It’s not a full-fledged hangover, but British Columbia’s prospects are definitely more subdued in the aftermath of the 2010 Winter Olympics. The province’s real gross domestic product grew by about 3.5% last year, thanks to the Games and a strong recovery in the housing market.

However, a post-Olympic slump is expected to affect the service sector in 2011 while new-housing demand plateaus. Those factors, combined with the gradual withdrawal of government stimulus spending, mean that overall GDP growth will be restrained in the coming year.

Economists generally agree that B.C. is on track for real GDP growth in the 2.6% range this year. That’s the prediction of the Economic Forecast Council, a blue-ribbon panel that advises B.C.’s finance minister. That figure is lower than it might otherwise be says Craig Alexander, senior vice president and chief economist with Toronto-Dominion Bank, because B.C.’s economy didn’t contract by as much as those in the rest of Canada in 2009 and it outperformed in 2010.

B.C.’s unemployment rate is forecast to drop slightly to an annual average of 7%, a 0.5% decrease, Alexander says: “We expect personal incomes to increase by about 4%, while inflation remains at 2.2%, largely because of increased food and energy prices. At the same time, retail sales will increase by about 4%.”

Noting that business investment growth has been strong in the past two quarters, Alexander expects the private sector to be the main driver of B.C.’s economic growth.

Jock Finlayson, executive vice president of the Business Council of British Columbia, agrees, predicting “healthy levels of business spending in 2011. It won’t be sector-specific but a broad-based thawing out, with particular strength in metals.”

That investment will be crucial as government stimulus spending winds down, Finlayson adds: “We haven’t yet seen the federal budget, and there are conflicting signals from Ottawa about ending the stimulus program. But we expect a significant paring back in provincial spending from $8 billion in 2010-11 to $5 billion-$6 billion in 2011-12.”

Royal Bank of Canada economists are forecasting real GDP growth of 2.9% for B.C. in 2011, largely because of the improved outlook for commodities. Says RBC senior economist Robert Hogue: “A key engine of growth will be increased investment in the natural resources sector amid continued strong global demand for commodities. There were major gains in mineral production, particularly coal, in the past year, and the northeastern B.C. natural gas play is another positive factor.”

The Conference Board of Canada predicts strong growth in B.C.’s mining sector this year, thanks to continued high prices for gold, copper and other metals. It also foresees forestry sector growth of 6.6%, compared with about 17% last year. Says Conference Board of Canada economist Jacqueline Palladini: “2010 was a good year for B.C. forestry because the U.S. housing industry stabilized and showed some growth. However, uncertainties remain, especially since several major U.S. lenders have frozen foreclosures because of evidence that many lenders weren’t completing paperwork properly.”

An RBC research report says that forest-products producers are unlikely to enjoy any major turnaround this year, given the limited improvement expected in the U.S. housing market. After contributing much to the rebound in B.C.’s economic activity in the early part of 2010, the B.C. housing sector is expected to show very modest gains this year. B.C. housing starts are forecast to rise by 1,600 units to 28,500 units in 2011, substantially lower than the 10,900-unit increase last year.

Finlayson expects the forestry industry to improve modestly, in part because lumber producers have found more success selling in Asia: “That’s the silver lining. They have made inroads into China, which looks like it will become an important market going forward.”

Most economists expect that B.C. will see higher export shipments and export values in 2011 — up by perhaps 10% for total merchandise exports, says Finlayson: “That reflects the continuing recovery of the U.S. economy and decent global growth. [B.C.’s] exports slumped by 20% in 2009 and staged an initial recovery in 2010; the export recovery should continue, at a modest pace, through 2011.”

However, Helmut Pastrick, chief economist with Central 1 Credit Union in Vancouver, cautions that trade remains B.C.’s weak economic link: “Exports will grow at a meagre pace and the trade deficit will continue to expand. It’s a net drag on the economy, and it won’t turn around any time soon because the U.S. remains our main trading partner.”

Nonetheless, Pastrick believes, B.C. is in generally good economic shape. “We forecast deficits for the next two years,” he says. “The economy is growing and starting to generate more revenue, the government-spending side is reasonable and the deficit could turn into a surplus sooner than expected.”

However, the referendum on the harmonized sales tax, which is scheduled for the autumn, could increase uncertainty when it comes to the economy. If the referendum results in the removal of the HST and its replacement with a provincial sales tax, says Pastrick, there will be changes in both consumer and business spending forecasts and government revenue.

“Consumer spending would increase a bit, particularly in sectors such as restaurants,” he says. “However, the tax change would reduce business investment, and such a flip-flop on an important tax policy would undermine business confidence. The switch back to a PST would also reduce government revenue and increase the deficit.”

“If the HST is scrapped,” says Finlayson, “it will damage business confidence, B.C.’s competitive position and the province’s reputation as a place to invest.” IE