Top One Hundred Overview 2005

Robin Brunet | | Published: July 01, 2005 Top 100

What happened? In short, B.C. had one hell of a year. Commodity prices soared, exports grew, construction exploded, the tech industry went on a hiring spree, biotechs were a magnet for cash and being on the Pacific Rim never looked better.
The only question: can we keep it up? Let’s look at the numbers...

The provincial elections are now a memory and in this perpetually polarized corner
of the country, we were divided as usual. Ironic, then, that when BCB compiled this assessment of year 2004 in early May, the only people who weren’t overly concerned about politics were economists -- regardless of their personal ideology. That well-known gadfly to the socialists, Jock Finlayson, stares out of the Business Council of B.C. boardroom window and explains: “I think we’ve created so much forward momentum in the economy that it won’t be derailed by anyone in Victoria.” Marc Lee, economist for the left-leaning Canadian Centre for Policy Alternatives (CCPA), agrees: “Politicians don’t have much of an effect on our economy, broadly speaking. We’re really at the mercy of external forces.”

And external forces ranging from low interest rates in the U.S., to the ravenous trade behemoth of China, helped make 2004 yet another year in which B.C. achieved almost across-the-board gains. Single-digit unemployment, a significant rise in exports, massive construction activity and even a modest rebound in tourism (revenues of $9.2 billion versus $8.9 billion in 2003) are some of the factors that compel Finlayson to indulge in momentary self-congratulations for having correctly predicted 2004’s economic course the year prior. His bird’s-eye viewpoint: we are
making a healthy comeback from 9/11, the tech debacle and onerous resource regulations. Not red hot, but healthy.

“The official figures won’t be released until May,” says Finlayson, “but according to our
calculations it looks like our real GDP growth was four per cent compared to Canada’s total of only 2.7 per cent, meaning this is the second year in a row we’ve beaten the rest of the country.” How did we beat it? Partly due to an 11-per-cent jump in export growth, which was fuelled by a worldwide demand for commodities and favourable commodity prices. Manufacturing shipments, meanwhile, enjoyed a 13.5-per-cent growth.

“Resource export levels were particularly strong,” says Finlayson, reviewing figures culled from Statistics Canada. “Tree harvesting was accelerated in 2004 because of the pine-beetle infestation scare. Mining activity was up: a record high of 1,277 wells were drilled in 2004 compared to 1,100 in 2003, and total exploration spending reached $130 million. Even a few new mining projects and old mines are coming online.

“But the real surprise was a sharp surge in coal prices that resulted from

a strong demand in Asian countries for metallurgical coal used in steel production. The industrialization occurring in China is relentless, to the point where they’ve completely outstripped their domestic supply of metallurgical coal.”

Lumber prices were high in 2004, thanks to massive U.S. housing starts, which in turn were spurred by low interest rates. “Plus, we’ve got a lot of cost-competitive lumber producers in the Interior of B.C.,” continues Finlayson, “so these factors helped us surmount the negative effects of the softwood dispute and the strong Canadian dollar.”

Export activity wasn’t totally rosy, however. Finlayson characterizes pulp and paper as “under stress” due to the strong loonie: “Frankly, pulp producers are sucking wind but once again we have China stepping in as a burgeoning pulp importer, so that will help. By how much, we’ll have to wait and see.”

By far the worst-performing export sector in 2004 was the film industry, which insiders say will post revenues of less than $1 billion compared to more than $1.4 billion in 2003. Finlayson dissects the problem: “Our film production, which is L.A.-driven and therefore an export of sorts, is not hugely significant in terms of GDP but it’s much more labour intensive than most resource industries, so if it disappeared tomorrow, you’d feel its negative effect throughout the Lower Mainland.

“Film in 2003 enjoyed a record year of spending but in 2004 it took an awful hammering with a 30-per-cent drop in spending. Let’s face it, we may have great crews and infrastructure, but the core reason Hollywood comes here is our favourable exchange rate and this, of course, has radically declined.”

Finlayson adds that although Gordon Campbell’s tax incentives for film producers were well intentioned, they were matched, and in some cases surpassed, by incentives offered by other provinces and states.

As with tourism, Finlayson doesn’t exhibit much enthusiasm about film-industry economics; the mere mention of tax incentives triggers a brief rant. “Film is the ultimate footloose industry – B.C. and the feds cover 25 per cent of its total labour costs just to keep business thriving. But why? What other industry enjoys such perks? The only reason is pizzazz, the sex appeal of Hollywood. I’ve said so in the past and been roundly criticized for doing so.”

Discussion of such a labour-intensive sector naturally leads Finlayson to a general overview of the 2004 job market. “Job market growth was very strong and, despite the claptrap spouted by the B.C. Federation of Labour, we’re talking about good, solid, full-time jobs that were created. It’s the first time in many years that we’ve achieved single-digit unemployment and for 2004 this applies to all regions of the province save for the northwest sector.”

Finlayson’s optimism is persuasive and for the most part his colleagues on the left agree that 2004 was another year of economic recovery. But the CCPA’s Lee is not as enthused by the single-digit unemployment rate which hovers at 7.2 per cent: “A
substantial portion of that figure is due to the flurry of construction triggered by low interest rates and the 2010 Olympics, and my concern is it can’t last. Also, unemployment is calculated by the total number of unemployed people divided by the number of people in the labour force, and this formula is prone to all sorts of weird fluctuations.

“Most economists prefer studying the employment rate, which is the total number of employed people divided by the total population. This is a far more reliable indicator of what’s going on in B.C. And on this score, our total employment rate in 2004 was only 60.8 per cent. Even Saskatchewan hovers around 64 per cent and Manitoba at 65 per cent.”

Lee continues to rain on Finlayson’s parade. “Also, our average hourly wage dropped slightly to $18.99 compared to $19.08 in 2003. This is troubling, considering construction and other activities are so brisk.”

Business consultant and columnist Bill Tieleman, who is Lee’s ideological brethren, nods politely at Finlayson’s take on the economy. Politely, yet briefly. “Yes, 2004 was more favourable than previous years, and thank God for China and low interest rates,” notes Tieleman. “But we weren’t exactly stellar in our own governance. In fact, we were given a huge bailout – in excess of $1 billion – by Ottawa due to our poor performance [Tieleman refers to the federal health-care transfer payments made last year]. Plus, Gordon Campbell in his 2002 budget created 15 new taxes and tax increases in order to grab another $1 billion.

“So despite the spin made by Liberals, Liberal-friendly economists and the business community about how fantastic we’re doing, the reality is quite different.” Finlayson, Lee and Tieleman are well-educated and respected men but despite their admission that government influence over the economy has been vastly overstated, it doesn’t take much to get their partisan blood boiling. Worse, they have an unsettling talent for using the same statistics to paint starkly contrasting portraits of B.C.’s health. Are we on the upswing or stuck in the mire?

Jason Clemens, director of fiscal studies for the Fraser Institute, attempts to clear the mud: “Let’s address the employment rate as Marc Lee defines it. Taking the total number of employed people in B.C. and dividing it by the total number of people living in this province is a brutal way of analyzing the job market, simply because you have to include our aging population and the fact that B.C., much more than any other province, attracts people who come here specifically to retire, not work. It’s much more fair to focus on the unemployment rate as Finlayson has done, because it explains the number of people who are willing and able to seek employment, people who are unable to gain employment and people who have simply stopped looking.”

Fully aware that he too will be branded as a big-business shill, Clemens blazes fearlessly onward, accusing Lee of distorting the ramifications of B.C.’s average hourly wage. “The $18.99 figure he quotes does not include other benefits provided by employers. Also, in terms of pure hours worked, we worked less than residents of Alberta, Ontario and other provinces, and this has a substantial income effect.

“Furthermore, we’re in the midst of structural economic reforms in which people are forced out of high-paying resource jobs and finding employment in lower-paying sectors. Our continued migration from rural areas to urban centres also means people work for less wages. It doesn’t mean they’ll never achieve desirable earning power; it just means they’re starting over.”

All this sparring occurs behind Finlayson’s back. In the quiet of the Business Council of B.C. boardroom, he merely delivers information to a nosy reporter who in turn knows who to contact afterwards to raise blood pressures. Therefore, Finlayson’s optimism is undaunted as he analyzes the domestic side of the economy: “Once again, we made a very strong showing. Retail sales were up by eight per cent or a record $45 billion. This is huge considering retail employs over 200,000 people and is a massive source of government revenue.”

Then again, 2004 saw B.C. losing several notable companies to mergers and acquisitions, including Creo, Radical and OctigaBay. “But my impression is that the M&A picture is quite nuanced,” says Finlayson. “True, some notable B.C. technology companies were acquired by out-of-province buyers, but on the other hand, the B.C. operations of one major U.S.-owned forest company, Weldwood of Canada, were bought by Vancouver-based West Fraser Timber. More recently, Canadian conglomerate Brascan agreed to buy a number of the coastal mills, harvesting rights and private timber lands owned by U.S. forestry giant Weyerhaeuser. In addition, a few B.C. technology companies, including QLT, have been buyers of U.S. businesses in the past 12 to 18 months. So the point is that M&A activity involving local businesses in 2004 was more of a two-way street, not simply a one-way process of U.S. buyers taking over companies based in B.C.”

In his strangely compelling, clipped manner, Finlayson moves on to other issues: "Residential housing starts [33,000 starts according to Stats Canada] and house resales were white hot; this has been a big engine of economic growth for the past three years.” To the tune of $9.4 billion in related spending and the creation of more than 78,600 jobs since 2001, in fact. “Non-residential building permits were up by 10 per cent. Population growth and low interest rates are the causes. Also an overall confidence in the future thanks partly to the advent of the 2010 Olympics. The Olympics is having a massive, positive psychological effect on people.”

Finlayson predicts that when 2004 final figures are in, they will show modest gains for the high-tech sector (although official data was not available, insiders say there were more financings done and more dollars going to more tech companies in 2004 than in the previous two years combined). “High-tech is really a boom-or-bust industry and because it’s something that fundamentally changed society the way electricity and automobiles did, we will never again enjoy the enormously inflated figures generated during the 1990s.”

However, Finlayson smiles favourably upon one tech sector: “B.C. really excels in
biotech. Performance was strong across the board and should continue to grow for the rest of 2005.”

Indeed, there was no end of good news in 2004 for the biotech sector. In March, for example, Victoria-based Aspreva Pharmaceuticals Corp. struck the second-largest life science venture capital injection in Canadian history – US$53 million in venture capital funds and US$4.2 million in converted debt. Smaller deals, such as Inimex Pharmaceuticals’ announcement of $6 million in financing, were plentiful. ID biomedical upped its vaccine capacity via new marketing and distribution agreements and QLT, one of Canada’s largest biopharmaceutical firms, maintained an aggressive stance by purchasing Atrix Labs and continuing to advance clinical trials. But there is a caveat to Finlayson’s pink-hued views. He hesitates before adding one warning: While we’re talking about boom or bust, all this economic expansion we’ve enjoyed underlines for me just how critically dependent we remain on resource industries.

There’s still a strong boom-or-bust element to our economy and there will always be wild price swings. With this in mind, I don’t think 2005 will be as strong as 2004. Interest rates will inevitably climb – we’re already seeing it stateside. And the rate of growth in North America as well as around the world will be somewhat lower, in the neighbourhood of 3.5 per cent compared to 4.5 per cent in the U.S. and four per cent compared to five per cent globally.”

So why was Finlayson, a strong supporter of business reforms enacted by the Campbell government, so blasé when the reins of power in Victoria were still up for grabs and some quarters were predicting a solid NDP showing? “Don’t get me wrong, I just finished saying that consumer confidence plays a vital role in economics and the outcome of any provincial election in turn has an impact on confidence. Plus, B.C. has a history of wild political pendulum swings and policy making that is unheard of elsewhere, the factors of which affect our productivity.”

The economist pauses, stares into space and shrugs. “But we’ve built enough momentum to keep going, certainly through the lead-up to 2010. We’re only constrained by our infrastructure, which is why our major seaports are currently being expanded in order to keep pace with exports to China.”

The ever-amiable Lee becomes somewhat muted when he looks ahead to the remainder of 2005 and beyond: “So much of our fortunes revolve around what happens in the U.S. and I see a huge cloud on the horizon stateside in the form of a gargantuan imbalance in international payments. The U.S. is borrowing hundreds of billions of dollars a year to try and close the payment gap, and if several of the big institutional investors and Asian banks that buy U.S. treasury bonds and assets decide to stop doing so, that will trigger a huge decline in the U.S. buck. And at the very least that could mean an end to the housing boom, which would be terrible news for our export trade.”

Tieleman shares these concerns. “You can’t have a boom without a bust, and the U.S. is so overextended and immersed in the Iraq quagmire that their economy is bound to decline.”

Predictably, Clemens is of contrary mind: “If you look at yield curves and study rising and falling trends, you can’t detect any huge inflationary risks on the horizon that would spike inflation or cause interest rates to spike. It’s impossible to predict these things over such a short timeframe. Quite frankly, when economists ruminate about ‘bursting bubbles,’ I don’t think they know what they’re talking about.”

This remark provokes a reaction from Tieleman that draws a curtain on any further speculation. Laughing, he concludes: “So much of economic analysis and speculation is a spin, really. That’s why I’m a political scientist. I don’t practice the dark science of economics!”

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