Commodity prices will determine the rise - or fall - of the B.C. and Alberta economies this year, say economists who participated in a recent Vancouver Board of Trade economic forum.

"Our achievement forecast is predicated on commodity prices remaining relatively high," said Rick Egelton, chief economist for BMO Financial Group.

BMO predicts 2.5-per-cent overall growth in Canada this year, but no region of the country is growing at that rate. Alberta is around six per cent, B.C. is around 3.5 to four per cent and Ontario is growing at about 0.7 per cent.

"The commodity-producing regions of the country are doing well," said Egelton. "The commodity-consuming regions of the country are doing poorly. That (situation), I think, will continue for quite some time."

Retail sales have jumped 15 to 20 per cent in Alberta and six to 10 per cent in B.C., and have increased three to five per cent in the rest of the country. But B.C. and Alberta are dealing with severe labour shortages and are starting to experience higher wage demand.

In Central Canada, the value of the dollar will affect how quickly or how slowly the hard-hit manufacturing sector continues to adjust, Egelton added. The sector is starting to stabilize in relation to the loonie.

"The declines in manufacturing, we think, are largely over and we'll start to see the manufacturing sector in 2007 grow at a fairly modest pace," he said.

Canadian commodity prices will remain relatively high as China and the rest of the Pacific Rim enjoy strong growth. He predicted China's economy will double in a few years while the rest of the Pacific Rim will grow around five per cent.

Europe, the U.K. and Japan will see two-per-cent growth this year, which does not sound high but is still much better than those regions fared in the 1990s, he added.

The Canadian dollar will remain strong because of high commodity prices and the weakening U.S. dollar. Inflation will stay around two per cent.

"We think OPEC will continue to defend an oil price in the high 50s, and we think they'll be successful," said Egelton, adding U.S. oil inventories are robust.

In B.C., lower commodity prices will reduce corporate profits, said Helmut Pastrick, chief economist for B.C. Credit Union Central, which oversees the province's credit union system.

He forecast a two-per- decline in the forestry sector. But the overall economy will still expand 3.79 per cent. The growth will be reminiscent of the pace in the late 1980s and early 1990s, and continue beyond 2007.

But the B.C. economy will still undergo significant changes. The forestry industry's decline will result largely from falling lumber prices. But logging, particularly in the Interior, will increase in wake of the pine beetle epidemic that has prompted the B.C. government to allow a larger timber harvest, and the pulp and paper sector will grow moderately.

"We think corporate profits will rise again at the end of this year, but their performance is relative to the forestry side," said Pastrick.

The real weakness in forestry will show up in the second half of the year as U.S. housing starts to decline considerably. "The (overall economic) growth will be on the investment side," said Pastrick.

Business investment spending on machine equipment will be "very considerable" as a result of high construction activity. But the residential housing market will slow.

"Housing activity is heading for what I would call a soft landing, a gradual market adjustment," said Pastrick.

"It's a rather unusual market adjustment that we're seeing, not just in B.C., but also in (the rest of) Canada in the sense that it's not accompanied by systematically higher (interest) rates, which have typically been the driver of past housing market corrections.

"Rather, this time, it's more of a price-driven affordability squeeze that's occurring. As a result, the adjustment phase will be long, it will be gradual and unlike past times, when we've seen very substantial corrections in volumes then followed by prices."

Real estate developers have attributed the high cost of housing to higher-priced commodities such as steel. Pastrick said housing prices will still rise moderately this year and may actually decline by the end of the year and into 2008, but 2009 could lead to a "resurgence" in demand and construction.

Keith Sashaw, president of the Vancouver Regional Construction Association, which represents 650 contractors, said the real story in B.C. construction is what's happening on the non-residential - or commercial - side.

Non-residential building permits reached record levels in 2006 and $111 billion of commercial construction projects are anticipated in coming years, said Sashaw. The Vancouver 2010 Winter Olympics will account for only $580 million of that total.

"You can see that we're on a very strong upward trend," said Sashaw.

Activity is strong in all regions of B.C., and he predicted construction-cost increases have likely reached their peak. But Sashaw, who has travelled to Europe in recent years on labour recruiting missions, said the challenge remains of where contractors will find skilled workers for the 42 trades specific to B.C.

"And that is a very serious challenge," he said.

(Monte Stewart can be reached at businessedge.ca)