In its latest economic outlook, Central 1 also forecasts a shift toward services spending by consumers and tourists, along with more business investment
“Heading into year three of the pandemic, British Columbia remains in a relatively solid economic position, having weathered much of the challenges better than its provincial peers,” the report states. “We project that the economy expanded by 5 percent in 2021 after contracting 3.8 percent in 2020, while employment growth averaged 6.6 percent. Momentum carries into 2022 with forecast growth of 3.9 percent with ongoing rotation toward services-oriented demand from domestic consumers and tourists, and higher business investment. Housing is forecast to drag on growth following last year’s surge.”
The highlights of Central 1’s latest outlook:
• After expanding 3.9 percent this year, the provincial economy will slow in 2023 and 2024
• Higher commodity prices and inflation continue to boost nominal gross domestic product, but the trend slows
• Economic growth rotates toward services spending while capital investment remains supportive in 2022-24
• The housing market’s contribution to the B.C. economy turns negative after a blockbuster 2021
• The unemployment rate will slide below 5 percent, with population growth providing some cushion
• Risks persist, given COVID-19 variants and central bank rate hikes
One sign of the province’s economic momentum is a sixth straight monthly rise in employment for January, which contrasts with job losses elsewhere in the country, Central 1 notes.
“Although part-time employment has led growth, broadly, B.C. employment has climbed 2.4 percent above pre-pandemic levels and is tops for the recovery phase. This has intensified labour market shortages, and indeed the province may have already reached full employment with an unemployment rate at 5.1 percent, and near full recoveries in both the employment rate and participation rate.”
As the forecast points out, sectors connected to the knowledge economy and the housing market are thriving. For example, employment in the tech sector and professional services has grown 10 percent during the pandemic.
“Labour market indicators are well aligned with other key economic indicators, although the recovery continues to be uneven,” Central 1 says. “Some sectors have emerged unscathed or thrived over the past two years, while others remain demand constrained, ebbing and flowing with provincial and federal health restrictions and global tourism activity.”
Since the pandemic started, B.C. home values have surged almost 40 percent, Central 1 observes. New construction, renovations and transaction fees have boosted the economy as housing demand rises in smaller urban areas.
However, Central 1 forecasts that residential property will lose steam later this year. “While housing construction remains elevated, new construction falls back. Affordability erosion and higher interest rates are expected to drag housing transactions lower by 10 to 15 percent. Prices will likely track higher into the spring, but the rapid gains and frothiness increases the likelihood of a climbdown of up to 10 percent as rates rise and inventory moves up.”
Central 1 also expects some key themes from last year to persist in 2022 and 2023. “Consumer demand decelerates but remains elevated at 4.0 percent this year and 3.0 percent next year, buoyed by a rotation toward services while population growth accelerates sharply,” it says. “Inflationary pressures are a dampening factor. This will contribute to stronger recoveries in hospitality and other hard-hit sectors. This rotation is also evident in exports as tourism sectors will continue to recover from pandemic declines, although full recoveries could take until partway through 2023.”
Non-residential investment will grow through next year as business investment firms and major projects build out, Central 1 projects. “Commodity markets also buoy private investment,” the report says. “The provincial government is likely to experience a rosier revenue outlook given broad strength in the economy, incomes and royalties. A solid fiscal picture suggests room for the government to remain vested in elevated capital spending on health care, education and climate-proofing B.C.’s public infrastructure. A bigger question mark for the economy comes partway through 2024 and in the second half of the decade when major capital energy projects roll off without any clear investments to take their place.”
Of course, such forecasts have their limits, Central 1 stresses. “Undoubtedly as was the case through the pandemic, outlooks are fraught with risk,” the report concludes. “We are assuming no new variants upend the economy or are generally mild. Other risk factors include central banks that may be too enthusiastic in hiking rates as transitory factors roll off, slowing an economy more than required.”