Ken Peacock Director Economic Research

1. Ken Peacock Director Economic Research BC Recovery Continues Amid Greater UncertaintyPresented to: Canadian Association of Equipment Distributors, BCApril 7, 2011

2. A Few Global Themes for 2011 2 • Emerging markets driving global growth • US recovery accelerates • additional monetary easing (QE2) and accommodative US gov’t fiscal policy • Crisis continues to unfold in Europe (sovereign debt and banking system) • Middle East turmoil creates a “new” geo-political risk • Commodity prices stay high • food, fuel, minerals/metals, potash, etc. • Some emerging markets (esp. China) struggling to manage inflation • Global economic rebalancing will continue (a multi-year process) • Earthquake and tsunami in Japan

3. World Economic Forecast 3 Source: Scotiabank Global Economic Research, April 1, 2011.

4. China Looming Larger 4 • World’s #1 exporter • Surpassed Japan as the second biggest national economy • Accounts for 12-15% of global imports • Largest foreign currency reserves ($2.5 trillion US) • In most years, #1 destination for inbound direct foreign investment • Biggest global consumer of coal, steel, copper, cement, iron ore, aluminum, etc. • Has eclipsed the US as the world’s largest market for new vehicle sales

5. US Near-Term Prospects Brighten 5 • Most forecasters now expect growth to exceed 3% in 2011 • 2010 fiscal and monetary policy actions expected to add one percentage point to growth this year • Consumer spending is gaining traction • Business investment on the rise • low interest rates, strong balance sheets, impact of federal tax incentives • Housing markets remain weak • housing starts climb to 680,000 this year, up from 590,000 in 2010 • prices falling again in many urban markets • Longer term, US faces huge fiscal problems – but these don’t matter much in 2011

6. US Job Picture (finally) Improving 6 Source: US Bureau of Labour Statistics, seasonally adjusted. Latest: March 2011

7. But an Unusually Deep and Slow Recovery 7 Source: Calculated Risk.

8. Slow Recovery – US Home Building 8 Source: US Bureau of Labour Statistics, seasonally adjusted. Latest: January 2011

9. US 14,256 China 8,888 Japan 4,138 India 4,752 Germany 2,984 Russia 2,687 UK 2,257 France 2,172 Brazil 2,020 Italy 1,922 China 59,475 India 43,180 US 37,876 Brazil 9,762 Japan 7,664 Russia 7,559 Mexico 6,682 Indonesia 6,205 Germany 5,707 UK 5,628 Global Balance of Economic Power is Shifting Ten Biggest Economies (US$ GDP, billions)* 20092050 * Measured in constant 2009 US dollars, at purchasing power parity exchange rates Source: PWC, The World in 2050 (2011).

10. But…Don’t Underestimate the United States! 10 GDP Per Capita, 2010 US$, measured at purchasing power parity) • Despite its recent troubles, the US remains the richest nation among the main advanced economies, with a per capita GDP 20% higher than Canada’s. Source: Economist Intelligence Unit.

11. Canadian Picture 11 • Upward revision to Canadian growth for 2011 reflects improved US outlook and strength in commodities • Growth stronger in the West and Newfoundland • High household debt a worry • Canadian housing markets flat in 2011 • Total employment almost back to pre-recession peak • …but private sector jobs still below previous high • Policy interest rates to rise in second half of 2011 but will stay low • Government fiscal restraint will start to weigh on growth • Canadian dollar also weighing on exports

12. Canada/US Comparisons 12 Source: IMF, World Economic Outlook.

13. Canadians Becoming Enthusiastic Borrowers 13 US Canada Source: TD Economics.

14. Interest Rates Will Move Higher 14 forecast Source: Bank of Canada, Scotiabank Economic Research and TD Economics for forecasts.

15. Surging Loonie Re-Shaping the Competitive Landscape 15 forecast Source: Bank of Canada, TD Economics & RBC for forecasts.

16. Canadian Economic Outlook 16 Source: Scotiabank Global Economic Research, April 1, 2011.

17. BC Background 17 • Economy recovering from 2008-09 downturn (but mixed) • Brighter US outlook is positive for 2011 • Asia providing a welcome lift • Some pluses/differentiators for BC vs Canada… • gateway economy (esp. important to Metro Vancouver) • commodities (coal, minerals/metals, pulp, lumber is picking up) • in-migration and population growth foster ongoing demand for housing and consumer goods/services • relatively solid fiscal/tax setting • less dependent on US than other provinces

18. (Very) Modest Job Rebound 18 1.7% job growth in 2010 Source: Statistics Canada. Latest: February 2011

19. 16,500 more jobs in the public sector than in July 2008 63,000 fewer jobs in the private sector than in March 2008 Private Sector Employment Lagging 19 Source: Statistics Canada. Latest: February 2011

20. Consumers Hesitant to Spend? 20 Source: Statistics Canada. Latest: January 2011

21. Housing Sales Picking Up, but Still Soft Source: CREA. Latest: February 2011

22. Housing Starts Flat 22 Source: Statistics Canada. Latest: February 2011

23. Construction Activity Easing 23 Source: Statistics Canada. Latest: January 2011

24. Exports Climb…After Slumping in 2009 24 24 % decline Source: BC Stats. Latest: January 2011

25. Resources Dominate BC’s Exports 25 Source: BC Stats.

26. China and Other Markets Driving Export Growth 26 Source: BC Stats. Latest: January 2011

27. China Buying More Wood! 27 Source: Statistics Canada.

28. China Buying More BC Pulp Than the US 28 Source: Statistics Canada.

29. Little Improvement for US Wood Sales 29 Source: Statistics Canada.

30. BC Growth Eases Slightly 30 BC Economic Forecast – BCBC Source: Business Council, Statistics Canada for history.*estimates

31. HST 31 • Reduces business costs (almost $2 billion) • lowers the cost of investing in machinery, equipment, structures, technology, etc. • improves competitive position of exporters • Decreased compliance costs – single tax system • More efficient tax • avoids cascading tax effect of PST • a more stable and growing tax base • $1.6 billion in “transition” funding from Ottawa • A few sectors adversely affected • Business savings passed on to consumers

32. Equipment Sales: Reasons for Optimism 32 • Business investment poised to rise • Transportation sector – Gateway activity • Mining industry expanding • construction / pre op: Mt. Milligan, Copper Mountain, Quintette • final permitting: Tusequah Chief, Kitsalt, Red Chris • Forestry: pulp prices strong; lumber exports growing • Agriculture exports – steady growth • High level of major project investment ($62 billion underway now) • Selected projects: Rio Tinto Kitimat expansion, Kitimat LNG terminal, Highway 37, transmission lines, Site C, IPPs • Sustained levels of immigration / population growth

33. Risks and Negative Factors 33 • Strong Canadian dollar is impinging on the competitiveness of trade-exposed industries and contributing to current account deficit • Uncertainty over HST • High household debt burdens • Recent job market wobbles / soft domestic economy – blip or trend? • End of government “economic stimulus” • Escalating energy costs (fuel, electricity), geopolitical instability

34. 34 Summary and Key Messages • Global economy growing at a reasonable pace • led by emerging economies • US near-term growth prospects have improved, but housing recovery will be slow • balance of power / economic growth shifting • BC economy is in decent shape • average growth over next couple years • export sector stronger, domestic side softer in 2011 • resource industries remain important • Sound fiscal setting (both federal and provincial), although spending restraint a drag on growth • BC is positioned to succeed, but deliberate and proactive policy work is necessary