Things are looking up for a a key aspect of the Central Interior economy, according to RBC's chief economist, Craig Wright, who said home construction in the U.S. is finally on its way back up following the 2008 meltdown.
Speaking to about 100 people packed into the Treasure Cove Casino show lounge Monday, Wright said that while about 1.5 million new households are formed in the U.S. each year, home construction has been lagging as excess inventory has been absorbed.
But with interest rates remaining at their low levels, Wright said housing south of the border has never been more affordable and a pent-up demand is growing in the housing market.
Historically, as the U.S. housing market goes, so goes this region's sawmills although the meltdown's impact on Interior lumber producers was greatly tempered by inroads into the Chinese market.
After peaking at two million starts in 2007, the pace of activity in the U.S. plummeted to just 560,000 starts in 2008 but there have been "huge gains" over the last few months, Wright said, although there is still some distance to make up before the million start mark is reached.
"The U.S. housing story, I think, is here to stay," Wright said.
The turnaround is also coming as China, the second-largest market for B.C. lumber, is facing a slowdown.
On that front, Wright said the Chinese government appears to be taking the right steps to avoid a hard landing that would see growth drop to seven per cent or below. RBC is predicting 7.5 per cent growth this year and eight per cent next year for the Chinese economy.
"If you look at when the crisis hit China, they introduced more fiscal stimulus as a share of the economy than any other country," Wright said. "When they put a dollar in the banking system, they tell the banks to lend and the banks do lend.
"Whereas we saw in other countries, when they put a dollar in the banking system, the banks sat on that to rebuild their capital and it didn't trickle out to the economy as aggressively."
Asked about Canada's lagging productivity, Wright said the poor numbers are partly a reflection of the nation's shift to commodity-oriented exports.
"To exaggerate the point, when an auto worker is moving to be an energy worker, there's a productivity hit initially, so that's taking place," Wright said. "On the energy side, if you build a pipeline or drill an oil hole, the productivity doesn't come until production comes on stream, so we should start seeing some of those productivity numbers pick up."
During his presentation, Wright said It appears companies are taking advantage of the strong Canadian dollar and deep cash reserves to invest in imported machinery and equipment that should translate into improved productivity over the long term.
Wright applauded the government's decision to raise the threshold for the small business income tax rate to $500,000 taxable income from $200,000. Some 99 per cent of Canada's businesses are small and medium-size enterprises employing less than 500 people, compared to 85 per cent in the U.S., Wright noted.
"For too long, I think, Canada focussed on the large corporates rather than focus on the small and medium-size enterprises," Wright said.