Provincial Credit Watch
May 05, 2025 | 09:17
Provincial Credit Watch: May 2025
Economics
Economics
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Provincial Returns |
Market volatility continued over the past month, but sentiment improved in the latter stages of April with some easing in U.S. tariff threats and a rebound in equities. Long provincial spreads have tightened somewhat since the early-April high, but remain about 12 bps wider than at the start of the year. The clear tariff-induced deterioration in risk appetite has weighed, and provincial borrowing programs remain chunky. That said, long provincials still outperformed GoCs on a total return basis in the latest month, and continue to do so over the past year. |
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Relative Performance |
Long spreads tightened for most provinces in recent weeks, leaving levels little change from the start of April. Budgets from PEI and Newfoundland & Labrador leave 9 of 10 complete, with Ontario (May 15th) the last province due to table their 2025 document. While risk appetite improved in recent weeks, oil prices also fell notably with WTI currently trading around $57.50. That has weighed somewhat on spreads in Alberta, Saskatchewan and Newfoundland & Labrador. Alberta, for example, assumed $68 for WTI in its 2025 budget, and a $10 miss would (all else equal) impact revenues by roughly $7 billion. |
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Fundamentals |
Post-Election Provincial ThemesThere are some important takeaways for the Canadian provinces following the federal election. First, let’s recap some of the big macroeconomic factors currently at play: The trade war: Given where the highest non-energy U.S. export exposure lies, we expect the economic impact to hit hardest in Ontario and the rest of Central Canada. It will significantly impact some concentrated industries in Atlantic Canada and B.C., while dealing a lesser immediate blow in oil-producing provinces. Immigration: The cap on nonpermanent resident inflows will weigh heaviest in British Columbia and Ontario, where the share of nonpermanent residents in the population was well above the 5% federal target coming into 2025. Population growth will slow less dramatically in Alberta, where interprovincial in-migration remains strong. The housing slump: Conditions remain highly localized, with Southern Ontario condos in a swampy correction, while parts of the Prairies, Quebec and Atlantic Canada hold firm. The biggest COVID-era investment hangovers are ongoing, while demographic forces will also accentuate that relative performance gap in the year ahead. With those forces in mind, StatCan’s initial read on 2024 real GDP was somewhat backward looking. Growth was led by booming populations in Atlantic Canada; Ontario and Quebec were middle of the pack; and strong resource sectors drove Alberta and Saskatchewan. The latter are expected to lead again with just under 2% growth this year, while Ontario and Quebec lag at just above zero. With the federal election now wrapped up, we can layer on a few more themes: Political stability: Ontario settled on another majority PC mandate earlier in the year, leaving Newfoundland & Labrador the lone province still to go to the polls in 2025 (November 24). Even with a minority mandate at the federal level, we believe the Liberal government is strong enough that it will be able to govern largely as planned in the year ahead. Quebec (October 2026) is the next big one to watch. Federal spending surge: The Liberal platform was loaded with roughly $20 billion of infrastructure spending over four years that should filter down to the provincial level. That includes transportation and trade infrastructure, the electricity grid, health care and community infrastructure. Even if not fully through direct transfers, those outlays will take incremental pressure off rising provincial borrowing for the same purposes. Defence boom: All major parties committed to raising Canadian defence spending to 2% of GDP. The national defence footprint is highest in absolute terms in Ontario and Quebec but, in relative terms, Nova Scotia could be a big beneficiary. Proportionally, that province sees the largest military/defence footprint as a share of GDP in Canada, and it also has significant naval/shipbuilding infrastructure. An ‘energy superpower’: That was the tagline in the Liberal platform, but the focus of investment dollars and incentives was almost entirely on clean/renewable energy. This will arguably be a win for provinces like Quebec and B.C. (vast hydroelectric resources) and Ontario (recent investments in critical minerals and batteries), even as the EV market has cooled. Alberta’s traditional oil & gas sector is on the other end of this trade, and the tone in the first few months of the new mandate will be critical in keeping provincial sentiment from fracturing further. |
Budget Season NotesThe Province of Newfoundland & Labrador is projecting a $372 million deficit in FY25/26 (0.9% of GDP), worse than the $252 million shortfall now estimated for FY24/25. The Province is anticipating a surplus in FY26/27 and through the rest of the medium-term outlook. Revenues and expenditures are expected to remain stable over the horizon, though the Province builds in an oil risk adjustment that starts at $20 million in FY26/27 and rises to $75 million by FY29/30. Full analysis here The Province of Prince Edward Island is projecting a record $184 million budget deficit for FY25/26, following a downwardly revised $166 million shortfall in the previous year. That weighs in at 1.7% of GDP, one of the deepest among its provincial peers. While tariffs aren't explicitly factored in to the economic outlook, the Province sets aside a $32 million contingency for FY25/26. While there is no contingency pencilled into the subsequent years, deficits are expected to persist through FY27/28. Full analysis here
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Recent Publications of Interest2025 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 Canadian Housing Monitor: Canada’s housing market remained under pressure in March, with sales and prices both weakening further. Full analysis here 25% 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. 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 Ontario: Budget pending May 15, 2025. 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 The Province of Prince Edward Island is projecting a record $184 million budget deficit for FY25/26, following a downwardly revised $166 million shortfall in the previous year. Full analysis here The Province of Newfoundland & Labrador is projecting a $372 million deficit in FY25/26 (0.9% of GDP), worse than the $252 million shortfall now estimated for FY24/25. Full analysis here |