Apr 27, 2009

Oh, about that recession …


BC’s recession started in 2008. That is the upshot of today’s release of Statistics Canada’s Provincial Economic Accounts, which provides the first estimates of BC’s GDP for 2008. Unlike national data, which are provided quarterly and on a timely basis, we have to wait about four months to tally the various provincial beans. These numbers will inevitably be revised in subsequent releases, so we should not take them too seriously, but this first pass is quite sobering.

Like most of the data coming out these days, this economic report card is worse than expected. We should think about hiding it from our parents. For starters, BC’s real GDP fell by 0.3% – not a big drop, mind you, but the first actual fall in provincial GDP since 1982. Most observers now expect declining GDP for 2009, but a drop in 2008 is very much a surprise.

In the 2009 BC Budget, tabled just two months ago, economic growth for 2008 was estimated at 1.0%, slightly lower than growth of 1.3%, the average estimate of the Economic Forecast Council. This tells us yet again that our forecasting has been too biased toward good times, and we are not developing economic plans or fiscal policies with contingencies for bad times (that we hope will not materialize). The esteemed EFC did not even see a recession in 2009 as late as last Fall, and the BC government seems to have been equally delusional.

In 2008, the whole goods-producing part of the economy, i.e. the export sector, basically fall apart. That forestry got killed is probably of no surprise to anyone living in the Interior. Resource-based industries showed downward movement across the board, including a drop of 15% in forestry, agriculture and fishing. I’ve pasted Statscan’s summary below.

BC’s economy is facing a double-whammy: a demand shock as export markets to the US and Asia drop simultaneously (in 1998, it was just the Asian engine that sputtered); and a supply shock arising from the rapid drop of commodity prices, meaning it costs BC more in exports to buy the same amount of imports. On the way up, these forces, strong demand in export markets and rising commodity prices, essentially made a big part of BC’s boom overall, and almost all of it outside Vancouver, Victoria and Kelowna.

The other shoe to drop in 2009 will be the construction sector. In 2008, construction was a source of growth, up more than 4%. With the sharp drop off in new building permits and construction starts, this sector will turn negative in 2009. In employment terms, consider that there were about 235,200 employed in construction at its peak last summer. By March this number had already dropped to 187,800. This pattern will have huge ripple effects throughout the rest of the economy. It bodes ill, for example, for retail trade, which plummeted to 0.6% growth in 2008 (though still positive) from 7% the year before; more unemployment and broader consumer retrenchment will lead to a decent drop in 2009.

All of this reinforces my concerns that the economy is in worse shape than either the NDP or the Liberals are willing to admit on the campaign trail. We need to press our prospective leaders in the next two weeks on what their economic plan is, and how they are going to handle a much larger deficit than what was projected at budget time. Is either prepared to run the types of large deficits that will be needed as the economy worsens (tip: appeals to the Bank of Canada to puchase provincial debt should be made loud and vociferously, as the Bank contemplates a new round of unorthodox monetary policy measures).

This has relevance for another storyline in the GDP statistics: the growth of the public sector. BC’s GDP performance would have been deeper in the red had it not been for 3% growth in education, health care and social services, and almost 4% for public administration. In times like these, when consumer spending, business investment and export markets are down, the only major sector that can step up is government. In 2008, the BC government leaned against those headwinds – but this is in hindsight, the government thought the wind was still at its back.

In 2009, with the storm gaining strength, the lesson is that the government must do more, not less, to avert a major drop in economic output. The meme of BC “living within our means” and the excessive attention paid to keeping the deficit small (and returning to budget balance within two years) are contractionary ideas that will make the economy worse in 2009. That attitude has already settled in in Victoria to some extent, but could get worse. Making large budget cuts to “share the pain” is exactly the wrong thing to do right now, and is the type of move that turns recessions into depression.

Anyway, here is the blurb for BC from the official publication:

The effects of a sharp drop in output of the forestry industry (-18%) rippled through the economy. The decrease was triggered by a slowdown in housing construction in the U.S. combined with a high Canadian dollar in the first half of 2008. Forestry-related manufacturing, including sawmills and paper manufacturing, posted large declines. Affected by these declines, the wholesale industry contracted while transportation and warehousing services remained flat. With economic activity slowing, demand for energy was also affected. The output of utilities was down 4.0%.

Exports fell 6.8% following a small decline in the previous year. The 2008 downturn was largely due to a drop in lumber products.

Output in the mining sector was down as oil and gas extraction and metal ore mining reduced production. However, with prices high, especially for commodities such as coal and natural gas, revenues poured in. This income helped to offset the losses in the forestry sector and corporation profits registered a small gain in 2008.

After a decline in 2007, construction grew again in 2008. Business investment in non-residential structures picked up with projects related to oil and gas extraction and electricity generation. Government capital expenditure increased 0.3% after a cumulative gain of 80% over the previous six years. Housing starts fell off putting a damper on housing construction. Investment in residential construction declined 4.1%.

Growth in personal spending decelerated in 2008 to 2.8%. This was the slowest growth since 2001. Purchases of durable goods fell as sales of cars and trucks declined.

Labour market conditions stayed strong. Labour income increased 5.6%. This pace was well above the national growth rate but below the British Columbia average of the previous five years. Employment advanced 2.1% while the unemployment rate edged up to 4.6%.

The slowdown in the economy was also experienced in the service industries. Only health and public administration grew more quickly than in 2007, benefiting from government expenditures on goods and services, which advanced at a similar rate as in the previous year.