BC Business
What do the next 12 months hold for B.C.'s economic health, business environment and investment climate? With help from an expert panel, we explore the forces, events and themes that will shape the year ahead.
(Clockwise from top left) Panellists Jock Finlayson, Erica McGuinness, Pete Molenaar, Val Litwin, Bryan Yu and Iglika Ivanova
Forestry is struggling, tech is booming, and companies of all sizes can’t find enough good people. As B.C. rings in the new year, those are just a few of the factors that will affect businesses across the province during an uncertain time for the global economy. For some insight into what 2020 could bring, we sat down for lunch with a panel of six experts:
Jock Finlayson: Executive vice-president and chief policy officer, Business Council of British Columbia
Iglika Ivanova: Senior economist and public interest researcher, Canadian Centre for Policy Alternatives
Val Litwin: President and CEO, BC Chamber of Commerce
Erica McGuinness: Vice-president, Sequeira Partners
Pete Molenaar: Senior vice-president and head of commercial banking, Western region, HSBC Bank Canada
Bryan Yu: Deputy chief economist, Central 1 Credit Union
First, a couple of disclaimers. The discussion took place in early October, before the recent federal election. And by the time you read this story, there’s always the chance that its take on 2020 has been overshadowed by major events, from a U.S. recession to some other crisis that dramatically changes B.C.’s economic fortunes. Whatever happens, the panellists gave us plenty to think about. Here are 10 key takeaways.
Like many observers, Bryan Yu is keeping a close eye on the world’s biggest power struggle. “Our outlook is largely contingent upon what’s happening with the U.S. and China and their trade relationship deteriorating, and global trade,” he says of Central 1. “What we’re really watching right now is how poorly that can go.”
Central 1 has tracked a slide in B.C. manufacturing activity that it expects to keep hindering the provincial economy, hitting exports in particular. The main weakness is the slumping forestry sector, whose manufacturing sales and product shipments were down 20 and 35 percent, respectively, year-over-year through August. “We don’t see a lot of growth occurring overall with exports in the next year, especially on the commodities front,” Yu says.
Low interest rates coupled with a strong B.C. job market—unemployment stood at 4.8 percent in September—should mean high consumer confidence. But Central 1 hasn’t seen much action on the retail front lately, Yu says. It forecasts retail sales to end 2019 up just 0.5 percent, a flat performance compared to the previous year—but to rebound by 4 percent in 2020. Housing starts could finish 2019 up some 7 percent, at 44,000, then plunge 16 percent in the coming year, according to the credit union. That 37,000 total would still be an elevated number, notes Yu.
The bottom line: Central 1 expects provincial real gross domestic product to grow about 2 percent in 2020, with help from LNG Canada and other liquefied natural gas projects. That continues a downward trend from its forecast of 2.2-percent GDP expansion for 2019, versus a 2.4-percent gain the previous year. “Overall, it’s actually not a bad story for the B.C. economy,” Yu says. “Services, technology, tourism—all of those sectors are still, in our view, quite strong.”
Jock Finlayson of the BCBC, who mostly agrees with Yu’s assessment, points out that Morgan Stanley recently became the first big U.S. investment bank to call for a 2020 recession in that country. He believes an American downturn is overdue, citing “an incompetent and erratic leadership, which I think is chipping away at business confidence, on top of the trade war.” With the global economy slowing, Canada and the U.S. are headed for choppy waters, Finlayson warns. “We’ve got to get ready for what’s going to be a pretty unforgiving external environment in 2020.”
For B.C., Finlayson identifies two main bright spots. The first is an often-overlooked strength: at 1.5 percent annually, population growth far exceeds that of most provinces and U.S. states. The second is non-residential construction, both private and public. But in 2020, the BCBC expects housing starts to drop almost 14 percent, to 34,500. With Canada struggling for 1.6-percent real GDP expansion in the year ahead, the group forecasts, B.C. will grow 2.2 percent.
The CCPA’s Iglika Ivanova points to provincial government investment in infrastructure, from the Site C dam to housing to transportation. She’s also waiting to see if Victoria will deliver on its pledge to add 22,000 licensed child-care spaces by 2021. “That will have an impact on labour supply as well, enabling more parents to work and to return to work faster,” Ivanova says. “That’s positive in terms of the environment that some businesses are facing in recruiting workers.”
There was widespread agreement that B.C.’s tight labour market is only getting worse. Erica McGuinness, whose Vancouver-based Sequeira Partners is a mergers and acquisitions adviser to small and medium-sized businesses, says much of her clients’ growth challenges revolve around finding employees. “This past year, it’s become much more prevalent.”
Businesses should brace for more of the same. Between 2018 and 2028, the province will have roughly 903,000 job openings, according to the provincial Labour Market Outlook. Although young people starting work, immigrants and migrants from other provinces will fill 85 percent, that still leaves about 130,000 jobs.
Yu sees a chance to recruit highly skilled people who have visited B.C. on work visas. For the BC Chamber’s Val Litwin, the Provincial Nominee Program and more temporary foreign workers are two ways to help fill the gap. But employers will have to get used to relative labour scarcity, Finlayson says. “The demographic shift we’re going through is going to constrain labour supply for as far as the eye can see, even with high levels of immigration and some other things that are putting us in a better position than a lot of other jurisdictions.”
One reason B.C. lacks even mid-tier managers is that so many of its companies are startups, leaving nowhere to gain such experience, Ivanova says. Proximity to the U.S. is another recruitment obstacle: “Even in fairly entry-level tech jobs, a lot of people can go across the border and make much higher wages and have slightly lower housing costs.”
Rather than turn to the government for help, companies should try leveraging talent and technology to ease their staffing woes, Finlayson suggests. But in this new labour environment, he says, even finding warm bodies will be tough. For example, although hundreds of thousands of North American truck drivers could eventually lose their jobs to automation, today there are 75,000 vacancies for long-haul operators. “Technology’s going to change the way business is done and the way work is performed, but we’ve got a big challenge around this basic labour supply, which I don’t see as getting better.”
Asked which regions of the province will enjoy the most economic growth in 2020, Yu says the Northwest is already seeing some benefits from LNG projects. In the Northeast, which is reeling from the forestry slump and low natural gas prices, a rebound largely hinges on whether that construction sparks more drilling activity.
In the Cariboo, the southern Interior and elsewhere, mill closures will keep taking their toll. But in Central 1’s view, the forestry industry’s troubles aren’t cyclical, thanks to a pest that destroyed half of the province’s merchantable timber. “It’s largely structural problems that they’ll be dealing with for the next 20, 30 years,” Yu says. “Because as much as it is about low prices and high log inputs now, the big issue for them is still the mountain pine beetle.”
As our Best Cities for Work in B.C. ranking shows, Vancouver Island is benefiting from population growth. “The aging boomers are moving into these areas, and to some extent you will see the younger demographics going there for more affordable housing as well,” Yu says.
For continued economic strength, look to the Lower Mainland, the centre of the province’s tech and service sectors. In Canada and the U.S., a few urban regions are driving innovation and the shift to a digital economy, Finlayson says. “Structurally, in my view, we’re going to be more and more dominated by what I call the southwestern quadrant of British Columbia.” Not that he’s writing off the rest of the province: “If I was running the show, I’d be looking at aggressively trying to encourage immigrants to settle somewhere other than Metro Vancouver.”
With uncertainty in the air as a new Liberal federal minority government starts its mandate—and the province gears up for a provincial election in less than two years—Litwin thinks the big conversation for B.C. in 2020 will be about prosperity. If you define prosperity as a situation where residents can get well-paying jobs and business growth provides tax revenue for better social services, the biggest challenge is increasing business costs and regulations, he says.
“There’s a municipal, provincial and federal dimension to it,” Litwin explains, flagging property tax, the NDP‘s carbon and employer health taxes, and higher Canada Pension Plan contributions. “We’re a have province; we’ve got an innovative business community. But if we can work with government to talk about how to create a more competitive marketplace for us, we can weather more storms.”
Overall, provincial and federal taxes aren’t bad, but there are some oddities in their design, Finlayson says. Unlike most industrial countries, Canada has tiered rates: in B.C., for example, provincial corporate income tax starts at 2 percent—then surges sixfold when annual revenue hits $500,000. To avoid such a jump, the BCBC has recommended that the province and Ottawa move to three or four rates.
In Metro Vancouver and beyond, high housing costs and lack of child-care spaces affect companies more than some of the new taxes by making it hard to attract employees, the CCPA‘s Ivanova says. Regional disparity is also high on her list of concerns, given mounting forestry job losses and a potential global recession, which would hurt rural communities by hammering commodities markets. “If we can’t get a handle on that, the disparities between urban and rural B.C. can have significant implications.”
Outside Metro Vancouver, HSBC‘s Pete Molenaar relates, people who run lumber and other “meat-and-potatoes” businesses fret about regulatory uncertainty. “There is a low hum just to have a clear and deliverable framework for getting things done,” he says. “I don’t know if it’s slowing things down a lot, but it’s definitely inhibiting opportunity.”
Finlayson of the BCBC calls it a made-in-Canada problem: “The regulatory systems are very slow-moving, but we’re in a fast-changing world.” Rather than widespread deregulation, he’d like to see B.C. modernize its regulatory processes and decision-making. For example, policy-makers could use geophysical mapping, data analytics and other tools to get a better picture of the land base and its natural resources. “Aboriginal rights and title issues and historical uses of certain parts of Crown land, that could all be documented using modern technology so they wouldn’t have to do it again each time a new mining permit is being developed,” Finlayson says.
On the policy front, Ivanova highlights two provincial government efforts that could impact businesses in 2020 and beyond. B.C. recently became the first province to introduce legislation that would square its laws and policies with the United Nations Declaration on the Rights of Indigenous People (UNDRIP). “Perhaps it will provide more regulatory certainty, or at least a path forward in terms of the issues around Indigenous rights and title,” Ivanova says.
Then there’s the government’s CleanBC plan, whose goals include making all new light-duty cars and trucks sold in the province zero-emission by 2040 and launching training programs for what it calls the clean jobs of the future. Given our cleantech sector’s successes to date, Ivanova believes it can become a global leader, replacing some of the jobs lost in traditional resources industries. “Perhaps some incentive from government or policy-makers would help realize that potential faster, but climate change is one of the defining challenges of our time.”
Over the past couple of years, data from the BC Chamber network has shown “the convergence of the twin pain points of carbon tax and climate change,” Litwin says. Where businesses were more likely to finger the carbon tax as an obstacle to growth and investment, “awareness around climate change has now caught up and is starting to surpass it as a choke point,” he adds. “Look at the tourism sector in B.C.: it just takes a couple of wildfires and a few floods, and they lose their sweet spot for the whole season.”
Small and medium-sized businesses want to be part of the climate change solution, Litwin says. Besides making it easier for SMEs to seek CleanBC funding, he argues, the provincial government could offer incentives for them to buy lower-emission machinery and equipment.
Depending on who you ask, outside investment in B.C. is a bonanza or a work in progress. For her part, McGuinness is seeing plenty of interest from buyers. Sequeira Partners, which advises Western Canadian businesses in sectors such as energy, industrial manufacturing and distribution, has noticed higher valuations for B.C. companies. In deals that Sequeira has worked on, they’ve commanded, on average, a premium of 2.5 times earnings before interest, taxes, depreciation and amortization (EBITDA) compared to their Alberta and Saskatchewan counterparts.
“There’s still that premium being placed on B.C.-based businesses, and a lot of that, we feel, is due to the diverse nature of our economy,” McGuinness says. Purchasers will also pay more for existing manufacturing space because B.C.’s scarcity of industrial land makes it difficult to greenfield.
At the same time, the province is reaping the rewards of a lower-growth environment in the U.S. that has left public companies trying to meet their expansion targets through M&A, McGuinness says. “B.C. has been a bit of a benefit in this last bull run, just seeing that investment from not only private capital but also some big corps.”
HSBC is busy, too, says Molenaar, some of whose clients have sold their companies to large U.S. private equity firms. “There’s a lot of what I call trapped value in businesses here that over time could be a big contributor, as well, to overall investment in this marketplace.”
Finlayson’s prediction for B.C. real estate: land and housing prices will “keep growing faster than nominal income for as far as the eye can see.” Because housing affordability plays a major role in quality of life for working families, governments must offer solutions by doing things like allowing more urban density, Yu reckons.
Luckily, B.C. has many examples to learn from. Take Hong Kong, which has a much higher proportion of social housing than Vancouver. “We often do get stuck thinking we’re unique and try to reinvent the wheel, but we don’t have to,” Ivanova says. “We can learn from the experience of other global cities that have dealt with it and have seen the pitfalls already.”
One big question for B.C. in 2020 is how Canada’s testy relations with China will affect its prospects. At press time, Meng Wanzhou, CFO of Chinese telecom Huawei Technologies, remained under house arrest in Vancouver, facing possible extradition to the U.S. on charges including alleged bank fraud. Against a backdrop of rising trade tensions with America, the Chinese government has taken out its frustrations on Canada, blocking pork and canola exports, among other moves.
“It’s a wakeup call for Canada,” Finlayson says of the realization that it’s dealing with a rising non-democratic superpower. In his opinion, our nation has two qualities that make it an irresistible target for the Chinese Communist Party: “We’re weak, and we’re self-righteous.”
Because Canada is governed by law, it had no choice but to act on the U.S. extradition request, Finlayson says. “It may change based on what President Trump thinks when he gets out of bed tomorrow,” he adds. “That’s what will rescue us from this, is if the U.S. drops their request.”
For Canada, the key issue is deglobalization, Finlayson says, noting that political forces could keep driving a decline in international trade. If the U.S. and China are competing for supremacy, too, Canada has no option but to ally with its North American neighbour, he notes. “I think the world’s moving to global-regional economic blocs, and the global multilateral trade system is decaying or even collapsing,” Finlayson observes. That puts a small country like Canada that wants to be a multilateral player in a tough spot. “We have no control over what’s going to happen, let alone B.C.”
Mainland China is the province’s second-largest trading partner after the U.S., accounting for 14.5 percent of our exports in 2018, according to BC Stats. Litwin worries that the provincial economy “could get ground to a fine powder” amid conflict between the two countries. “We’ve got to find a way to do business with them,” Finlayson says. “But abandon the notion we’re going to have some special partnership or free trade with China.”
Asked what mindset B.C. businesses should adopt for 2020, Molenaar says HSBC encourages its clients to think globally by looking at Europe and Asia. “We find when they go into those markets as well, their growth is as strong as or stronger than in the U.S.” McGuinness sees value in broadcasting the made-in-Canada brand. “We’ve had clients that have been very successful, they do make the jump going into Asia just by having that on their label.”
With worldwide economic turbulence on the horizon, Finlayson calls for businesses to practise “resilience in the enterprise context of managing your balance sheet carefully,” perhaps by pulling back from major commitments. One of his worries is cheap credit. With companies and households making decisions on the assumption that low interest rates will last forever, Finlayson expects a painful readjustment if they return to normal historical levels. But in 2020, money will get even cheaper, he predicts.
On that note, now is the time for governments to build infrastructure, Yu says. Meanwhile, businesses could seize the opportunity to make capital investments that lower the wage share of their costs, he suggests. “Long-term, our view is that wages are going to go up significantly as we still have those labour shortages.”
The BC Chamber‘s Litwin thinks 2020 could be a year of readiness as well as resiliency for small and medium-sized companies: “You have to have a people plan because of the labour shortage, and you have to have a climate plan.” Lacking the resources and capital reserves of their larger counterparts, SMEs take longer to pivot, Litwin notes. “So entrepreneurs need to start having these conversations internally with their teams to prepare for the future.”