British Columbia’s economy is on the verge of a years-long slowdown after a remarkable run over the past four years, when the economy expanded by over 3.5% annually.
According to a report released today by Central 1 Credit Union, growth will slow to 2.9% this year, then an average of 2.7% in 2019 and 2020, before further falling to 2.3% in 2021.
‘Housing sales have plunged’
Although recent provincial government policies and the tightening of the mortgage lending policy have slowed down the housing market, residential investment still remains as a major growth driver in 2018 due to high levels of construction activity.
Housing starts reached a record in 2017, but there is an expectation that there will be a “mild” full-year decline for 2018.
“Housing sales have plunged this year, with BC experiencing the steepest decline among provinces since January,” reads the report, adding that sales have “likely bottomed” after a 30% plunge in volume and are expected to remain slow into 2019.
“This follows the implementation of federal mortgage stress tests and higher interest rates, as provincial measures further curtailed demand. Credit constraints have lowered purchasing power, causing some buyers to lower their property expectations or delay purchases, while others have been priced out.”
Spending on new home construction and renovation projects are the largest contributors to residential investment and, effectively, overall economic activity.
However, because projects are now taking longer to sell, the pace of future construction starts could slow down. The report predicts they will fall to 4% in 2019 to 39,800 units and then 37,500 units by 2021.
“Residential investment will be negative in both 2019 and 2020 despite growth in renovation demand,” the report reads.
But construction-related businesses are still investing in machinery and equipment to increase their capacity in response to strong domestic demand, including government-funded projects such as Metro Vancouver’s transit expansion, the Site C hydroelectricity dam, and the new Pattullo Bridge.
20,000 vacant job positions in BC
The province’s poor labour market is also stifling economic growth potential, not because there is a shortage of job openings but because there is a severe labour shortage.
Job growth expanded by 3.7% in 2017, which was the strongest since 1994, but average growth is expected to only reach 1.1% this year. The employment trend has been described as “ice cold” since the second half of 2017, and this past June the year-over-year growth dropped to the negative digits for the first time in five years.
Even though the unemployment rate in BC is up from 2017, at about 5%, it is still the lowest in the country, and unemployment rates in the province are lowest in Metro Vancouver and Vancouver Island.
To attract workers burdened by the housing affordability crisis, businesses have been hiking up their compensation. In fact, average hourly wages in BC have grown by about 6%, which is double the rate of growth than the rest of the country.
There are currently 20,000 vacant job positions in BC – an increase of 35% from a year ago during the first quarter, creating the highest job vacancy rate in the country at 4.2%.
“While there are pockets of labour market weakness, the recent employment lull likely reflects deepening labour shortages. Most industries are in expansion mode, and the economy is operating at near full capacity,” reads the report.
“Insufficient labour supply, and mismatch of skills means employers are contributing to upward wage momentum.”
Migration from elsewhere in Canada falls
Net migration into BC from other areas of Canada has fallen, likely due to the rebounding economy in Alberta and other provinces, even though there are plentiful job opportunities and rising wages. Net interprovincial migrants are forecast to reach 2,700 people in 2018, down from over 16,000 last year.
But net international immigration is expected to surge to 49,200 people this year – up from 36,700 in 2017.
“Integration of new immigrants into the labour market requires more time than migration flows from other provinces, while the surge in non-permanent residents largely reflects an increase in student population and refugees, which may be contributing to the lacklustre expansion of labour supply,” continues the report. “Nonetheless, population growth remains a solid driver of consumption and housing demand.”
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