The Canadian economy started 2023 with solid momentum, but the full impact of past interest rate hikes and some likely tightening of credit conditions should weigh on growth through the remainder of the year. Real GDP growth is expected at 1.0% this year, with negative prints possible in coming quarters. Growth is then expected to firm to 1.3% in 2024. Housing has corrected sharply, but there are signs of stability for prices and a pickup in unit sales in some markets. Business investment is choppy, while government stimulus looks to add modestly to growth this year. A very tight job market should help cushion the impact of any downturn, but inflation remains sticky above the Bank of Canada’s comfort zone, leaving rate cuts as unlikely this year.

All provinces are grappling with inflation, higher interest rates and drum-tight labour markets. Alberta and Saskatchewan are expected to lead the country this year with real GDP at 2.0% and 1.6%, respectively. Demographic inflows and still-high oil prices are helping in Alberta, which has also barely seen a real estate downturn, while Saskatchewan is seeing major resource-sector project build-out. Manitoba remains steady, with growth expected roughly in-line with the national average this year and next.

Meantime, the real estate downturn is playing a significant role in British Columbia and Ontario underperforming the national average this year. In B.C., residential investment carries the highest weight in real GDP in the country. While that share is proportionally lower in Ontario, the downturn there was the sharpest in the country. Counter to an aggressive push by policymakers, new housing construction in these provinces could dip this year, depending how market conditions evolve. On that note, it looks like activity and prices are firming through the spring with a bottom possibly now in place. Quebec also faces the broader impact of high rates, and slowing U.S. demand will hit the province, although the softer loonie is acting as a buffer for exports and manufacturing.

Atlantic Canada continues to grow well above rates seen in recent years, as the region is drawing in strong population flows from outside the country and other provinces. While a slowdown is likely, growth prints should remain positive and above the national average through 2024 as consumer spending and residential investment remain sturdy.

Budget Season Breakdown

The provincial budget season has wrapped up, and the group overall looks to be in strong fiscal shape. The combined provincial budget deficit is estimated at a modest $4.6 billion for FY23/24, or 0.2% of GDP. While that marks a deterioration from two consecutive surpluses averaging roughly $10 billion in the two prior fiscal years, the key takeaway is that the books are largely in balance for the group. British Columbia has arguably been among the most willing to run deficits, and their $4.2 billion shortfall (1.1% of GDP) has already come with some negative credit-rating implications. Among the group, however, it’s worth recalling that B.C. is starting from a position of relative health. At the other end of the spectrum, provinces in Atlantic Canada have improved significantly from positions of relative weakness. Budgets remain in very small deficits or surplus, and the average net debt-to-GDP ratio in the region is a manageable 32%—now fully five percentage points below Ontario and Quebec.

Indeed, the surge in inflation and nominal GDP over the past three years has been a boon for provincial finances, driving up revenues and the size of the economic base. The combined provincial net debt-to-GDP ratio is pegged at 29% for FY23/24, which is 1.5 ppts below pre-COVID levels. At the same time, the provincial ratio is running 14.5 ppts below the federal debt ratio, given that the latter swallowed the vast majority of COVID-related support spending and borrowing.

This fiscal year, the provinces look to borrow $95 billion, up from last year’s total, and somewhat above the typical pre-pandemic pace—maturities and some heavy capital-spending programs account for this, despite near balanced budgets.

From a policy perspective, modest net stimulus flowed out of the 2023 budgets. Spending remains a priority, especially in areas like health care and other infrastructure. Wage demands in a very tight job market are also adding incrementally to costs. But, perhaps the most interesting takeaway is that we’ve seen two provinces—Quebec and New Brunswick—cut income tax rates, a policy lever that hasn’t been pulled much in recent years. Both of these provinces are relatively high-tax jurisdictions, and it will be interesting to see if these moves are the start of a trend toward lower income taxes. After all, remember that once one province sent out “inflation relief” cheques, all others eventually followed with some version of the same.

Spotlight on Population Flows

Canada’s population surged by more than 1 million in 2022, the largest raw increase in the headcount on record, and the biggest year-over-year percentage increase since the early-1970s. This is having major implications across the country in areas like housing and consumer demand.

Canada has seen a significant increase in international immigration flows. In recent decades, a downward trend in the birth rate has meant that net immigration has made up a larger portion of overall population growth. More recently, immigration flows have skyrocketed across the country, more than making up for pandemic-era restrictions. The push comes from the federal government’s immigration targets: 465k new permanent residents in 2023, rising to 500k by 2025. That’s a meaningful jump from the 303k average in the five years before the pandemic, and that level of immigration will add the most to population growth (roughly 1.3 ppts) since the 1950s.

Canadians are also moving around the country in numbers not seen in half a century. In the four quarters through 2022Q4, Canada saw almost 400k people move to a new province, the largest such flow since 1976, and about 125k more than the pre-COVID run rate. At fully 1% of the population, these flows are not to be overlooked, even if they are dwarfed by international immigration rates.

Alberta and Atlantic Canada are the largest recipients of these flows. In the latest four quarters, Alberta has pulled in 45k people from other provinces, matching levels seen at the height of their economic booms in 2006 and 2014. Atlantic Canada’s near-30k inflow is far and away a record for that region. Where are they coming from? In a nutshell, Ontario. More than 52k people have left Ontario on net in the past year, a historic outflow for that province. Technically, Ontario’s outflow is smaller than those from Saskatchewan and Manitoba as a share of population, but there’s no doubt the province is losing significant numbers of people and young families. Meantime, neutral migration flows in Quebec are actually a dramatic improvement from perennial net outflows from that province of about 5-10k per year prior to the pandemic.

This section in an updated excerpt from a recent report titled, On the Move: Assessing Canadian Population Flows. Full report is available here.

British Columbia

The B.C. economy is expected to grow 0.9% this year, slightly below the national average before rebounding with 1.3% growth in 2024. The softness follows a strong outperformance over the prior two years, and through the duration of the pandemic. While tourism and service activity are now helping growth, housing has been a drag given that residential investment makes up the largest share of provincial real GDP in the country.

The housing market cooled considerably alongside higher mortgage rates, with sales activity plunging below levels seen during the 2018/19 correction. Prices also pulled back, with the provincial average down 17% from the February 2022 high as of January, before rebounding modestly into the spring. Indeed, some markets seem to be finding a price floor given a lack of new listings.

The job market remains strong, and the unemployment rate is expected to average 4.6% in 2023, among the lowest levels in Canada. Conditions are expected to soften in the second half of the year, but the jobless rate in 2024 is still pegged below 5%.

The Province of British Columbia is projecting a $4.2 billion deficit in FY23/24, or just over 1% of GDP. While hardly deep or concerning, B.C. is seemingly doing its best to run deficits at this stage. Gross provincial borrowing is estimated at a hefty $19.0 billion for FY23/24, up sharply from $9.0 billion in FY22/23.

Alberta

The Alberta economy is expected to lead the country with 2.0% growth this year and 1.7% in 2024. While this marks a slowdown from growth above 5% in each of the prior two years, recession risk in the province is deemed relatively low. Still-elevated oil prices are supporting local incomes, while real estate has held up well to higher interest rates.

After slumping through the pandemic, oil production has returned to capacity levels that prevailed before 2020. Capital spending growth in the industry looks very firm for the year ahead, but the level of spending remains less than half of its 2014 peak. Even if we don’t expect a resurgence in new project investment, cash flow in the sector looks well-supported. The extent of shutdowns and damage related to current wildfires remains to be determined.

Housing has seen much less correction given that the market was never as extended as those in Ontario and B.C., but a slowdown is still felt across the industry. Interprovincial migration flows have also turned positive after six years of outflows, which is helping to cushion the downturn. That said, the commercial real estate backdrop remains tough, with high vacancy rates in the downtown office market persisting.

The job market has tightened significantly, with the unemployment rate now trending below 6%, near the lowest since 2015. While that is holding above the national average, the gap is likely to close through 2024, and cross below that of Ontario.

The Province of Alberta is projecting a $2.4 billion surplus in FY23/24, or 0.5% of GDP, narrowing from a hefty $10.4 billion surplus now expected for FY22/23. After revenues surged in FY22/23 on the back of $90 WTI oil prices, this year's budget was based on a more modest $79 assumption. Total borrowing requirements are expected at $6.6 billion in FY23/24, largely for maturities and to cover the capital plan.

Saskatchewan

The Saskatchewan economy will likely grow a sturdy 1.6% this year, outperforming the national average and avoiding the worst of any downturn. Exposure to the real estate correction is limited, and buildout of a major potash project is supporting employment and investment.

Agriculture rebounded sharply in 2022 after very challenging conditions in 2021 cut output. The resource sector has regained strength alongside higher oil and potash prices. Oil production is grinding higher, and incomes will be very well supported. Meantime, potash prices soared amid geopolitical turmoil, and BHP’s go-ahead of the massive Jansen project will support activity in coming years until reaching expected production around 2026. Indeed, capital spending intentions in the province look strong this year, with the highest overall growth expected since 2008, led by mining.

The unemployment rate is below 5% and among the lowest in Canada as the job market remains tight. Unlike Alberta, the province continues to see net interprovincial outflows to even stronger jurisdictions, but those flows are dwarfed by international inflows.

The Province of Saskatchewan is projecting a $1 billion surplus in FY23/24 (1.0% of GDP), a touch smaller than the $1.1 billion now estimated for the fiscal year just ended. The total borrowing program is pegged at $1.7 billion, down from $2.7 billion last fiscal year and the lowest total in six years.

Manitoba

The Manitoba economy is expected to grow 1.2% this year and in 2024, slightly better than the national average in 2023. Manitoba’s diverse and steady economic base has historically helped the province outperform during periods of national economic weakness—a direction we could be headed later this year.

The unemployment rate has been trending in the mid-4% range, at the very low end of the Canadian provinces. This marks a historically tight job market for Manitoba, and a period of softness into 2024 should see that rate move back up to a level consistent with pre-pandemic norms of 5%-to-6%.

Extremely strong housing activity has cooled alongside higher mortgage rates. Like the economy more broadly, we expect the downturn to remain more moderate in Manitoba given less froth on the way up. For example, Winnipeg’s benchmark price growth peaked at 16% y/y, less than half of that in Toronto, and the correction since the early-2022 has also been milder.

The Province of Manitoba is projecting a $363 million budget deficit in FY23/24, roughly in line with the $378 million shortfall now expected for FY22/23. The province remains well positioned fiscally during a period of uncertainty.

Ontario

Ontario’s economic growth is expected to slow to 0.7% this year, below the national average as higher interest rates and a housing correction bite relatively hard. The economy is then expected to rebound 1.5% in 2024, a stronger bounce than the national average as demographics and business investment help.

Housing activity across the province retrenched, with higher mortgage rates chilling demand and buyer psychology. Unit sales started the year at some of the lowest levels of the past 20 years, but there are signs of a bounce into late-spring. Prices are also down sharply, with some markets more than 20% off February 2022’s peak level—suburban/exurban single-detached were hit especially hard early on. With the extreme strength now unwound, new construction activity should also cool through 2023. That said, a lack of new resale listings has started to put a floor under prices, as demographic support remains in place—at the right price.

In the commercial real estate sector, GTA office vacancy rates continue to rise, now topping 17%, according to CBRE. Some other sub-sectors, such as industrial, remain strong, but cap rates are adjusting to higher interest rates.

The job market has been very strong, with employment powering to a record high and the unemployment rate ending Q1 at just 5.1%, the lowest since 1989. Service-sector jobs also sit at a record high, despite a still-wide gap in accommodation & food services employment. Finance, professional services and technology-based industries have been hiring at a strong and almost uninterrupted clip through the pandemic, but momentum looks to be slowing.

The Province of Ontario is projecting a small $1.3 billion deficit for FY23/24, roughly in line with the $2.2 billion shortfall now expected for FY22/23. These deficits are small enough that one can think of the budget as effectively balanced. Total long-term borrowing requirements are estimated at $27.5 billion, down from $32.1 billion in FY22/23 and the smallest program for Ontario in seven years.

Quebec

The Quebec economy is on track for slower 0.8% growth this year, somewhat below the national average, and is expected to rebound 1.2% in 2024. The slightly shallower slowdown comes alongside a less severe contraction in residential investment than some other regions and the largest fiscal support among the provinces. We are optimistic that Quebec will remain a relative economic outperformer over the medium term.

Elevated oil prices have tilted some relative strength back to Western Canada, and Quebec is typically at the losing end of that shift. But, the loonie has weakened, which will contain the impact on exports and manufacturing; the local fiscal and employment situations are much better; and outward migration has neutralized.

The housing market has slowed sharply, with existing home sales running at less than half of 2020 peak levels, and below pre-pandemic trends. Prices have fallen, but markets like Montreal didn’t see the extreme gains that some others did, and started from a more affordable level. Still, the jump in mortgage rates is a significant hit to even a less frothy market. Meantime, residential construction remains sturdy amid healthier demographic flows (especially fewer losses to other regions), but new starts are expected to cool amid softer investor demand and high borrowing costs.

The Province of Quebec is projecting a $1.6 billion deficit in FY23/24 (0.3% of GDP), before transfers to the Generations Fund. That's little changed from the $1.7 billion shortfall now estimated for FY22/23, but also comes with an embedded $1.5 billion contingency, as well as personal income tax cuts. Total borrowing requirements are pegged at $29.5 billion in FY23/24, including $13.4 billion in maturities.

New Brunswick

The New Brunswick economy is expected to grow 1.2% this year, somewhat firmer than the national average as strong population growth drives activity. Growth should pick up to 1.5% next year, still well above past-decade norms and ahead of Canada overall.

Population growth has surged to above 3% y/y, the fastest pace on record dating back to the postwar era, boosted by both international immigration and a surge in interprovincial migrants. The latter has come as families look for space and affordability in a new hybrid/remote-work environment. The consequence has been some stress on living costs.

The unemployment rate has fallen to around 6% in recent months, the lowest level since at least 1976. While the participation rate is drifting down longer term, this still reflects a very tight local job market.

The Province of New Brunswick expects its surplus, pegged at $863 mln in FY22/23, to narrow to $40 million this year. The province sits in a strong fiscal position, with the boost in economic growth lifting revenues and shrinking the net debt-to-GDP ratio to the lowest east of Saskatchewan. Total borrowing requirements are estimated at $1.8 billion this fiscal year.

Nova Scotia

The Nova Scotia economy is expected to grow 1.4% this year, holding up relatively well in a potentially challenging year, and should continue to outperform the national average through next year on the back of strong population flows.

Demographic strength and a rebound in tourism have powered well above-potential growth in the province, but a slowing in some sectors is likely later this year. That said, Nova Scotia’s population has surged by 3.5% or more than 35k people in the past year, driving consumer spending and housing demand. Both international immigration and a surge in interprovincial migrants are boosting these figures.

The job market is also strong. The unemployment rate sank to just 5% at one point earlier in the year, the lowest level on record. Full-time employment has surged, while part-time jobs have been more volatile alongside choppy hotel & restaurant hiring—but they too are back to pre-COVID levels.

Resale housing market activity has cooled sharply alongside higher mortgage rates, with sales well down from extreme early-2021 highs, while prices peaked last April. But, there are early signs that the market is stabilizing now with the Bank of Canada likely done raising rates. Building activity remains robust and, while cooling, should lead to 8,000 housing starts this year.

The Province of Nova Scotia is projecting a $279 million deficit in FY23/24 (0.5% of GDP), roughly in line with the $260 million deficit now expected for the previous fiscal year. Total borrowing requirements are pegged at $2 billion this fiscal year.

Prince Edward Island

The PEI economy will likely expand 1.5% this year, slowing from last year’s 2.9% pace and consistent with a broader slowdown across Canada. Still, signs of strength include demographic flows and a return of tourism activity, which will help keep the province running above the national average through next year.

Tourism and seasonal visitors during the summer months are major drivers of local economic activity, and both of those sources have improved. With Atlantic and Canadian travel opened back up, U.S. and Canadian inbound travel could be looking at its strongest summer since the pandemic began. Meantime, an influx of migrants, both from abroad and from other parts of Canada, will continue to support robust housing demand, even as higher interest rates have cooled prices and resale activity.

The unemployment rate is holding around 7%, which represents a historically tight job market for the province. Employment has surged, including among full-time workers, and a near-record share of the population is now working.

A FY23/24 budget plan is forthcoming following the April 3^rd election. The Progressive Conservatives under Premier Dennis King secured another decisive majority mandate in that vote.

Newfoundland & Labrador

The Newfoundland & Labrador economy will likely see real GDP growth rebound 1.8% this year, following a 1.7% contraction in 2022 that came alongside some shutdowns in the mining sector. The economy should continue to expand through 2024 as oil production picks back up at Terra Nova.

While longer-term oil production remains burdened by declining reserves (Hibernia and White Rose), Hebron continues to churn out steady output. However, the value of that output has softened alongside a drift down in prices.

The unemployment rate has bounced around 10% for most of the year, which marks the lowest level on record for the province. Employment has recovered all the losses seen over the past two years, and then some, but is still down from the highs set in 2014.

The population decline since that peak has turned around significantly over the past two years, and the 1.4% y/y pace matches the high seen during the mid-2000s boom.

The Province of Newfoundland & Labrador is projecting a small $160 million deficit in FY23/24 (0.4% of GDP), a deterioration from a larger-than-expected $784 million surplus now estimated for FY22/23. The Province will borrow $1.5 billion this fiscal year.