Provincial Credit Watch
April 02, 2025 | 10:06
Provincial Credit Watch: April 2025
Economics
Economics
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Provincial Returns |
Long provincial returns were muted over the past month, as slightly lower GoC yields were offset by wider provincial spreads. Risk appetite continues to be impacted by the Canada-U.S. tariff battle ahead of reciprocal tariffs expected on April 2nd. The Bank of Canada cut interest rates by another 25 bps on March 12th, but firming inflation on the ground suggests that they could be on hold in the near term, unless growth really cracks under the stress of the trade war. All told, long provincial total returns are now running at just over 7% for the past year, still outperforming Canadas. |
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Relative Performance |
Long provincial spreads were wider across the board in the past month. While a weaker risk appetite is lifting spreads across the board, provincial budgets so far have forecasted wider deficits. We discuss the various 2025 budget planning approaches below. As of April 2nd, we await documents from Ontario, PEI and Newfoundland & Labrador. |
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Fundamentals |
Trade War and Budget Peace—For NowThe provinces have been tabling FY25/26 budgets in a highly uncertain economic environment. With seven down and three to go (Ontario, PEI and Newfoundland & Labrador), the combined budget deficit is on track to widen to $31 billion (1.0% of GDP) from $21 billion in FY24/25, while total borrowing holds around the $130 billion level. Here are some quick takeaways for provincial finances in the context of a trade war: Provinces have taken varying approaches to accounting for the trade war. Some (e.g., Alberta and Quebec) have built tariffs and retaliation explicitly into their outlooks, while others have ignored the rhetoric and early action. Table 1 breaks it down. Some provinces could see upside, while others face downside risk. Alberta is arguably set up for the most upside at the moment given that they have built in the toughest tariff conditions, while arguably being the province least exposed in reality. Manitoba and New Brunswick, where tariff exposure is significant, have not built any measures into their economic outlook and are also running with the thinnest contingencies. Quebec is just about down the middle with moderate tariffs and contingencies built into the fiscal plan. The downside is significant, but manageable. Most provinces have offered a sense of what a trade war would do to the bottom line, even if not officially incorporating it into their fiscal plan. In general, that downside risk is averaging roughly 1% of GDP. If we stack those risks onto the current budget forecast, the combined deficit would push toward $45 bln, or 1.5% of GDP before any major stimulus. That could lift borrowing by about $15 bln to roughly a near-record $145 bln. The fiscal response to the trade war has been limited so far—but won’t be. Quebec rolled out more than $1 billion in new measures, some targeted at growth, while Alberta cut personal income tax rates. These measures weren’t necessarily in direct response to the trade war, and most provinces have kept their powder dry with few major new measures announced. That said, the provinces will have a key role in the fiscal response given that they have capacity, and the impact will vary significantly across the country—Ontario, for example, could be preparing a significant program. It’s easy to see added stimulus taking the combined provincial deficit toward 2% of GDP.
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Budget Season NotesThe Province of Quebec is projecting a record $11.4 billion deficit in FY25/26, before transfers to the Generations Fund. That shortfall will weigh in at 1.8% of GDP, the deepest relative to the size of the economy since the mid-1990s, when it topped 3%. The balance for the fiscal year just ending is, however, tracking somewhat better than expected. The deficit for FY24/25 is now pegged at $8.1 billion, down from $8.8 billion as of the most recent fiscal update. Notably, this budget is based on the assumption that 10% tariffs on Canadian imports to the U.S. will be in place for two years, a reasonable middle-ground assumption at this point. At the same time, contingencies of $2 billion per year are built in for the upcoming two fiscal years, which could absorb some further downside. Indeed, a downside scenario with 25% tariffs would worsen the balance by another $1.2 billion. Full analysis here The Province of Manitoba is projecting a $794 million summary budget deficit in FY25/26, better than the $1.2 billion shortfall expected for FY24/25. Given the tariff uncertainties, the Province is building in a modest contingency that peaks at $200 mln this coming fiscal year before shrinking to $50 mln for the following two years. Additionally, the Province includes a 'tariff budget' with a $1.1 billion fiscal hit that would bring the deficit closer to the $2.0 billion mark if broad-based U.S. tariffs are sustained—that accounts for the revenue impact as well as a planned increase in stimulus spending. Full analysis here The Province of Saskatchewan is projecting a small $12.2 million surplus in FY25/26, a positive turn after a $661 million deficit now estimated for FY24/25. The latter is a modest improvement from the most recent fiscal update that called for a $744 million shortfall. The better fiscal position comes on the back of higher revenues across the major taxation and non-resource categories, and the Province sees surpluses persisting through the FY28/29 forecast horizon. Full analysis here The Province of New Brunswick is projecting a deeper $599 million deficit for FY25/26, in the first post-election budget for the new government. That follows a $399 million deficit now expected for FY24/25, which has been revised down from a small $40 million surplus penciled into last year's budget plan. Ramped-up spending pulled the budget into the red last fiscal year, and will continue to do so this year and in the years ahead. Full analysis here |
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Recent Publications of Interest25% Tariffs: What If? We judge that a 25% tariff could pull Canadian growth down by nearly 2 ppts and weigh on the loonie, but monetary and fiscal policy would not stand still. Full analysis here. Provincial Monitor: Most provinces are expected to see growth improve in 2025, but a set of major macroeconomic factors could make for an interesting landscape. Full analysis here. Housing Outlook: A Long Way Home: The Canadian housing market should post modest sales and price gains this year, but don’t expect another exuberant takeoff. Changing secular forces also suggest it’s still a long way back to the 2022 highs. Full analysis here. What 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. 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. 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. |
FY25/26 Budget ReportsThe Province of British Columbia is projecting a $10.9 billion deficit in FY25/26, or a chunky 2.5% of GDP. Full analysis here The Province of Alberta is projecting a $5.2 billion deficit in FY25/26, or just over 1% of GDP, a significant swing from a $5.8 billion surplus now estimated for FY24/25. Full analysis here The Province of Saskatchewan is projecting a small $12.2 million surplus in FY25/26, a positive turn after a $661 million deficit now estimated for FY24/25. Full analysis here The Province of Manitoba is projecting a $794 million summary budget deficit in FY25/26, better than the $1.2 billion shortfall expected for FY24/25. Full analysis here The Province of Quebec is projecting a record $11.4 billion deficit in FY25/26, before transfers to the Generations Fund. Full analysis here The Province of New Brunswick is projecting a deeper $599 million deficit for FY25/26, in the first post-election budget for the new government. Full analysis here The Province of Nova Scotia is projecting an $898 million deficit in FY25/26 (1.4% of GDP), a notable turn after four consecutive years in the black. Full analysis here |