mainland-Southwest Vancouver Island/Coast Thompson Okanagan North Coast & Nechako Northeast Cariboo Kootenay Per Cent Source: Statistics Canada, Central 1 Credit Union Forecast will be curtailed by lower employment growth and weaker housing activity. Consumer demand will largely be driven by population growth which is forecast to remain at a modest 1.2 per cent each year over the forecast period. International immigration is forecast to rise given higher federal immigration targets, while a relatively stronger economy will continue to attract workers from other regions of the country. Residential investment will be a drag on the economy after driving growth in 216 with record housing starts. A forecast slowdown in residential investment reflects both a normal retracement after a very strong year of building as well as the impact of policyrelated measures to cool the housing market. The provincial government introduced a property transfer tax on luxury homes and a foreign-buyer tax geared at Metro Vancouver prices, with the federal government adding to the dampening trend in October with tighter qualifying criteria for mortgage insurance. Export-oriented sectors will continue to benefit from a competitive Canadian dollar that is forecast to depreciate even further over the next two years to about 74 US cents. However, forestry is a risk factor given the absence of a softwood lumber agreement and high likelihood of countervailing and antidumping duties in 217, which will negatively impact competitiveness of Canadian lumber. Non-residential investment spending is anticipated to rise over the next two years, with business expansion, 1

2 the buildout of the Site C Dam, and transportation infrastructure investments. While key commodity prices have surged, particularly copper and coal, which could bode well for increased exploration activity and advancement of proposed mines, there remain uncertainties about sustainability given a still subdued and uncertain global growth picture. We do not anticipate a major LNG project going forward until mid-22s. B.C. s positive but mixed growth prospects set the stage for continuation of the regional economic divide observed in 216. Specifically, the Lower Mainland-Southwest, Vancouver Island and Kelowna remain the province s growth drivers, underpinned by rising populations due to labour market opportunities and lifestyle demand, and service-oriented export growth. Population growth will continue to be concentrated in these areas of the province, supporting consumption and housing activity. However, higher priced home markets such as Metro Vancouver, Victoria and Kelowna which draw in younger urbanites will likely bear more of the burden from tighter mortgage insurance rules. Victoria and Kelowna will see their red-hot housing markets move back into balance in 217 and prices will stabilize after strong 216 gains. Meanwhile, Metro Vancouver is anticipated to show modest downward pressure in median home values of four per cent in 217. Residential housing construction will slide after strong gains in 216 with weaker homeownership demand from policy changes, but given demographics there are stronger prospects for rental construction. In contrast, the economic cycle outside these markets will remain tempered with still challenging conditions in the economy. Weak commodity-related investment, closer reliance on Alberta s oil economy, subdued global growth will continue to constrain economic activity. Employment growth will fall below the provincial average, with growth sitting below.3 per cent, and unemployment above 7.5 per cent in 217 with improved but still elevated levels in 218. High unemployment rates and negative to negligible population growth over the next two years, coupled with tighter credit conditions, will keep residential sales at a subdued pace with some downside risk for prices. Vancouver Island and Coast Economic activity on Vancouver Island has been solid in 216 with rising employment and population, a bustling tourism sector and red hot housing market, which bodes well for further expansion. Per Cent Vancouver Island and Coast Labour Market Forecast Employment Growth Source: Statistics Canada, Central 1 Credit Union, Forecast Unemployment Rate The region has found itself on the bright side of B.C. s two-tone labour market. Outside Metro Vancouver, Vancouver Island is B.C. s lone economic region with positive employment growth in 216. Employment has tracked sharply higher since the summer months, driving year-over-year growth above three per cent late in the year and is expected to lift annual growth above two per cent after a 1.5 per cent gain in 215. Despite a higher participation rate and labour force expansion, the region s jobless rate has fallen to near five per cent, down from seven per cent at the beginning of 216. With two years of employment expansion, the economy has shown strong indication that the lull is behind it, with employment approaching levels last seen in 21. For the most part growth has been concentrated in 216 in the large urban areas of Victoria, with employment growth of near four per cent, and Nanaimo, compared to flat employment elsewhere. Uplift has reflected substantial gains in public-sector employment and economic growth generated by tourism, and household demand. Public-sector hiring has jumped in the region, potentially reflecting solid government finances in B.C. and increased hiring. While given the possible estimation error we are skeptical of an eye-popping year-to-date public administration employment gain of 2 per cent, which accounts about two-thirds of the overall regional employment gain, sector gains are still likely to be substantial. More broadly, public administration hiring in B.C. well exceeded overall employment growth in various measures including payroll employment and labour force survey estimates. Vancouver Island is home to more than a quarter of those employed in the public administration sector and the sector makes up nearly 1 per cent of regional employment. Economic Analysis of British Columbia 2

3 Broad economic growth has propelled employment across sectors, albeit concentrated in services industries. Growth in professional services, technological and management services have all expanded. This could tie to an overall gain in public-sector hiring and contracts. Meanwhile, retail and wholesale trade and construction have climbed with the consumer demand cycle. In contrast, education and healthrelated employment have underperformed. Non-residential investment activity looks to have climbed with the broader economy with building permits projected to climb about 2 per cent in 216, with gains in both the public and private sectors. However, major projects under construction are relatively small in magnitude, although work continues the North Island Hospital Project, made up of a new $331.7 million hospital in Comox Valley and a new $274.5 million hospital in Campbell River. Additionally, construction continues substantial upgrades to the CFB Comox facility, and the long-term Capital City Centre project. Rising building permits likely reflect reinvestment in the general economy, as well as business expansions. Population Growth by Regional District, Powell River Comox Valley Strathcona Alberni-Clayoquot Nanaimo Cowichan Valley Capital Van Island/Coast Per Cent Source: Statistics Canada, Central 1 Credit Union A low Canadian dollar has propelled tourism flows on the Island. BC Stats estimates point to a lift in tourism room revenue of more than 15 per cent this year, with all areas of the Island sharing in the boost from international and domestic travellers. A primary contributor to rising economic fortunes is a rebound in population growth over the past three years, which underpins higher consumption Vancouver Island/Coast Labour Force (s) % ch Total Employment (s) % ch Full-Tme Employment (s) % ch Part-Time Employment (s) % ch Unemployment Rate Residential Transactions 12,592 15,14 19,7 18,2 18,3 % ch Median Price 34, 35, 381, 385, 393, % ch Residential Permits ($ millions) ,8.7 1,38. 1,3. 1,38. % ch Non-Residential Permits ($ millions.) % ch Private Non-Res Building Permits ($millions) % ch Public Non-Res Building Permits ($millions) % ch Population (s) % ch Sources: Statistics Canada, Landcor, C1CU notes: Housing sales and prices represent arms-length resale land-title transfers for detached, attached and apartment units Economic Analysis of British Columbia 3

4 and housing demand. After struggling below half a per cent per year from 211 onwards, population growth has rebounded to.9 per cent since 214. While an aging population is a drag, the region has posted a surge in the net inflow of people from other provinces and regions of B.C. over the past two years. Job growth, retirements, and high home prices in Metro Vancouver have combined to draw residents to the region. Vancouver Island is attracting both semi-retirees as well as families. Moderate population growth is poised to continue given aging demographics in the province and Canada, which along with a stable public-service, will further attract families to the region. A combination of job growth, positive demographics, and relative affordability, compared to Metro Vancouver, have contributed to a red hot housing market and hefty contribution from construction activity. While off early year monthly peaks, annual resale transaction growth on the Island will be about 3 per cent higher this year. Strong demand and lack of inventory have underpinned accelerated price growth conditions. Median home value growth for 216 is projected at nine per cent, but compositional impacts mask underlying growth. Constant-quality MLS pricing measures point to year-over-year growth of close to 2 per cent in Victoria and 15 per cent on the rest of the Island. Residential construction trends have followed suit with permit volumes tracking close to 3 per cent higher this year. However, gains primarily reflect a ramp up in Victoria Capital region housing starts of more than 5 per cent. Housing starts among other large urban areas have eased, but a rise in building permits point to uplift in renovation spending activity. The Vancouver Island economy remains on solid footing into 217. While growth momentum among key drivers from 216 such as housing and tourism will surely slow, employment will continue to expand with a stable public-services and population gains. The Island will continue to experience population growth, particularly as the population ages and boomers retire. Housing volume will decline due to the mortgage insurance rules changes and some normalization after substantial momentum in 216. However, resale activity will remain elevated, while housing price growth will decelerate to one per cent. Per Cent MLS Benchmark Year-over-Year Price Growth Victoria REB Lower Mainland-Southwest Island (excluding Victoria) REB Source: VREB, VIREB, Central 1 Credit Union Latest: Oct /16 Per Cent Lower Mainland-Southwest Labour Market Forecast Employment Growth Unemployment Rate Source: Statistics Canada, Central 1 Credit Union, Forecast Driven by a Metro Vancouver economy that is on track to be the strongest economic performer among larger Canadian metro areas, the Lower Mainland Southwest (LMSW) which spans from the Fraser Valley to the east, through the Sunshine Coast to Squamish- Lillooet, has established itself as B.C. s runaway growth leader. A glance at labour market performance provides the clearest picture of strength and aligns with strong retail sales and housing activity. While there are signs of moderation since August, employment growth in the region has remained robust. Annual employment growth is on track to exceed 4.5 per cent, a record annual pace going back to at least Strong job growth has outpaced labour force expansion, pushing the unemployment rate to near five per cent, and an annual average of 5.6 per cent. In comparison, national employment growth tracked.7 per cent over the period. Industry employment growth points to a market firing on nearly all cylinders, albeit with services-sector expansion leading Economic Analysis of British Columbia 4

5 the way. Employment growth is in the double-digits in the information/culture/recreation, wholesale and retail trade sectors, and business management, while construction and manufacturing exceed the regional gain, public administration. Losses were observed in accommodations/foodservices, and resourceextraction. That said, there are significant regional differences. Metro Vancouver is experiencing one of its strongest employment cycles on record and ranks near the top when compared to other large urban areas in Canada. In contrast, the employment cycle deteriorated mildly in Abbotsford-Mission after an early-215 peak near seven per cent of the labour force. Chilliwack employment has climbed sharply after a sharp 215 contraction, but remains below levels seen two years ago. The regional economy has benefitted from both export-oriented gains and strong consumer demand owing to broad macro-economic factors including the low Canadian dollar and interest rates as well Employment Growth by Metro Area Vancouver Abbotsford-Mission Calgary Toronto Montréal Canada Per Cent Source: Statistics Canada, Central 1 Credit Union YTD Nov locational advantages which will continued to underpin growth. While the pace of growth will decelerate from strong gains in 216, economic growth in the Lower Mainland-Southwest will remain steady and underpinned by population growth and export-oriented service sectors, with downside risk coming from the housing market. Lower Mainland Southwest Labour Force (s) 1, , , ,65.3 1,677. % ch Total Employment (s) 1, , ,54.6 1, ,588.2 % ch Full-Tme Employment (s) 1, , ,219. 1, ,258.5 % ch Part-Time Employment (s) % ch Unemployment Rate Residential Transactions 45,195 59,36 68, 52, 55, % ch Median Price 57, 545, 6, 575, 587, % ch Residential Permits ($ millions) 5, ,43.3 6,5. 5,8. 6,. % ch Non-Residential Permits ($ millions.) 2, , ,2. 2,2. 2,35. % ch Private Non-Res Building Permits ($millions) 1,846. 2,44.9 1,8. 1,75. 1,85. % ch Public Non-Res Building Permits ($millions) % ch Population (s) 2, , ,915. 2,956. 2,99. % ch Sources: Statistics Canada, CMHC, Landcor, C1CU notes: Housing sales and prices represent arms-length resale land-title transfers for detached, attached and apartment units Economic Analysis of British Columbia 5

6 A favourable exchange rate will maintain high levels of international tourist visits. Metro Vancouver is a highly attractive destination with the low dollar and safety concerns elsewhere. Dollar-conscious Canadian tourists who are staying north of the border have also contributed to higher hotel occupancy rates, room revenues, as well as the retail and food-service sectors. Hotel room revenues in the region were trending 15 per cent higher this year, according to B.C. Stats estimates. The TV and film production sector is similarly benefitting from the exchange rate and renaissance in TV show demand due to on-demand distributors like Netflix and Amazon. From , B.C. TV/film and post-production revenues rose 28 per cent, with much of this work in the Vancouver CMA area. Anecdotal evidence points to persistence of an industry operating near capacity in 216 which will continue going forward. The region is home to a number of high profile productions and associated post-production jobs to including DC Legends of Tomorrow, Supergirl, A Series of Unfortunate Events, among others. Feature films adding to the landscape include Why We re Killing Gunther and Okja. Regional tech sector expansion continues with organic growth of the local tech cluster and large unicorn status for such companies as Avigilon, Hootsuite and Slack. 1 Large multinationals including Microsoft and Amazon have increased their regional footprint in recent years. B.C. technology services employment has climbed sharply this year owing mostly to a rise in software design employment. While spread across the province, employment is concentrated in Metro Vancouver, which by our estimates is home to about 7 per cent of all companies 2, with nearly all of those with 2 or more employees are in the region. The sector remains competitive as the low Canadian dollar drives service exports, while the large pool of local and less expensive talent, provides a competitive advantage. The federal government announcement to loosen foreign worker restrictions for high skilled tech workers should be a boon for the industry and expansion plans. High employment growth has contributed to population gains, reflecting economic migrants from other provinces and rebound in international migrations, partly due to the number of Syrian refugees. Population expansion will continue to underpin consumer demand for goods and services and long-term growth Defi ned as Computer systems design and related services (NAICS 5415) Units Lower Mainland- Southwest Home Sales 8, 6, 4, 2, Lower Mainland Unit Sales (MLS ) LMSW Resale Activity (Landcor) Source: REBGV, FVREB, Landcor, Central 1 Credit Union, seasonally-adjusted in homeownership demand, while putting pressure on an undersupplied rental market. Population growth in the Lower Mainland-Southwest will average about 1.3 per cent through 218, representing average gains of about 37,5 persons each year. Economic fundamentals will remain strong, but the regional housing market will face a period of stagnant sales and prices declines from a combination of local and national housing policies designed to stem price growth. The combination of measures including provincial luxury home tax in the spring, foreign buyer tax in August, and subsequent tightening of mortgage insurance qualification policies look to have ended the rise in the housing cycle. Detached housing has thus far borne the brunt of the downturn with market conditions shifting into a sellers market, driving lower realized and listing price expectations on the part of sellers. Detached home prices arguably ran ahead of themselves in the spring months, and a natural pull back due to affordability constraints was further impacted by policy measures. We do not see the foreign buyer tax as having a long-term impact on the market. While short-term speculators will be pushed out, those with a long-term horizon, future residents, and students will internalize the cost. Metro Vancouver remains well priced compared to other global markets and highly desirable. However, tighter mortgage insurance rules will mark an end to the current housing cycle across the Lower Mainland-Southwest as first-time and lower-equity buyers as well as the move-up market cool, maintaining low sales and declining prices in 217. Sales have declined for multi-family product, but lack of inventory in both the resale and new home market have supported price levels. The regional housing market is amid a modest correction phase that will continue into mid-217. Media Economic Analysis of British Columbia 6

7 Lower Mainland - Southwest Resale Housing Forecast Units (s) Dollars (s) Transactions (L) Median Price ( R) Source: Landcor Data Corp, Central 1 Credit Union, Forecast reports will invariably focus on average price levels, which are impacted in large part by product composition, and show deep price declines, the underlying price declines will be less exciting. We forecast median home values in the Lower Mainland-Southwest to decline four per cent in 217 to $575, and a peak-to-trough drop in the benchmark home value of five per cent. While sales activity will remain weak due to policy constraints, the impact will predominantly be through low sales volumes. Strength in the economy, which will lift average employment by a mild 1.1 per cent in 217 after a strong gain of 4.9 per cent in 216, will mitigate panic selling on the part of sellers. Many prospective sellers will wait on the sidelines, rather than sell their homes, maintaining a period of frigid volumes in the region. More significant impacts will come on the new construction side, where residential permit volumes in the Lower Mainland-Southwest will fall 25 per cent after a 15 per cent surge in 216. Vancouver CMA housing starts hit a record high in 216 with a more than 3 per cent year-over-year gain, with Abbotsford-Mission also displaying a similar gain. The impacts of weaker residential investment will likely spread into 218, as strong housing starts in 216 maintain substantial construction work this coming year. Despite near-term weakness, housing affordability will remain a challenge over the medium-to-long term. This primarily reflects supply-side factors of a constrained land base which will maintain upward pressure on land values, and require increased density in the region to meet population needs. Per Cent Thompson-Okanagan Thompson-Okanagan Labour Market Forecast Employment Growth Unemployment Rate Source: Statistics Canada, Central 1 Credit Union, Forecast B.C. s Thompson-Okanagan is home to about 55, residents and extends from the Thompson-Nicola region in the east, through the Columbia-Shuswap region to the B.C.-Alberta border and down through the Okanagan and Keremeos and is anchored by the Kelowna census metropolitan area (CMA). Kelowna represents about a third of the regional population and Kamloops roughly 16 per cent. The remainder of the regional population is dispersed among many small and medium-sized areas including Penticton, Vernon and Salmon Arm, as well as Peachland, Oliver and Golden. Labour market statistics point to softness in the regional economy as average employment levels have trended lower in the Thompson-Okanagan, both in Kelowna and elsewhere in the region. While there are signs of late-216 improvement, estimated regional employment has hovered about two per cent below year-ago levels for most of the year, with the unemployment rate tracking near eight per cent. While suggestive of local stagnation, some of this decline could reflect a relatively high propensity of workers employed in Alberta and other regions of the province. Industry-level data supports this view. Losses have been heavily concentrated in the in manufacturing and transportation/warehousing. With no major announced losses locally these are most likely tied to external oil and gas jobs. Offsets included construction, accommodations and food services, resource extraction, and education which are service local-area demand. While drops in overall employment may not be visible directly through local community job cuts, household incomes have likely been negatively impacted. Economic Analysis of British Columbia 7

8 Thompson-Okanagan Population Growth Growth in Room Revenues Per Cent Source: Statistics Canada, Central 1 Credit Union Latest: 215 Okan-Similkameen Thompson-Nicola Central Okanagan North Okan Col Shuswap Thompson/Nicola Vernon Valemount Penticton Osoyoos Kelowna Kamloops Per Cent Source: BC Stats, Central 1 Credit Union YTD July 216 Labour market trends suggest a weaker performance than is the case, as domestic indicators remain robust. Rising population trends in recent years likely extended into 216, with particularly with higher inflows to the Kelowna-anchored Central Okanagan region, North Okanagan and to a lesser extent Okanagan-Similkameen. However, growth has been concentrated in the Kelowna CMA, which expanded sharply by more than three per cent in 215, following a moderate 1.8 per cent increase in 214. Elsewhere in the economic region, gains have trended at a subdued.5 per cent over the past two years. Estimates for 216 are not yet available, but we expect 1.5 per cent growth for the Thompson- Okanagan, aligning with a rise in the working-age population. Hard hit workers from Alberta and individuals avoiding high home prices in B.C. s Lower Mainland, have flowed into regions in Okanagan. The region has consistently been attractive to residents from other parts of Canada and the province. Decline in labour force participation suggests a rise in student inflows into local colleges and an increase in the retirees and lifestyle segment. Housing is key evidence of the misalignment of labour market data and real economic activity. Activity has surged this year with strengthening sales, median prices and new home investment. Following years of underperformance, home sales have surpassed mid-2 highs in the Thompson-Okanagan and will climb more than 2 per cent on an annual basis, with particularly strong gains in the Kelowna-anchored Central Okanagan. Excess supply has largely been absorbed, generating upward pressure on prices. Stronger sales growth for apartment and townhomes limited growth in median home values at about six per cent to $353, in the Thompson-Okanagan. Adjusting for composition, sale prices growth is in the double-digits, albeit with gains concentrated in the $ (millions) 1,4 1,2 1, Thompson-Okanagan Residential Permits Source: Statistics Canada, Central 1 Credit Union, Forecast Kelowna-anchored Central Okanagan. Price growth in the Thompson-Nicola has held steady from a year ago, More importantly for growth, residential construction has accelerated with housing starts up nearly 6 per cent in Kelowna, 3 per cent in Kamloops and more than 1 per cent in Vernon through November. Residential permit volume growth, which also includes renovation activity, is expected to surpass 4 per cent this year, led by Kelowna. While household formation and consumer demand are the key economic drivers, external factors are boosting regional growth. Tourism is contributing to growth across the region. Data from BC Stats points to a significant uplift in accommodation spending this year, with estimated room revenues through mid-year tracking about 1 per cent higher, with some of the most substantial gains in Kamloops, Osoyoos, and Vernon. A favourable exchange rate and high level of overseas visits should continue to promote high levels of travel into the region. Forestry, like in other regions of the province, has improved with timber harvests at elevated levels, albeit down slightly from 215. That Economic Analysis of British Columbia 8

9 Thompson-Okanagan Labour Force (s) % ch Total Employment (s) % ch Full-Tme Employment (s) % ch Part-Time Employment (s) % ch Unemployment Rate Residential Transactions 1,883 12,169 14,6 13,73 14, % ch Median Price 325, 333, 356, 35, 353, % ch Residential Permits ($ millions) ,19. 1,5. 1,49. % ch Non-Residential Permits ($ millions.) % ch Private Non-Res Building Permits ($millions) % ch Public Non-Res Building Permits ($millions) % ch Population (s) % ch Sources: Statistics Canada, Landcor, C1CU notes: Housing sales and prices represent arms-length resale land-title transfers for detached, attached and apartment units said, gains will likely be pared with intensification of the softwood trade dispute with the U.S. and associated tariffs in 217. Non-residential investment spending has remained steady after a 215 surge with modest business formation rates in Kelowna and Vernon, alongside rising new building construction. Flat but elevated nonresidential construction permits this year owe mostly to one-off government projects such as the Penticton Hospital redevelopment. In contrast, private-sector investment has declined. Non-residential permits are forecast to track $45 million in 217 and ease to $385 million in 218 Going forward, economic prospects are generally positive for the Thompson-Okanagan. Population growth trends and household formation will continue to be a key factor driving regional economic performance and business formation in the region, but residents are likely to gravitate towards Kelowna given its role as the key regional service hub. Serviceoriented sectors oriented to aging population trends such as healthcare look likely to grow, while areas like technology will be boosted by investments in regional institutions and lower costs than Metro Vancouver. Domestic drivers, tourism and less drag from Alberta s economy will contribute to higher average employment growth in 217 of one per cent, led by Kelowna. Unemployment will continue to track above seven per cent as employment growth will be largely met by population and labour force expansion. This year s surge in new housing construction will continue to drive expansion in the Thompson-Okanagan economy through ongoing construction, but we can expect a pullback in housing momentum and sales. Federal tightening of mortgage insurance rules will impede first-time and low-equity buyer purchases and new housing starts. A six per cent decline in residential home sales are forecast for 217, while home values flatten. Residential permit volume will decline 12 per cent in 217 after a 216 surge. Economic Analysis of British Columbia 9

10 Kootenay Labour Force (s) % ch Total Employment (s) % ch Unemployment Rate Residential Transactions 2,71 2,778 3,2 2,9 2,87 % ch Median Price 24, 236,85 242, 244, 245, % ch Residential Permits ($ millions) % ch Non-Residential Permits ($ millions.) % ch Private Non-Res Building Permits ($millions) % ch Public Non-Res Building Permits ($millions) % ch Population (s) % ch Sources: Statistics Canada, Landcor, C1CU notes: Housing sales and prices represent arms-length resale land-title transfers for detached, attached and apartment units Kootenay The Kootenay Economic Region is home to about 148, residents and comprised of many small towns and municipalities, with the largest areas being the census agglomeration of Cranbrook and City of Nelson. Per Cent Kootenay Labour Market Forecast Despite a small population base, the regional economy is diverse with a mix of tourism and resourceproducing sectors. Given relative proximity, Alberta tourism is a key driver for recreation, tourism and secondary housing activity in areas like Cranbrook, Invermere, Kimberley and Fernie. However, the region is also home to Teck Resources coalfield operations near Elkford and a lead-zinc smelter in the western Kootenay at Trail. Other key industries include forestry and agriculture. Soft economic conditions in the Kootenay continued through 216 as low metallurgical coal prices in recent years have held back capital investment, while Alberta s recession weighed on the labour market and remained an anchor on housing demand. These factors have more than offset tourism and forestry sector expansion Employment Growth Unemployment Rate Source: Statistics Canada, Central 1 Credit Union, Forecast Average employment tracked lower through 216 with year-over year declines at more than three per cent being the most severe among regional areas. Unemployment is elevated near eight per cent and would be higher if not for a pull-back in labour force participation and lower population growth. That said, there has been intra-regional movements including Fortis relocation of its B.C. Kootenay Operations Centre and 1 employees to Castlegar from South Slocan. Economic Analysis of British Columbia 1

11 Alberta s recession has a direct impact on regional labour market statistics given a significant number of individuals residing in the Kootenay, but employed across the Rockies. Central 1 research points to the Kootenay having the second highest proportion of interprovincial employees in B.C., next to the Northeast, at near seven per cent. While this figure is from 211, challenging conditions across the B.C. interior have limited the degree to which these individuals could find work elsewhere in B.C. Employment insurance beneficiary counts suggest higher unemployment rates in the East Kootenay region. As a high-unemployment region, impacted workers in the Kootenay are eligible for extended EI benefits. Aligning with a weak labour market and contributing to the low growth state is a lack of new construction, both residential and non-residential. Housing demand continues to underperform, and while sales have improved significantly from a year ago, conditions remain shallow and modestly oversupplied driving a mild uplift in resale prices. While the supply overhang from overbuilding in the mid-2s gradually diminishes, excess supply persists. Lack of household growth has held back new housing demand. Lower employment through early 216 is driving a 3.5 per cent annual contraction but that marks a cyclical bottom. Mild growth of about half of a per cent is anticipated in both 217 and 218 owing to an economic environment that remains mixed. Unemployment is forecast to average about 8. per cent. Population has contracted with regional economic challenges. Population contracted in 215 by.1 per cent, owing to declines in the Grand Forks and Rossland-anchored Kootenay Boundary area. Since peaking in 29, the number of residents in the Kootenay has generally been on a downswing, except for a 214 uplift. While caution is warranted when examining regional estimates, downward momentum has reflected a combination of weaker intra-provincial migration, international inflows, as well a drag due to the region s older age demographic. With the regional economy dependent on a combination of commodity sector investment, recreation demand, and population growth the Kootenay economy is forecast to remain in a holding pattern over the next two years, with risks to both the upside and downside. Prospects for the regional coal market have improved after a challenging few years. Global metallurgical coal prices have surged recently owing mostly to Units Kootenay Housing Market Activity Resale Transactions (L) Median Price ( R) Source: Landcor, Central 1 Credit Union, seasonally-adjusted Kootenay Residential Permits $ (millions) Source: Statistics Canada, Central 1 Credit Union, Forecast Dollars (s) 3 regulatory moves in China that have cut domestic capacity and other supply-side shocks have generated the best pricing environment in years and mark an improvement to B.C. s coal sector profitability. The question is whether high prices can be maintained as Chinese and global economic growth generally remains subdued. Risks to coal prices are a reversal of China s policy and increased global production given high prices. Consensus is for coking coal to retrace a significant portion of the gain, given underlying demand fundamentals. Consensus Forecasts outlook is for coking coal prices to fall 3 per cent to $18/metric tonne by the end of 217, with a drop to $1 through 218. We anticipate coal miners to be cautious in this environment, but sector activity can only improve. Nonetheless, coal looks to have passed its low point, which will provide stability for the region and related-investments. Recently, Teck Resources Baldy Ridge extension at it Elkview operations received its environment assessment certificate. 3 With a six-year construction period, which will ultimately supply ARiSXB Economic Analysis of British Columbia 11

12 million tonnes of clean coal annually through 245, the project will provide temporary construction jobs and help sustain the current mine workforce. Strengthening forestry sector demand has maintained timber harvest levels in the Kootenay at elevated levels, with the 216 total harvest broadly in line with a year ago thus far. Harvest levels over the past few years hover at pre-recession levels and are about 8 per cent above recession lows in 29. Steady gains in U.S. housing demand, relatively benign impacts in the region from the mountain pine beetle epidemic contribute to high levels of production. However, the lack of a new softwood lumber agreement and likelihood of punitive tariffs going forward are a negative risk to sector production, particularly given location advantages of the U.S. market for southern interior timber. Tourism is expected to continue as a bright spot for the region as the low Canadian dollar will attract visitors from the U.S. as well as those Canadians looking to stay north of the border for the same reason. Room revenues associated with accommodations in the region are up more than 1 per cent in the areas of Fernie, as well as Castlegar, Nelson and Rossland, with mild gains in Invermere and Radium. Stabilization in Alberta s economy will be helpful for the region. Although low oil prices will keep capital spending on the backburner and limit interprovincial hiring, growth will provide further support for sectors such as tourism and recreational housing. Nevertheless, non-residential investment will take a cue from regional economic trends. While up this year by a projected five per cent, due in large part to the Fortis B.C. relocation, and gains in Invermere and Rossland, which offset sharp declines in Nelson and Trail, we anticipate a moderation back to more normal levels going forward. Private sector drop in permits push dollar-volume non-residential activity back to the $5 to $55 million-dollar range in 217 and 218. A sharp drop in 216 public-sector investment rebounds. With mild employment growth and flat population levels expected for 217 and 218 and tighter mortgage credit conditions, regional housing activity is forecast to lose some momentum in 217. Sales are forecast to decline four per cent in 217, after a nine per cent gain this year, with flat sales in 218. Average home prices are forecast to hold range-bound near $245,. Diminishing excess housing inventory and higher sales volume are forecast to lift new home and renovation spending in 216, providing a five per Per Cent cent lift to residential building permit volume with growth of about two per cent in 217 and four per cent in 218. Cariboo. Cariboo Labour Market Forecast Employment Growth Unemployment Rate Source: Statistics Canada, Central 1 Credit Union, Forecast Persons (s) Cariboo Population Forecast Growth (R ) Population (L) Source: Statistics Canada, Central 1 Credit Union, Forecast Per Cent 1. B.C. s Cariboo economic region is anchored by the Prince George census agglomeration, spanning 1 Mile House through Quesnel, Williams Lake and its surrounding areas, and eastward to McBride and Valemount. The region is home to about 154,, with Prince George comprising roughly half the regional population. While regional data is volatile, the region is set for second year of employment losses. After a near seven per cent contraction in 215 led by Prince George, average employment is on pace for another two per cent drop in 216. Service-oriented employment has borne the brunt of the decline, albeit at more shallow pace than last year. Declines in full-time positions have partly been offset by part-time increases, but this points to a decline in hours and lower quality employment. Prince George has held up better than outlying areas in 216 with flat year-to-date Economic Analysis of British Columbia 12

13 Cariboo Labour Force (s) % ch Total Employment (s) % ch Unemployment Rate Residential Transactions 2,364 2,43 2,6 2,4 2,3 % ch Median Price 215, 22, 224, 221, 22, % ch Residential Permits ($ millions) % ch Non-Residential Permits ($ millions.) % ch Private Non-Res Building Permits ($millions) % ch Public Non-Res Building Permits ($millions) % ch Population (s) % ch Sources: Statistics Canada, Landcor, C1CU notes: Housing sales and prices represent arms-length resale land-title transfers for detached, attached and apartment units employment, but similarly reflects part-time gains while shedding full-time jobs. Recessionary conditions in the Athabasca oil patch have also contributed to employment declines, but have a lesser impact relative to other B.C. regions such as the Northeast and Thompson-Okanagan. Lack of job growth, unemployment, and net losses in businesses have led to a population slump. Estimated levels fell 1.7 per cent in 215, with losses across all communities outside One Hundred Mile House. This marks a substantial deterioration following stable but low growth since 28. Population declines largely reflect net outflows to other regions of the province and Canada, driven by economic factors and by young people leaving for education. Despite underlying weakness, housing has fared better than expected. Low mortgage rates and a relatively stronger economic performance in Prince George have provided a modest bump to resale transactions this year and led to steady prices. Dollarvolume permits and housing starts have climbed, with gains concentrated in Prince George and forestry-reliant communities. Northern Interior Lumber Production s dry cubic metre 1,6 1,5 1,4 1,3 1,2 1,1 1, Source: Statistics Canada, Central 1 Credit Union, seasonally-adjusted Economic conditions in the Cariboo are forecast to remain on a slow growth trajectory as a subdued global economy continues to hamper recovery in the mining sector and international trade, while a forest sector recovery is roiled by an intensifying softwood lumber trade dispute and a high likelihood of punitive tariffs on Canadian lumber exports to the U.S. Negative to flat population growth and challenging labour markets will continue to dampen business formation, consumer-oriented growth and housing markets over the forecast period. Economic Analysis of British Columbia 13

14 Forestry-oriented growth has been positive over the past year. Stronger export demand from the U.S., due in part to a now expired one-year grace period after the end of the softwood lumber agreement in 215, helped propel production and job growth. Provincial payroll employment data for the forestry, logging and support employees points to a mild decline in forestry, logging, and support employment, but a two per cent increase in sawmill and wood production employment. A four per cent increase in sawmill production was driven by a six per cent increase in the northern interior, benefitting regions like Quesnel and Williams Lake. Re-opening of the Lakeland mill in 215, and uplift in goods-related employment suggest growth in associated employment in the Cariboo area. Lumber demand will continue to rise with an increase in U.S. housing starts and a favourable Canadian dollar. Consensus Forecasts show an average estimate of 1.3 million U.S. housing starts in 217, compared to 1.1 million this year. However, expiration of the 26 Softwood Lumber Agreement in 215 and subsequent one-year grace period without a new deal makes countervailing and anti-dumping duties of up to 3 per cent likely given a more protectionist stance in the U.S. This will cut demand and production of Canadian lumber, but have greater impact in higher cost jurisdictions like Quebec. In B.C., highly efficient mills and the competitive Canadian dollar will provide some cushion for the sector as a new agreement is reached, but lower production and employment can be expected. Rotation of exports to other international markets may provide some minor offset. Further sectoral downside remains the long-term impacts of the mountain pine beetle epidemic, which has killed about half of the merchantable pine and led to mill consolidation and timber swaps. Despite a recent restart of the Lakeland mill in Prince George, forestry-related manufacturing will not return to pre-recession peaks as further industry consolidation is likely. The trade disagreement and lack of timber are constraints to capital investment in the industry and will also dampen consumer confidence. Support for the economy from other resourceoriented sectors is uncertain. Base metal prices have climbed since the U.S. election amidst expectations for stronger growth due to infrastructure spending and tax cuts, but this remains speculative at least for a few more months until policy is cemented. In contrast, global economic growth remains slow, limiting exploration activity and delaying further mining Cariboo Resale Housing Forecast Units Dollars (s) 5, 24 4,5 22 4, 3,5 2 3, 18 2,5 2, 16 1,5 14 1, 5 12 Transactions (L) Median Price ( R) Source: Landcor Data Corp, Central 1 Credit Union, Forecast starts. The proposed Spanish Mountain Copper-Gold at Williams Lake and Lorraine-Jayjay Copper Mine at Prince George are unlikely through to the end of the decade given project economics and the commodity price outlook. On the bright side, Mount Polley mine near Williams Lake has fully resumed operations this year after the 214 tailings pond collapse. 4 With key base economies facing ongoing challenges and stagnant population levels, growth in service sectors, including transportation and warehousing, and trades oriented post-secondary education will also underperform. Non-residential permit volume is up sharply this year after a weak 215 but owes mostly to local public demand such as the $2 million North Cariboo Multi-Centre in Quesnel, rather than commercial interests. Regional economic risks are tilted to the downside in the Cariboo area given uncertainties related to the softwood lumber agreement. Population is forecast to remain level through 218, while employment will be little changed following a 216 drop. Unemployment will remain close to 7.5 per cent of the labour force with some upward pressure from labour force expansion. Resale housing transaction will pull back in both 217 and 218, while median home values edge lower. Economic uncertainty and federal mortgage insurance rules will contribute to the weakness. North Coast and Nechako The North Coast and Nechako development regions (NCNE) are in B.C. s northwest quadrant and are home to roughly 96, residents. While comprised of two distinct areas with various drivers, economic data labour market information in particular is often combined for the areas due to the small popula- 4 Economic Analysis of British Columbia 14