Provincial Credit Watch
January 07, 2025 | 11:53
Provincial Credit Watch: January 2025
Economics
Economics
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Provincial Returns |
Long provincial returns were negative to finish 2024, as a backup in GoC yields weighed. For the year, long provincial total returns came in at just under 1%. That managed to outperform Canadas (-2.1%) as spreads tightened in the latter stages of the year. As the Bank of Canada eased aggressively, the curve steepened, driving stronger returns at the shorter end. Overall, the broad provincial index posted a 3.1% total return in 2024. We expect another 75 bps of Bank of Canada easing this year, albeit more gradually. |
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Relative Performance |
Long provincial spreads were slightly wider across the board in December. Performance was mixed on the year, with British Columbia lagging the pack amid an ongoing deterioration in the fiscal backdrop and credit-rating downgrades. Alberta, and Newfoundland & Labrador outperformed, with sturdy oil prices driving positive fiscal results. Alberta continues to post the strongest fiscal fundamentals in Canada. Ontario also performed well as that province continues to beat budget expectations, and enters 2025 with the tightest 30-year spread on the provincial landscape. |
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Fundamentals |
Most provinces are expected to see growth pick up in 2025, but a set of major macroeconomic factors could make for an interesting landscape. Lower interest rates should filter through and drive firmer growth, especially in areas that were struggling with tough housing and consumer spending backdrops. At the same time, an abrupt slowdown in population growth and the U.S. political backdrop will have varying degrees of impact across the country. Ontario, Alberta and British Columbia are expected to lead the country with growth above 2% in 2025. While Alberta continues to churn out sturdy growth alongside stable oil prices, B.C. and Ontario figure to benefit most from lower interest rates. These provinces carry relatively high household leverage and saw some of the deeper housing market corrections, which now appear to be turning around. Saskatchewan and Manitoba will likely see stable growth around 1.6%. In Quebec, underperformance is expected to continue with 1.5% growth. While a weaker loonie and firm U.S. growth will benefit Central Canada disproportionately, we would judge Ontario and Quebec among those most at risk to any U.S. tariff action. Ultimately, the provincial impact of any tariffs will come down to their size, duration and, most importantly, industry coverage—that is arguably the big risk heading into 2025. Finally, Atlantic Canada looks to grow somewhat below the national average in 2025 (in the 1.6%-to-2.0% range) as population growth slows significantly. B.C. and Ontario should technically see the biggest slowdown given their large share of temporary residents, but Atlantic Canada’s smaller economic base could notice the change more. |
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In the housing market, activity and prices have firmed alongside Bank of Canada rate cuts, and that momentum should continue through 2025—but we don’t expect another exuberant takeoff. Nationally, we see sales volumes rising 12% for the calendar year, while the MLS benchmark price rises a modest 3%, as still-challenging affordability and poor investment calculus will keep the rebound in check. Mortgage rates appear to be nearing their cycle low around 4% given that any further interest rate cuts are already priced into fixed mortgage rates. Still, easier mortgage rules, especially in the $1-to-$1.5 mln range, will also work to boost activity. Regionally, we could see the significant outperformance of Alberta and Atlantic Canada step back, while more beaten-down markets in Southern Ontario and B.C recover. That said, we expect significant performance discrepancy within the major cities, especially Toronto, depending on property type. Single-detached housing remains scarcely supplied and well bid by young Canadian families; yet the condo market is dealing with a flood of completions, much of which are investor-owned and will be flipped onto the resale market. Look for condo prices to struggle in 2025 even if the single-detached market firms. Finally, a slowdown in population growth on the back of temporary resident caps will be felt more in the rental market. There is already evidence that investor-owned completions are adding to supply and putting downward pressure on rent. With a near-record number of apartment units under construction (both privately-owned condos and purpose-built rental stock), they could conceivably be reaching completion at a time when rental demand is backing off—a major change compared to conditions of recent years. |
On the fiscal front, the provinces have now published their mid-year updates, with the combined provincial budget deficit pegged at $23.3 billion for FY24/25 versus $9.1 billion in the prior fiscal year. That weighs in at a still-modest 0.8% of GDP, with British Columbia now carrying the largest shortfall at 2.2% of GDP. The Province of British Columbia is estimating a $9.4 billion deficit for FY24/25 (2.2% of GDP), in the first refresh of the books following the October election. That's running deeper than both the 2024 budget ($7.9 billion) and the Q1 update ($8.9 billion). Note that this fiscal update doesn't incorporate what turned into an election campaign full of promises, so we could see even more pressure on finances in the 2025 budget. The Province did not update the medium-term fiscal plan, but pre-election messaging suggested little priority to balance the books. Total gross borrowing requirements are now pegged at $26.0 billion for FY24/25, down slightly from the $27.1 billion expected in the Q1 update. About $7.0 billion remains to be completed, with the Province expecting both short- and long-term issuance. The taxpayer-supported debt-to-GDP ratio is tracking somewhat higher at 22.0%, as the larger deficit is offset partially by slightly lower capital spending.
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Recent Publications of InterestWhat Canada’s Immigration Shift Will and Will Not Do: Ottawa’s dramatic about-turn on immigration will turn Canada’s fiery 3%+ population growth of the past two years to an icy near-zero pace in coming years. This may have some important economic effects, but there are already many misleading narratives that have emerged since the announcement. Full analysis here. Canada’s Housing Market in Charts: The following is a chart-based tour of the market as it stands now, and where it might be headed. Full analysis here. Slicing the Provincial Growth Pie: Economic growth remains slow across the country, and some provinces have seen their job market soften more than others. But the dispersion of unemployment rates has never been tighter. Full analysis here. Provincial Monitor: The Canadian economy is grinding out moderate growth as past interest rate hikes weigh and the job market softens. Full analysis here. Canadian Job Market: “We’ll Be in Touch”: The job market has gone from extremely tight to exhibiting some clear signs of weakness. We explore some of the reasons why, and the implications for policy. Full analysis here. Pathways to Affordability for Canada’s Housing Market: You would need to go back to the era of double-digit mortgage rates in the early 1990s to see the last time buying a home in Canada was as expensive as it is today. The workout last time involved a major price correction followed by a long period of stagnation. Is there a less painful route back to affordability this time, and, if so, how long will it take? Full analysis here. Extraordinary Population Delusions and the Trouble with Crowds: Canada’s population has exploded by 1.3 million people in the past year, or 3.2%, the fastest pace since the 1950s. This surge is rooted in sound principles, but has clearly run amok. Indeed, the narratives around the population boom have, in our view, been off the mark. Here are five pieces of the narrative that are worth challenging. Full publication here. |
FY24/25 Budget ReportsThe 2024 Canadian federal budget lands at a time when the economy is struggling to grow, the Bank of Canada is still leaning on inflation pressures, the loonie is under stress, and the impact of torrid population growth pervades across much of the country. Full analysis here The Province of British Columbia is projecting a $7.9 billion deficit in FY24/25, or almost 2% of GDP, with a hefty borrowing program. Full analysis here Province of British Columbia mid-year fiscal update. Full analysis here The Province of Alberta is projecting a small $367 million surplus in FY24/25, or 0.1% of GDP, narrowing from the $5.2 billion surplus now expected for FY23/24. Full analysis here Province of Alberta mid-year fiscal update. Full analysis here The Province of Saskatchewan is projecting a $273 million deficit in FY24/25 (a small 0.2% of GDP), a touch narrower than the $483 million now estimated for FY23/24. Full analysis here The Province of Manitoba is projecting a $796 million summary budget deficit in FY24/25, improved from the hefty $2.0 billion shortfall expected for FY23/24. Full analysis here The Province of Ontario is projecting a $9.8 billion deficit for FY24/25, substantially deeper than the $5.3 billion last forecasted in the fall fiscal update, and the $3.0 billion shortfall now estimated for FY23/24. Full analysis here Province of Ontario mid-year fiscal update. Full analysis here The Province of Quebec is projecting a much deeper $8.8 billion deficit in FY24/25 (1.5% of GDP), before transfers to the Generations Fund. Full analysis here Province of Quebec mid-year fiscal update. Full analysis here The Province of New Brunswick is projecting a small $41 million surplus for FY24/25, in a pre-election budget that largely stays the course. Full analysis here The Province of Nova Scotia is projecting a $467 million deficit in FY24/25 (0.8% of GDP), a notable turn after three consecutive years in the black. Full analysis here The Province of Prince Edward Island is projecting an $85 million budget deficit for FY24/25, little changed from the prior fiscal year. Full analysis here The Province of Newfoundland & Labrador is projecting a small $152 million deficit in FY24/25 (0.4% of GDP), an improvement from the worse-than-expected $433 million shortfall now estimated for FY23/24. Full analysis here |