Provincial Monitor
December 02, 2019 | 11:30
2020 Vision
The Canadian economy has settled into a below-potential pace in the second half of the year, with growth running just below the 1.5% mark. Oil production curbs in Alberta have eased and housing activity has rebounded in some major markets after a plunge in long-term interest rates. However, business investment remains subdued against an uncertain global policy backdrop, and net exports are no longer adding to growth. National growth is expected to improve slightly to 1.8% next year from 1.7% in 2019. Regionally, Ontario, Quebec and British Columbia continue to see the strongest overall economic performance. |
British Columbia is expected to lead the pack next year, with growth picking up to 2.2% from an expected 1.9% pace in 2019. The current-year slowdown would mark the coolest annual pace since 2009, in part the result of a correction in housing. But, housing momentum has turned and should be supportive again next year, while the massive LNG project should ramp up and add more meaningfully to the economy. Alberta real GDP growth is likely to rebound to 2% next year from just 0.5% in 2019. Mandated oil production cuts have been scaled back throughout the year after initially reducing output by 325k bpd, which will result in a meaningful addition to calendar-2020 growth. More broadly, capital spending, housing and consumer activity set a still-sluggish backdrop for the province. Saskatchewan looks to be relatively stagnant as well around the 1% mark, with slower population growth and an overhang of past housing supply still weighing on home prices. Manitoba should continue its steady performance, with growth expected at 1.6% next year. Ontario’s economy has moderated after a powerful multi-year run, but overall performance remains healthy. Real GDP is expected to grow 1.8% this year, before edging up to 1.9% in 2020. Recall that average growth in the prior five years ran at 2.4%. The downshift largely reflects a move back toward potential for the province, with some key sectors, such as housing, coming off the boil. That said, the housing market has firmed alongside a substantial decline in five-year fixed mortgage rates through 2019. Despite past policy measures designed to cool price growth, fundamental supply/demand conditions are still very supportive. Also, the GTA labour market is arguably the strongest in the country right now. In Quebec, housing market activity is strong (especially in Montreal), as demographic demand is supplemented by increased nonresident activity. And, consumer spending and business investment remain solid. Real GDP is on pace to grow 2.4% this year, the strongest in Canada, before downshifting somewhat in 2020. While expected to slow, growth will remain above potential, and conditions remain supportive for employment, investment and real estate. Finally, a population boost has lifted growth in much of Atlantic Canada well above potential over the past few years. While that is persisting into late-2019, we believe the process of gradually returning to trend will play out in this part of the country as well. One challenge will be retaining recent immigrants in a relatively weak (albeit tightening) labour market, versus stronger regional economies. Some provinces in the region are also starting to feel a hangover after a number of major private- and public-sector capital spending projects reached completion. |
Ottawa and the Provinces: Separate WaysAll Provinces have published their final public accounts for FY18/19. The overall theme has been better-than-expected balances to finish the year for most. The combined provincial deficit is now pegged at $5.1 billion for FY18/19, the narrowest combined budget deficit in a decade. Notably, that is much smaller than the $16.1 billion expected after the spring 2018 budget season. Almost all Provinces finished the year better than expected, including multi-billion-dollar improvements in B.C., Alberta and Quebec. Ontario was the lone province to end with a deeper deficit, but the modest deterioration from the original plan (by $700 million, to $7.4 billion) is actually good news. Recall that after the new government took office, they guided to a deficit as deep as $14.5 billion at one point. We’ve argued all along that they were setting the bar extremely low (perhaps intentionally), and the public accounts figures confirm that underlying finances are not nearly as troubling as they have been made out to be. In the meantime, mid-year fiscal updates for FY19/20 have also rolled in, and it’s clear that the FY18/19 combined provincial deficit reduction was temporary. As of publication time, the combined deficit is pegged at $14.3 billion for FY19/20, with Alberta and Ontario slipping deeper into the red, while large surpluses in B.C. and Quebec shrink. Fundamentally, the big picture at the provincial level is that most jurisdictions have tacked to the political and fiscal right, even as the federal election result will arguably shift policy further to the left. Note that when the federal Liberals were first elected in 2015, there was just one provincial Conservative government in power (Saskatchewan Party). Today, there are seven. At the federal level, it’s reasonable to assume that Ottawa’s $20 billion FY19/20 deficit, which was pegged to rise to $27 billion next year under the Liberal platform, could easily push over $30 billion when infused with measures designed to win other-party support. At the provincial level, however, current projections suggest the deficit could narrow by roughly $5 billion in 2020 after temporarily widening this year, acting as a partial offset to any federal stimulus. Indeed, with Alberta’s restraint-heavy budget in hand and spending profiles set out by others in the spring, FY20/21 could see one of the slowest rates of combined provincial program spending growth of the past 20 years at around 1.7%—that would be down about 2% in real per-capita terms. That said, various tax relief measures (corporate tax rate cuts, a sales-tax reduction and more) have begun trickling out, and will act as a partial offset. But, capital spending plans have been scaled back in some provinces, and have broadly levelled off. All told, a provincial fiscal policy shift toward restraint, in exchange for some early tax relief, will serve to counter some of the shift expected at the federal level. |
British Columbia’s economy has moderated this year as the housing market slowed, with real GDP on pace for 1.9% growth. With housing now turning up, growth should pick up to 2.2% in 2020 to lead the country. Growth will get a boost next year as the $40 billion LNG Canada project breaks more significant ground. Plant construction is expected to peak around 2021 with roughly 10,000 jobs created, providing steady support to growth. Residential investment is likely bottoming alongside the housing market. The correction was the result of less speculation and foreign investment, prior Bank of Canada rate hikes and stricter OSFI mortgage rules. That said, home sales in Vancouver have bounced back and prices have recently firmed—mortgage rates have fallen and demographic demand is strong. |
The labour market is solid, with employment up 2% y/y despite declines through the summer months. The jobless rate has backed up slightly to 4.7%, but should tighten again through 2020. The Province of British Columbia expects a modest $148 mln surplus for FY19/20, a touch smaller than the $179 mln expected in the original budget plan. A $500 mln forecast allowance remains in place. |
Alberta’s economy remains sluggish, with real GDP growth likely slowing to 0.5% this year from 1.6% in 2018. Mandated oil production cuts have weighed on output this year, though the curbs have been rolled back to 125k bpd as of September 1st from as much as 325k bpd. This will help 2020 real GDP rebound 2%. Longer term, with oilsands production still on the rise, limited pipeline capacity will remain a pressing issue. New capital investment is expected to remain limited. The housing market is soft but stabilizing, with prices in Edmonton and Calgary still drifting lower—each is down about 2.5% y/y. Housing starts have found a footing, though well down from pre-shock levels. |
Commercial real estate also remains awash in supply with vacancy rates topping 24% in Calgary’s downtown office segment. The labour market is steady, with job creation just enough to absorb growth in the labour force. The jobless rate has held steady below 7%, down from a recent peak above 9%, but well above pre-shock lows of 4.3%. The first budget under the newly-elected United Conservative Party laid out a plan balance the books by FY22/23. This will lean on a heavy dose of spending restraint, the elimination of various tax expenditures and the assumption that WTI oil will gravitate toward the $63 level by that point. This is partly offset by a reduction in the corporate tax rate from 12% to 8% by 2022, as well as scrapping of the carbon tax. |
Saskatchewan’s economy remains subdued, as the effect of the oil price downturn lingers. Real GDP is expected to advance a moderate 0.9% this year, underperforming the national average for a sixth straight year, and remain subdued at 1.2% next year. The oil sector has been retrenching, but the Province expects relatively stable production over the near term. Capital investment, however, looks to be down this year. Potash production is rising at a steady clip, but trade tensions with China and a November rail strike have negatively impacted the farm sector. Labour market momentum has improved recently, with service-sector jobs lifting total employment after a prolonged period of stagnation. |
The jobless rate has averaged 5.3% through October after peaking at 7% just over two years ago. Population growth continues to slow, as the province is again losing migrants to other regions. That, and supply from the past cycle have left unabsorbtions high and house prices correcting—down 7% y/y in Regina and worsening. The Province of Saskatchewan is projecting a small $26 million surplus for FY19/20, or negligible as a share of GDP. That is improved from the $268 million deficit reported for FY18/19. Recall that this new fiscal year marks the third in the government’s ongoing plan to balance the books. |
Manitoba continues to grow at a steady pace, with real GDP expected to rise 1.9% this year, and again in 2020. The diverse manufacturing base and sturdy service sector continue to churn out some of the steadiest growth in Canada, which is often the norm. Manufacturing has had a reasonable run since 2010, but could be dragged by ongoing trade tensions, and a weaker backdrop for U.S. business investment. USMCA clarity has helped, though we await ratification. The labour market is sturdy, with employment growth trending around 1%. The jobless rate is bouncing around 5.5%, close to the national average, with little deviation in recent years, highlighting the province’s stability. |
Housing market activity should remain stable, with sales and price growth both modest, supported by solid population growth and favourable affordability. Indeed, demographic demand is supporting housing starts, which have averaged a record level over the past 12 months. The Province of Manitoba is projecting a $360 million summary budget deficit in FY19/20, though FY18/19 came in better than expected at $163 million. That weighs in at less than 1% of GDP, and remains on a clear improving path since bottoming at more than $800 million in 2015. The provincial sales tax was cut by 1 ppt as of July, 2019. |
Ontario’s economy has moderated after a powerful run. Real GDP is expected to grow 1.8% this year, down from 2.2% in 2018 and 2.9% in 2017. This reflects a return to potential growth for the province, with a steady 1.9% expected in 2020. The housing market has regained momentum after a wave of policy measures (non-resident buyers' tax, rate hikes and OSFI rules) triggered a modest correction. But, strong demographic demand and a plunge in longer-term mortgage rates have firmed activity. Toronto sales were up 13% y/y through October, and many segments of the market are again tight. Condo prices continue to rise more than 8% y/y, while detached prices have turned up. Markets outside the Greater Golden Horseshoe continue to perform very well. |
The labour market is strong, with near-3% job growth likely to lead the country this year. The jobless rate, trending around 5.5%, has remained low despite a surge in the labour force as the market has absorbed the influx. Migration flows from outside Canada and other provinces remain historically strong. Export volumes are rising at a modest pace, and longer-term challenges, such as relatively high labour and electricity costs, remain. That said, USMCA clarity (eventually), accelerated CCA allowances and a business-friendly policy shift should support business confidence and investment. Fiscal Update: Better Momentum Continues The Province of Ontario is projecting a $9.0 billion deficit for FY19/20 (1.0% of GDP), improved from the $10.3 billion estimated in the 2019 budget. But, that’s still tracking somewhat deeper than the $7.4 billion reported in the FY18/19 public accounts (though there could be some improvement yet before the fiscal year is fully wrapped up). Indeed, a $1 billion reserve allowance still remains in place. The medium-term fiscal outlook was also updated, but remains very little changed, with the deficit pegged at $6.7 billion in FY20/21 and $5.4 billion in FY21/22. Total revenues for FY19/20 have been revised up by a meaningful $1.6 billion, on the back of higher corporate and personal income tax receipts, while the following two fiscal years are tracking $1.7 billion higher. This flows from the higher-than-expected tax base last year, lifting revenue estimates in all future years. That said, the Province has allowed the revenue upside to largely flow through to higher spending. This year’s program spending will run $0.8 billion higher, but the increase rises to $2 billion above the prior plan in each of the following two fiscal years, fully offsetting the revenue increase. Debt service costs are also tracking $0.5 billion lower, to make up the difference. In a nutshell, this a sign that the Province is backing away (slightly) from what was a pretty tough restraint-heavy spending profile laid out in the original 2019 budget plan. Still average program spending growth this year and through FY21/22 is running at a subdued 1.6% pace—still pretty tight-fisted with inflation around 2% and population growth at 1.7%. There were few major policy changes in this fiscal update. The Province will trim the small business tax rate from 3.5% to 3.2%, starting in 2020. This is partly offset by a reduction in the non-eligible dividend tax credit rate, for a small net tax reduction of $20 million in FY20/21. Total borrowing requirements are pegged at $31.9 billion for FY19/20, down $4.1 billion from the budget outlook. |
Quebec's economy remains strong, and has experienced its best performance in 15 years. Real GDP is expected to grow 2.4% this year, the strongest in Canada, before cooling to 1.8% in 2020. While slowing, this is still a solid growth rate for the province, and overall conditions remain supportive for employment, investment and real estate. Real business investment continues to grow at a strong clip, with confidence boosted by a stable political backdrop and much-improved government finances. Export growth has also been solid. The labour market performance has been strong, with sturdy job growth and a low jobless rate. Indeed, the jobless rate has dipped below 5% for the first time on record, and remains below the national average. |
Montreal’s housing market is seeing continued momentum, and remains one of the strongest in Canada—solid demand fundamentals, favourable affordability and increased non-resident investment have all helped. Benchmark prices are running at a 7% y/y pace, and prices should be able to rise further. Residential construction has also been a recent boon for the economy. Fiscal Update: Tax Relief Ongoing The Province of Quebec is projecting a $4.1 billion surplus in FY19/20 (0.9% of GDP) before transfers to the Generations Fund, and is pulling forward some previously-announced policy measures. This is up from the $2.5 billion surplus projected in the budget plan, entirely on the back of stronger-than-expected revenues. Indeed total revenues are now tracking $1.7 billion higher, with strong growth in personal income and sales tax receipts. Meantime, total spending is slightly higher, with much lower debt service costs offset by an increase in program spending. Separately, the FY18/19 public accounts reported a much larger-than-expected $8.3 billion surplus, up from the $5.6 billion latest estimate and just under $1 billion in the original budget plan. Notably, that is the third-largest provincial surplus on record, trailing only those seen in Alberta during the heady days of the oil boom in 2006/07. Given the much better fiscal backdrop, the Province announced that it will pull forward a few previously-planned measures. For example, the family allowance increase/restructuring previously planned for 2022 will now take effect in 2020. Also, the Province will go back to a single rate for childcare, with the additional contribution removed retroactively to the start of 2019—it was previously planned to be phased out by 2022. Borrowing requirements have been increased by $0.7 billion, with repayments up by $2.3 billion and Retirement Plans Sinking Fund deposits up by $1.5 billion, offsetting lower underlying financial requirements. Net debt is now expected to finish FY19/20 at $172.5 billion, or 38% of GDP. Note that FY18/19 (just reported) came in at 39.3%, the first time below the 40% mark in 13 years, and down from a recent high of 50.9% in FY12/13. For the record, Ontario’s ratio has moved above 40%. All told, there is no let-up in Quebec’s fiscal momentum, with FY18/19 coming in much stronger than expected, allowing the Province to implement some previously-announced measures earlier than planned. With the coffers still full and the economy still rolling, one wonders what the 2020 budget will have in store… |
The New Brunswick economy has softened after a healthy run, with real GDP growth expected at 0.6% this year, before firming slightly to 0.7% in 2020. This reflects more trend-like growth for the province. Capital spending has retrenched recently as some major projects have wound down in the forestry and refining sectors. Forestry exports have firmed alongside improved momentum in U.S. housing, thanks in part to a plunge in long-term interest rates. Labour market trends have been mixed. Employment growth was strong through the first half of 2019, but has faded since mid-year. The unemployment rate has drifted moderately higher alongside a jump in the labour force—it sat at 8.1% in October. |
While the province has seen a near-term boost in population, demographics remain a longer-term challenge given an aging population. In the meantime, international immigration and less outflows to other provinces have helped. The Province of New Brunswick is projecting an $88 million surplus for FY19/20. That follows a $72 million surplus reported for FY18/19, and would mark the third straight year in the black. The Province continues to expect surpluses through FY22/23, while net debt will drift lower as a share of GDP. |
Economic growth continues to moderate in Nova Scotia, with real GDP growth expected at 1.0% this year, and 0.9% in 2020. This roughly marks near-term potential growth after a multi-year run above that mark. Indeed, the province has come off its best three-year run (averaging 1.6%) since the financial crisis—demographics and nonresidential investment added a boost. The Halifax Shipyard is busy building combat ships for the Royal Canadian Navy (through 2030). Other major capital projects, such as the Nova Centre and Maritime Link, have also supported growth recently, but their contributions have begun to fade—capital spending is expected to fall modestly this year. Residential construction has been strong, with the number of units under construction in Halifax at a record high. |
This is partly in response to firmer population growth through two channels: a reversal of outflows to Alberta, and a big jump in international immigration, as seen across much of the Atlantic region. Labour market momentum has been strong, with employment surging to record levels earlier in the year, before ebbing through the summer and fall. Softer job momentum and still-strong labour force growth have caused the jobless rate to back up to 8% after hitting a record low 6.2% in the spring. The Province of Nova Scotia is projecting a $31 million surplus in FY19/20 (0.1% of GDP), narrower than the $120 million surplus reported for FY18/19. That would mark the fourth straight year in the black. |
The PEI economy has run at a very solid pace, but real GDP growth will likely moderate to 1.4% this year and 1.0% in 2020. Strong tourism activity, a population boost and less fiscal restraint should keep the economy performing well. Exports are rising at a solid clip, led by transportation equipment, as well as past gains in electronics and electrical equipment. While U.S. demand is expected to soften, the Canadian dollar is supportive of continued tourism activity. Public-sector restraint has given way to firmer spending growth, thanks in part to better government revenues. Population growth is running at a very strong 2.2% y/y pace. International immigration has accelerated, and net interprovincial migration has largely levelled off. |
Employment has been very strong, rising to a record level in October, with all of the gains full time. That has helped pull the jobless rate consistently below 9%, after trending in the 10%-to-13% range previously. The Province of Prince Edward Island is projecting a small $1 million surplus in FY19/20, similar to the prior year and the third consecutive year in the black. |
Newfoundland & Labrador’s economy remains mixed. Real GDP is expected to rebound 2.0% this year after a 3.5% decline in 2018, partly the result of temporary factors. The oil sector makes up roughly 20% of GDP and 7% of employment, and the recent cycle in oil prices has impacted incomes. Production has faded after peaking in 2007, but Hebron began producing late in 2017, and should ramp up to 150,000 bpd over the coming years. Longer-term potential in the sector is solid, but near-term capital investment is facing a lull, with other projects such as Muskrat Falls also winding down. Last year’s temporary decline in iron-ore output was a drag on GDP growth. |
Employment has improved somewhat over the past year, but is still about 8% below the 2013 peak. But, because the province hasn’t seen the population influx that most of its peers have seen, the jobless rate has fallen to just above 11%, down more than 4 ppts since the end of 2017. That said, retail sales and housing have underperformed since the demographic boost has been absent. The Province of Newfoundland & Labrador projected a hefty $1.9 billion surplus in the FY19/20 budget (more than 5% of GDP), fully on the back of an accounting move that books new future Atlantic Accord revenues in the current fiscal year. Excluding this impact, the underlying deficit sits at $575 million, a touch wider than the $552 million reported for FY18/19. The Province expects a return to balance in FY22/23. |