Canadian economic growth is expected to struggle this year as the uncertainty surrounding the trade war, and the reality of any U.S. tariffs, bites confidence and business investment. BMO Economics is forecasting 1.0% real GDP growth in 2025, down from 1.5% in 2024. A modest contraction in the economy can’t be ruled out through the middle stages of the year, before growth staggers back toward potential through 2026. As of the time of writing, the tariff situation between the U.S. and Canada is still evolving, so some forecast revisions should be expected. On the positive side, past Bank of Canada easing continues to ripple through the economy and interest rates should fall gradually further through the rest of the year. And, a significant wave of federal fiscal stimulus will begin to roll out, including income tax cuts and hefty infrastructure spending.

All provinces are expected to see growth slow in 2025, but the regional disparity will widen notably. Alberta and Saskatchewan are expected to lead with growth at just under 2%. Demographic flows and housing activity are solid, and the tariff impact on energy exports will be relatively low. British Columbia is also relatively sheltered and should expand 1.3%, carrying the lowest U.S. export exposure in Canada—more B.C. trade flows to Asia.

Ontario, Quebec and Manitoba will certainly feel the impact of the trade war, posting growth around 0.5%. These provinces carry high exposure to U.S. exports across a range of diverse manufacturing industries, autos (Ontario) and steel & aluminum (Quebec). At the same time, Southern Ontario remains in the grips of a housing correction, which lower mortgage rates have yet to relieve.

Finally, Atlantic Canada could look more mixed this year, with a few pockets of varying industry trade exposure. That said, the region is still catching up to torrid population growth even if that will slow sharply this year, and the ‘Buy Canadian’ movement could drive domestic tourism activity this summer. Growth in the region is expected to fall to the 0.7%-to-1.6% range.

Budget Season in the Books

All provincial governments have now published their 2025 budgets, and the general trend is toward a deterioration in fiscal balances, along with robust borrowing programs.

The combined provincial budget deficit is on track to widen to $45.0 billion (1.4% of GDP) in FY25/26 from $20.1 billion in FY24/25. While that is still very manageable, it marks a fourth straight year of deterioration and is the deepest (non-pandemic) shortfall as a share of GDP in 13 years.

Revenue growth, which had been robust thanks to the post-pandemic recovery and high inflation, has cooled amid softer economic growth. Meantime, program spending growth remains firm, partly reflecting upward pressure on public sector wages, while interest costs are also on the rise. Torrid population growth has also stressed infrastructure, necessitating large capital spending programs. And, this is not isolated: every province in Canada, with the exception of Saskatchewan, is forecasting a deficit for this fiscal year.

It’s also worth noting that every province has taken a somewhat different approach to accounting for the impact of the trade war. Some have fully built tariffs into their outlook, while others have fully ignored them; some have built in larger contingencies, while others have built in none.

Total borrowing requirements are currently pegged at a hefty $139 billion for FY25/26. In addition to operating deficits, provinces almost across the board are funding large capital expenditures. In some cases, credit rating agencies have taken notice, with the post-pandemic wave of upgrades now turning the opposite direction, albeit in only limited cases at this point.

Federal Election Impacts

With the federal election now wrapped up, we can layer on a few more themes that could impact provincial growth and finances:

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, and no budget expected until the Fall, 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.

British Columbia

B.C. is expected to grow 1.3% this year, up from a 1.2% rate in 2024 and above the national average. The province is relatively insulated from the trade war given lower exposure to U.S. exports, with Asia accounting for a large share.

Residential real estate continues to struggle, with sales volumes slumping through early spring alongside weaker consumer confidence. Vancouver sales were near multi-year lows during Q1, while prices were flat from a year ago. Province-wide construction has also slowed, with new starts expected at 40.0k this year. B.C. population growth will also feel the impact of federal caps on nonpermanent residents more than other provinces.

The job market continues to loosen, with the unemployment rate rising to 6.2% by April amid still-robust labour force growth. We expect the rate to rise to 6.7% later in the year. While relatively sheltered on the U.S. trade front, some major projects such as LNG Canada and the TMX expansion have passed peak construction phases.

The Province of British Columbia is projecting a $10.9 billion deficit in FY25/26, or a chunky 2.5% of GDP. The FY24/25 deficit was revised down slightly to $9.1 billion, while larger deficits persist through the forecast horizon. By FY27/28, the province still sees a large $9.9 billion shortfall, with the end of the forecast again running meaningful larger than previously expected ($6.1 billion).

Alberta

The Alberta economy should hold up well this year. Real GDP growth is expected at a solid 1.9%, the highest in the country. The province is arguably best positioned to handle tough macroeconomic conditions, even if the step down in oil prices takes some momentum out of income growth.

Oil production continues to grow at a steady pace, as increases in oilsands output are set against stable conventional output. While capital spending remains less than half of its 2014 peak, maintenance spending and cash flow are ongoing. With additional TMX pipeline takeaway capacity now online, producers have benefited from a tighter spread relative to WTI, all at a time when the loonie is weak—so far, U.S. tariffs have had a minimal impact on spreads.

Housing is firm, although showing signs of levelling off. Calgary prices are still pushing record levels, but the extremely tight market balance has ebbed in recent months to become more balanced. Edmonton has firmed at the same time, with better affordability drawing in buyers. Net interprovincial migration is still running at a record level, which will dampen the broader slowdown expected in international immigration. The commercial real estate backdrop, however, remains tough with persistent high vacancy rates in the downtown office market.

Job growth is solid, but hasn't kept pace with the influx of labour. That has left the unemployment rate above 7%. Still, pockets of labour scarcity remain—for example, skilled trades amid robust residential construction demand.

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. WTI oil prices are assumed at $68, which looks high as of mid-May, but there $4 billion of contingencies built into the budget plan.

Saskatchewan

Saskatchewan's economy will likely grow 1.8% this year, after jumping 3.4% in 2024. Last year's gain likely won't repeat given surges in agriculture, mining and potash output, but the province will still perform relatively well through the trade dispute.

Agriculture output is a wildcard, but oil production is pushing higher, and incomes will be well supported by current prices. Meantime, potash prices remain elevated, and BHP’s massive Jansen project buildout will lift activity in coming years until reaching production in 2026. Capital spending intentions in the province have been strong this year.

The unemployment rate has fallen in recent months to just above 4%, leaving it at the lowest level in Canada. Job growth has accelerated with gains in the construction and resource sectors, while public admin hiring has also been strong. That has outpaced cooler-than-average labour force growth.

The housing market remains well-balanced and mostly stable, which is a positive story.

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.

Manitoba

The Manitoba economy is expected to grow a subdued 0.6% this year before picking up to 1.1% next year. While Manitoba’s diverse and steady economic base has historically helped the province avoid major swings in growth, the economy has a high exposure to U.S. trade that will leave it vulnerable to the trade war—especially in sectors like pharmaceuticals and agriculture.

While agriculture output should benefit from favourable growing conditions, tariff uncertainty from China and the U.S. remains a risk, especially around canola. The labour market has been relatively steady, with the jobless rate stepping down from recent highs and unchanged from a year ago.

Housing activity has stabilized alongside lower rates and relative affordability. Like the economy more broadly, the previous housing market swings have been more moderate in Manitoba. While there was less froth on the way up, the rate-driven correction was also milder; now, benchmark prices are still up a sturdy 8% y/y in Winnipeg (vs. down almost 4% nationally).

The Province of Manitoba is projecting a $794 million summary budget deficit in FY25/26, improved from the $1.2 billion shortfall expected for FY24/25. While that weighs in at a manageable 0.8% of GDP, the Province includes a ‘tariff budget’ that sees the deficit nearing the $2.0 billion mark if broad-based U.S. tariffs are sustained. The Province sees a return to balance, but not until FY27/28.

Ontario

Ontario’s economy is expected to grow 0.6% this year and 0.9% in 2026, near the bottom of the pack in both years. The province’s high exposure to manufacturing—especially autos—leaves it the most vulnerable to U.S. tariffs by our estimates. Additional headwinds include a prolonged recovery in the housing market and the more restrictive immigration targets. The latter disproportionally impact Ontario and B.C. given relatively strong inflows of international students in recent years.

Housing activity remains subdued across the province with particular softness in Toronto condos, which is arguably the weakest segment in Canadian real estate. Overall, the sales-to-new listings ratio points to the softest market since the mid-1990s with a number of cities firmly in buyers’ market territory as affordability remains a challenge despite lower interest rates.

The immigration caps have also put significant downward pressure on rents, keeping investors on the sidelines. We expect the housing market to remain soft as long as trade uncertainty clouds the economic outlook. Meantime, construction activity remains elevated though it has pulled back from recent highs on a glut of existing inventory, weak demand, and difficulty finding skilled labour.

In the commercial real estate sector, GTA office vacancy rates continue to rise and are nearing 20%, according to CBRE. Multifamily cap rates are also increasing as the caps on nonpermanent residents weigh particularly given a high concentration of international students.

Job growth has stalled and turned negative in March and April as tariffs weigh heavily on Ontario, particularly in manufacturing. The unemployment rate has risen to near 8%, up a full percentage point from a year ago in April. Past immigration inflows have kept the unemployment rate relatively high among youth and lower-skilled workers, with additional pressure expected in manufacturing (particularly in autos) over the coming months. A number of auto assembly plants have already announced temporary shutdowns and shift cuts, while previously announced investment in EVs and battery plants have been delayed or scaled back.

The Province of Ontario is projecting a $14.6 billion deficit for FY25/26, much deeper than the $6.0 billion shortfall now estimated for FY24/25. The near-term fiscal outlook has clearly deteriorated as trade uncertainty clouds the outlook for economic activity and, thus, tax revenues. The Province expects a $7.8 billion deficit for FY26/27, before a return to balance in FY27/28, a year later than previously planned.

Quebec

Quebec’s economic growth is expected to slow to 0.4% in 2025, following an estimated 1.3% rate in 2024. Quebec is expected to be among the most impacted provinces from tariffs due to its high concentration of manufacturing, especially aluminum. The province is also coming into the trade war with limited momentum given smaller past population inflows and less fiscal stimulus relative to other provinces.

On the positive side, the aluminum sector benefits from a lack of North American alternatives, allowing producers to pass along some higher tariff costs to their U.S. customers. And, a low average tariff rate on Canada helps to limit the broader economic impact relative to initial estimates.

Meantime, the labour market has loosened with the unemployment rate up almost a full percentage point in the year to April. Still, at 6.0%, it remains well below its historical median of 9%.

Quebec is home to some of the tightest housing markets in the country amid the ongoing shift to more affordable cities. Benchmark prices in Quebec City have skyrocketed by over 15% y/y, compared to a national average decline of roughly 4% from a year ago.

The Province of Quebec is projecting an $11.4 billion deficit in FY25/26 before transfers to the Generations Fund, which weighs in at 1.8% of GDP—the deepest by that measure since the mid-1990s. The budget assumes average U.S. tariffs of 10% over the years, which seems like reasonable estimate at this point, if not a touch conservative assuming the USMCA exemptions hold.

Looking ahead, Quebec will run deficits right through most of the subsequent four-year forecast horizon. The budget is just the latest in a years-long deteriorating trend for fiscal finances, resulting in a ratings downgrade from S&P to A+.

New Brunswick

New Brunswick’s economy looks to grow 0.7% in 2025 before picking up to 1.0% next year. The province’s higher exposure to manufacturing leaves it in a weaker position than its Atlantic peers, with growth expected to be the slowest outside Central Canada this year.

While population growth has come off all-time highs (like in the other provinces), it’s notable that year-over-year growth in New Brunswick (just under 2%) remains well above its historic norm.

As a result, the unemployment rate has not risen as quickly; hovering around 7.0%, it is at the low end of the pre-pandemic range.

The Province of New Brunswick’s first post-election budget is projecting a $599 million deficit for FY25/26, following a $399 million shortfall in the prior fiscal year. The deficit is expected to gradually shrink over the forecast horizon though there is no estimated return to balance.

Broadly speaking, robust population growth has driven higher spending across a range of public services and infrastructure, pushing up the Province’s debt load while the trade war adds further downside risks.

Nova Scotia

The Nova Scotia economy is expected to grow 1.0% in 2025, cooling from a sturdy 2.7% in 2024 on strong population inflows. Despite the slowdown, growth is expected to be in line with the national average this year.

The labour market remains relatively healthy despite a full percentage point jump in the jobless rate to 7.2% in April. The rate is expected to average around 7% through this year and next. Looking ahead, Nova Scotia’s relatively high exposure to defence could benefit its economy as the federal government looks to boost spending in this area to fulfil NATO/U.S. commitments.

The major driver of activity seems to have peaked with population gains down from all-time highs and now in line with historic norms. Still, relatively lower cost of living continues to support housing demand, leaving Halifax one of the tighter markets in the country. That said, lower mortgage rates could result in a partial reversal of demand being diverted from elsewhere in the country through next year. Still, the affordability calculation is expected to continue favouring the region over the medium term.

The Province of Nova Scotia is projecting an $897 million deficit in FY25/26 (1.4% of GDP), a notable shift following four straight years in the black. The deteriorated outlook reflects a new contingency fund (with broadly defined usage) and a one percentage point cut in the Harmonized Sales Tax.

Prince Edward Island

The PEI economy looks to expand 1.6% this year after leading the country with 3.6% growth in 2024. The province’s relatively low cost of living has helped it attract more interprovincial and international migrants in recent years. While population growth has stepped down from its all-time high in recent quarters, it is in line with historic trends.

While past labour force growth put some upward pressure on the unemployment rate, it has come off recent highs to 6.6% in April, in line with past norms.

The Province’s latest budget calls for a record $184 million deficit this year; the relative size (1.6% of GDP) is one of the deepest among the provinces, though it includes some personal and corporate income tax cuts. Long-term borrowing is estimated at $800 million this year, up from $500 mln in the prior fiscal year.

Newfoundland & Labrador

Newfoundland & Labrador’s economy is expected to be one of the better performers this year, with a forecasted 1.5% growth rate at about twice the national pace. This follows an estimated 2.4% expansion in 2024, supported by elevated oil prices and a pickup in production. While oil prices have slumped this year, the province benefits from a lower U.S. tariff rate on Canadian energy, leaving it relatively well insulated from the trade war.

That said, the long-term outlook is more closely tied to energy prices, along with reserve levels and maintenance of production capacity. This leaves broad economic activity, and the labour market, susceptible to large year-over-year swings. The unemployment rate has actually trended down since late last year; but at 9.6%, remains the highest in the country.

The Province of Newfoundland & Labrador is forecasting a $372 million deficit in FY25/26 (0.9% of GDP), worse than the $252 million shortfall now estimated for FY24/25. However, the latest budget does expect a return to balance next fiscal year and through the rest of the medium-term outlook. The province also faces the U.S. trade war with some political uncertainty after Premier Andrew Furey’s surprise resignation earlier this year. He has been replaced by relative newcomer John Hogan as the Premier and Liberal leader, with a general election scheduled for November.