Despite its current rigour, B.C.’s economy is still vulnerable through its ties to the U.S. and Asian markets, says a top Canadian economist.

Glen Hodgson, vice-president and chief economist of the Conference Board of Canada, told a Vancouver business audience last week that the province’s economic picture is generally bright.

“People in British Columbia should feel good right now because a lot of things are moving in the right direction,” Hodgson said during a speech at the Vancouver Board of Trade But he also warned that, as good as things are for B.C., which along with Alberta is one of only two provinces in the country to be in a surplus situation, the B.C. economy is open to outside influences. “The B.C. economy is so plugged into the American economy, but increasingly to the international economy, to the Asian economy,” he said.

The Conference Board’s most recent economic forecast shows that Canada is back in a period of “normal” economic growth, projected to be three per cent this year and up slightly to 3.2 per cent next year. In B.C., the manufacturing sector has recovered and construction – “which is going crazy right now,” said Hodgson – will return to more normal levels next year but then gradually strengthen as the 2010 Olympics draw nearer.

Conference Board chief economist Glen Hodgson spoke in Vancouver.

Hodgson said B.C. is also benefiting from positive inter-provincial migration. “Demographics are a positive driving force for economic growth,” he noted, and are forecast to be three per cent this year and 2.7 per cent next year in this province.

The Bank of Canada can be expected to head off the threat of inflation by raising short-term interest rates by almost two per cent between now and the end of 2005, he predicted.

“That’s not slamming on the brakes. That’s a return to normal,” Hodgson said. As a consequence, he added, housing starts will probably go down nationally, as people are no longer able to get five-year mortgage rates at under five per cent.

Hodgson said the strongest component of the Canadian economic outlook for the next two years is the purchase of machinery and equipment.

“Once you’ve controlled all the costs you can and you’re still in business, you then have to find ways to make yourself more efficient,” he said, and that means purchasing machinery and equipment with new technology.

The hardest thing to forecast right now is the exchange rate, Hodgson said, as strong commodity prices and oil prices are putting pressure on the dollar. He suggested businesses might want to have a “Plan B.”

“I think you would be more than wise to think about what your costs look like, what happens to market share, where you would be if the dollar began to stabilize at around 80 cents,” he noted.

Hodgson also said Canada has not kept pace with the free trade movement unlike other countries, such as Mexico, which have signed several bilateral trade agreements. “The more free trade you have the more opportunity you have to grow your business internationally,” he said. “We have to stretch our minds and think about freer trade with Asia and even with Europe, the way other countries are.”

Globally, the most important driving force is the emergence of Asia as a strong growth hub, which Hodgson said is especially important for anyone in the western part of North America, including B.C. “There’s a very fundamental transformation happening in how the world will be arranged going forward,” he said. “The China effect is not a passing fad. It’s going to be with us for the balance of our careers and our lives. We should start getting used to it right now . . . China is going to cause all of us to choose the way we operate, choose the way we think.”

The rise of the middle class in China, estimated at 200 million people today and forecast to rise to 400 million consumers, presents enormous opportunities, he added. But on the other hand, the rise of standardized labour and low-cost manufacturing being moved offshore to China is a big concern.

“You can see destruction going on in the U.S. economy. It’s happening in our economy as well,” Hodgson said.

But the biggest challenge to the world economy is the imbalance that exists between trade and investment globally, said Hodgson, who singled out the United States, which currently has a trade deficit close to $600-billion (US), while the major Asian economies are accumulating massive foreign exchange resources. Following his speech, Hodgson noted this imbalance is also a real concern for Canada’s trade sustainability with the U.S. “These numbers are so massive and it can influence everything in the world,” he said. “It would push up long term interest rates, short term interest rates, it would destabilize currency markets, it would interrupt capital flows and that would all slow global growth.”

(Jan Mansfield can be reached at jan@businessedge.ca)