ICBA Chief Economist Jock Finlayson has just released a mid-year update on economic conditions in Canada, with a specific focus on British Columbia and Alberta. The analysis is sobering. By most measures of economic performance, Canada has been losing ground relative to peer jurisdictions. This is starting to show up not only in the economic domain, but also in areas like declining housing affordability, a faltering health care system, and challenges on our streets and communities. This report offers insights that are important for strategic planning, long-term forecasting, and business development.
I encourage you to read this piece, recognizing that with our abundant resources, preferred geographic location, and talented workforce, Canada and all our provinces can and should be doing better.
– Chris Gardner, ICBA President
By Jock Finlayson, ICBA Chief Economist
Economic developments have unfolded largely as we predicted in our end-of-2023 outlook and 2024 forecast. Global economic conditions remain choppy, with overall growth a bit stronger than expected when the year began. Canada’s economy continues to underperform amid still-high borrowing costs, rising numbers of financially wobbly consumers and businesses, stagnant productivity, and weak private sector investment.
Of particular concern, per capita economic output (real gross domestic product per person) is still falling in Canada and now sits about 3% below the level recorded back in 2019. In the last decade, this basic measure of prosperity has basically flatlined – an unusual and alarming picture. We have lost significant ground – not just compared to our own history, but also vis-à-vis the United States, where per person GDP climbed by 7% over the same period.
Canada’s well above-average population growth has played a key role in dampening gains in per capita GDP. Most advanced economies have population growth rates between 0 and 1% per year; Canada’s population jumped by a head-spinning 3.2% in 2023 and is set to climb by around 3% this year. Last year, Canada added a city the size of Calgary to its existing population.
Because output is growing more slowly than the number of Canadian residents, GDP and income per person are trending lower, against the backdrop of an essentially moribund national economy. Canada is failing to translate immigration-fueled population growth into improvements in living standards, average real incomes, or business dynamism.
The good news is that inflation is easing. After surging almost 7% in 2022, the all-items Consumer Price Index (CPI) increased by a more moderate 3.9% (annual average) last year. For 2024, RBC Economics predicts a further drop, to 2.4%. Decelerating inflation is setting the stage for lower interest rates, with the Bank of Canada delivering an initial cut in its short-term policy rate in June. This suggests the conditions may be in place for a much-needed pickup in economic growth over the next year. However, Canadians will continue to face the legacy of higher prices for many goods and services after the inflation scare of 2021-23. Figure 1 shows the cumulative increase in prices for several items included in the CPI over the five years ending in April 2024.
Figure 1
RBC Economics sees Canada’s real GDP expanding by a tepid 1% this year, on the heels of an equally underwhelming 1.2% advance in 2023. But like other forecasters, RBC projects an acceleration in economic activity in 2025, with real GDP growing by 1.8%. This modest turnaround will be supported by lower interest rates, a stronger housing sector, and the growth-augmenting effects of a cheap Canadian dollar. That said, Canada is staring at serial declines in GDP per person over most, if not all, of the 2023-25 period. As a result, we are set to fall further behind the U.S. on this core indicator of economic success.
Sluggish B.C.
Current economic conditions in the two western-most provinces are a picture of contrasts. As of mid-2024, Alberta is leading the country on several performance metrics, while B.C. is lagging. That said, last year B.C. did manage to outpace its neighbour in economic growth, with real GDP edging ahead by 1.6% vs. 1.5% in Alberta. In part, this reflects significantly faster growth in public sector spending and hiring in B.C. – something that can juice the economy, but not for long. It is also due to a normalization of energy markets last year, following sharp increases in oil and natural gas prices in the wake of Russia’s invasion of Ukraine in early 2022. (In 2022, Alberta’s economy grew by a hefty 5% vs 3.8% in B.C.) This underscores the fact that although Alberta’s economy is diversifying, energy still dominates the province’s export portfolio and occupies a central position in its broader industrial mix.
Both provinces have seen outsized population growth over the past three years, driven by fast-rising immigration and – in Alberta’s case – soaring net in-migration from other provinces, including B.C. (Last year, about 35,000 people left for B.C. for next-door Alberta, even as B.C.’s overall population continued to increase due to international in-migration.)
In 2024-25, economic growth in B.C. will be dampened by subdued consumer spending as debt-burdened households pull back on discretionary expenditures. British Columbians, saddled with the heaviest debt loads in the country, have been disproportionately impacted by higher mortgage and other borrowing costs over the last two years. ICBA Economics estimates that $375-400 billion of residential mortgages will need to be re-financed in B.C. over 2024-26, in most cases at higher mortgage rates. This is sure to crimp consumer spending.
B.C. retail sales actually fell in nominal terms last year – a worrisome development at a time of above-average population growth and still-elevated inflation. Consumer spending will stay notably soft in 2024 before posting an underwhelming rebound in 2025.
British Columbia’s merchandise exports have been trending lower on a year-over-year basis, after hitting record highs in 2022. Fortunately, exports should get a lift in 2025 as LNG production comes on-line and lumber and other commodity prices tick higher.
B.C.’s job market should continue to chug along, bolstered by a still-expanding public sector, pockets of strength in the private sector economy, and a growing population. However, the frenetic pace of public sector hiring in recent years is unsustainable. Moreover, the province’s unemployment rate has been moving higher and is expected to rise further over 2024-25 as labour force growth outpaces net job creation.
Capital spending is an area of economic weakness for B.C. The construction phase of four major energy-related projects – totalling cumulative capital spending of almost $100 billion – is now winding down, removing what had been an important source of economic and job growth over the past seven years. B.C. does not have another $100 billion of large projects to fill the gap. There is some upside potential in energy – including additional LNG projects – and mining, but overall non-residential investment will be hampered by a deteriorating business climate, high land, space and construction costs, and mounting challenges in accessing Crown land and resources in a province where the government controls what happens on 95% of the land base.
Finally, recent developments in B.C.’s public finances are troubling. The NDP government is planning for a string of large operating budget deficits along with a costly capital spending plan. The net result is an historic rise in the province’s net debt-to-GDP ratio over the next few years – a trend which has already prompted the downgrading of B.C.’s credit rating. The yawning gap between provincial spending commitments and revenues suggests the current government will likely impose sizable tax hikes if it is returned to office in the October 2024 election – a prospect that may have a negative effect on business and consumer confidence.
As Figure 2 shows, the B.C. economy – increasingly reliant on an expanding public sector to keep afloat – will lag Alberta’s (see next section).
Figure 2
Alberta Better Positioned
The outlook is considerably brighter in Alberta, with the economy poised to kick into higher gear after a generally sluggish 2023. Importantly, household and business costs are less strained than in B.C., and government policies pose less of a headwind to private sector investment and business expansion. This makes Alberta a relatively more attractive location for people to live and in which to operate and grow a business.
Alberta’s energy output is setting new records as oil production and exports ramp up, bolstered by the completion of both the Trans Mountain Pipeline expansion as well as previously sanctioned oil sands projects. The start-up of LNG production in British Columbia will provide a further boost to the province’s energy sector.
Unprecedented inflows of people from international and Canadian jurisdictions have lifted economy-wide spending and spurred demand for housing as well as commercial and industrial space. Alberta resembles B.C. in this respect, but its demographic growth is even more pronounced – in the year ending July 2023, the province added 184,000 residents, equivalent to an annual growth rate of 4.1%. Population growth is likely to slow somewhat from this blistering pace in 2024-25 but remain higher than the national average.
ATB Economics predicts a “jump in residential investment this year as the construction industry struggles to keep up with soaring demand.” Looking at capital spending broadly, the Alberta government counts some $154 billion in projects either at/very near completion or underway across multiple economic sectors, including upstream energy development, downstream energy-based industrial activity (e.g., the huge Dow Canada petrochemical project), “alternative” energy (e.g., hydrogen, carbon capture/storage), transportation and logistics, manufacturing, agri-food, multi-family residential construction, and the public sector.
As always, oil and natural gas prices and trends in global and North American energy markets will significantly shape Alberta’s economic prospects going forward. For now, oil prices remain “constructive” for the province, according to ATB Economics, while natural gas markets have been weaker over the last 12 months. Looking ahead, natural gas production will benefit from the start-up of LNG production in B.C. ATB Economics projects the volume of Alberta’s oil and gas exports will rise by 5% this year and by 3% in 2025.
Finally, Alberta’s relatively healthy public finances are another positive. The province is avoiding operating deficits and is keeping the debt/GDP ratio in check, supported by substantial revenues generated by the large energy sector. Unlike in B.C., residents and business owners in Alberta have little reason to fret about the risk of major near-term tax increases to close a record provincial government budget deficit.
Figure 3 summarizes our outlook for the Alberta economy, which should be among the top-performing provinces in the next two years.
Figure 3
For more analysis from Jock, please watch www.icba.ca/economics, our ICBAIndependent.ca news portal, or our ICBA social media feeds (Facebook, LinkedIn, Instagram, Twitter).
