Provincial Credit Watch

June 01, 2026 | 12:30

Provincial Credit Watch: June 2026

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Provincial returns solid as yields back down
Oil producers still outperforming
Recession chatter doesn't apply to all provinces

Provincial Returns

Long provincials posted positive returns over the past month. That came mostly on the back of a late-May rally in long GoC yields, while provincial spreads were little changed. Optimism over a U.S.-Iran deal pulled down oil prices in the final week of May, and long GoC yields followed. Meantime, we continue to see the Bank of Canada on hold through 2026 with underlying core inflation near 2% and growth running below potential. From a year ago, long provincials continue to outperform Canadas alongside tighter spreads.

Relative Performance

Spread performance was mixed over the past month, with most of the fiscal news now baked in following the 2026 budget season. From a year ago, the oil-producing provinces (Alberta, Saskatchewan and Newfoundland & Labrador) have outperformed alongside the jump in crude prices, while British Columbia has lagged amid tough budget conditions and credit-rating action.

Fundamentals

Cue the Recession Chatter

Canada saw growth contract for a second consecutive quarter in Q1, cuing the recession chatter. But, there is much more to a recession than two quarters of negative GDP growth. We often think of the three Ds—depth, duration and dispersion. Things aren’t great, but Canada isn’t there yet.

Depth: The combined decline in Canadian real GDP over the two negative quarters (2025Q4 and 2026Q1) was just 0.6% annualized, or barely a scratch in GDP terms. Pandemic aside, the average two-quarter decline at the weakest point of the prior three Canadian recessions (2009, 1991, 1982) was 5.3%. Suffice it to say the depth is not there, and could easily be revised away.

Duration: We’ll concede that the period of softness for the Canadian economy has run long enough to qualify, going back to the start of 2025 and the outbreak of the trade dispute. Since 2025Q1, we’ve seen three negative quarters out of four, and real GDP is down from a year ago. While just -0.1% y/y, negative year-over-year growth prints are usually reserved for recession. There were two instances similar to today where growth dipped slightly year-over year but didn’t get marked as a full-fledged recession: One in 1986; and more recently in 2015 when crumbling oil prices pulled the energy sector and a few provinces into a downturn, but didn’t bring down the broader economy.

Dispersion: The 2015 non-recession highlights arguably the most important benchmark, which requires weakness to spread widely across the economy. At the macro level, the bulk of the decline in GDP from a year ago has come from a sharp disruption to net export volumes. Net exports alone have carved roughly 1.5 ppts from year-over-year growth, while final domestic demand has expanded a sturdy 1.3% —even with negative population growth. The job market has also held steady with employment up modestly from a year ago and the unemployment rate unchanged. The latter is a classic lagging indicator, and recent years have been clouded by big swings in labour force growth, but we’re not seeing the 2-to-4 ppt increases and deep job loss normally associated with recession. Some industries like manufacturing, real estate and trade are clearly seeing weakness (real estate has been in recession for a few years), but others like finance, resources and health care are growing steadily.

Regionally, growth is teetering in Ontario, Quebec and British Columbia, where full-year 2026 growth is now pegged below the 0.5% national forecast. Trade headwinds, population caps and real estate corrections are hitting harder in these areas. However, growth is still expected at 1.5% or better across four of ten provinces this year, lead by 2% growth in Alberta. Those with oil and resource exposure, along with lower tariff exposure, continue to grow at a solid clip.

Recent Publications of Interest

Spring Economic Update: Canada Strong, Deficits Long. Ottawa is projecting a $65.3 billion deficit (1.9% of GDP) for FY26/27 in the Spring Economic Update, little changed from the $65.4 billion forecast in the original budget plan. Full analysis here

Canada’s Population Estimates: Shrink Nation. Canada’s population fell 0.2% y/y in Q1, the first annual population decline on record going back to WWII. Full analysis here

Canadian Housing Monitor: Canada’s housing market remained very quiet through February, with weak demand conditions and a low-volume period of the year working together to keep activity suppressed. Full analysis here

Provincial Monitor: The Canadian economy is still dealing with the burden of U.S. tariffs, but the impact is uneven across the country, and conditions are beginning to drift apart. Full analysis here.

Housing Outlook: What You See is What You’ll Get: As we continue to work through the secular downturn in Canadian housing, expect more of the same for sales and prices in 2026. This year figures to bring a weaker
rental market, shy investors, and another step closer to restoring affordability. Full analysis here

Federal Budget: The highly anticipated 2025 budget lands in the middle of a trade dispute, and at a time when the economy is struggling to grow. Full analysis here.

Canada’s Job Market: Decoding the Disruptors: Canada’s job market is exhibiting signs of slack, which could still tilt the BoC toward easing. Notable longer-term disruptions include the trade war, a leaner federal government, high youth unemployment and the proliferation of AI. Full analysis here.

Surveying the Provincial Landscape: The trade war threatens to drive a wedge between economic performance in provinces with high and low exposure to U.S. trade. At the same time, a new federal government is expected to push through various policy measures that will impact the provincial landscape in the coming years. Full analysis here.

Supply, Meet Demand: Housing affordability will return to pre-pandemic norms through a combination of market dynamics, income growth, a modest reduction in borrowing costs and firm construction activity. Full analysis here.

Guns N’ Bonds: Ottawa’s sudden shift to higher defence spending will also have implications for the budget deficit and, potentially, long-term interest rates. Full analysis here.

2025 Election — The Same, but Different: The Canadian election results are still being finalized, but Mark Carney and the Liberals appear to have secured a strong minority government mandate. Full analysis here

FY26/27 Budget Reports

The Province of British Columbia is projecting a $13.3 billion deficit in FY26/27. Full analysis here

The Province of Alberta is projecting a $9.4 billion deficit in FY26/27. Full analysis here

The Province of Saskatchewan is projecting a $819 million deficit for FY26/27. Full analysis here.

The Province of Manitoba is projecting a $498 million summary budget deficit in FY26/27. Full analysis here

The Province of Ontario is projecting a $13.8 billion deficit for FY26/27. Full analysis here

The Province of Quebec is projecting a $6.3 billion deficit in FY26/27. Full analysis here

The Province of New Brunswick is projecting a $1.4 billion deficit for FY26/27. Full analysis here

The Province of Nova Scotia is projecting a $1.2 billion deficit in FY26/27. Full analysis here

The Province of Prince Edward Island is projecting a $410 million budget deficit for FY26/27. Full analysis here

The Province of Newfoundland & Labrador is projecting a $688 million deficit in FY26/27. Full analysis here