Provincial Credit Watch
December 02, 2024 | 11:52
Provincial Credit Watch: December 2024
Economics
Economics
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Provincial Returns |
Long provincial returns were positive in November, as a rally in GoC yields and tighter spreads drove a solid performance. Bank of Canada easing expectations have ramped up somewhat with economic uncertainty surrounding U.S. President-elect Trump's threat of tariffs on Canada. We continue to see the Bank easing steadily to 3% by March 2025, before slowing the pace toward 2.5% by September. The provinces continue to run well ahead of their FY24/25 borrowing programs, and mid-year fiscal updates have been largely in-line with expectations, if not somewhat better. Long provincial total returns are now running at a strong 10.1% on a 12-month basis, or a few basis points ahead of Canadas. |
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Relative Performance |
Long provincial spreads were tighter across the board in November. Quebec's mid-year fiscal update left the fiscal path largely unchanged, while Alberta is looking at a larger surplus for FY24/25. Saskatchewan, however, is estimating a wider budget shortfall for this fiscal year. On the political front, following elections in B.C., Saskatchewan and New Brunswick in the prior month, Nova Scotia saw the Progressive Conservative party re-elected to another majority mandate. |
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Fundamentals |
The Province of Quebec is projecting an $8.8 billion deficit for FY24/25 (1.4% of GDP) on a public accounts basis, little changed from the 2024 budget estimate—and the deepest deficit since the mid-1990s as a share of GDP. Note that in the spring, Quebec had removed its forecast to return to surplus in the medium term, and it now expects the deficit to shrink to $0.6 billion by FY28/29. While the Province does have a $750 million risk provision this year (pegged at $1.5 billion in FY25/26 and thereafter), it will also need to find over $2 billion in savings by the end of the forecast horizon. Total borrowing requirements are running at $32.5 billion for FY24/25, down from $36.5 billion previously expected. The Province of Alberta is estimating a larger FY24/25 budget surplus, now pegged at $4.6 billion (1% of GDP) compared to $2.9 billion estimated in the Q1 update, and a small $355 million in the 2024 budget. That leaves this year's surplus tracking roughly in line with the $4.3 billion balance posted last fiscal year. The cash continues to flow in Alberta. There was no major update to the medium-term projection, and no major new policy announcements in the mid-year update. The Province of Saskatchewan estimated a $744 million deficit (0.7% of GDP) in its post-election update, a deeper shortfall than in the budget plan. |
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Tariff Threats and Provincial ExposureThe threat by U.S. President-elect Donald Trump to impose a 25% tariff on all imports from Canada was a loud reminder to be ready for disruptions on the trade front. While this could certainly be early posturing to prompt some changes in Canada— and responses have already begun—policymakers and businesses can’t just ignore it. The U.S. market accounts for roughly 75% of Canadian goods exports—and nominal U.S. goods exports, in total, weigh in at about 20% of Canadian GDP. There are many moving parts, including the details and any retaliation, but here are some high-level takeaways of a full-scale 25% tariff:
At the provincial level, direct exposure to U.S. trade varies across the country. B.C. carries a relatively low share of goods exports in its economy, and roughly half of those exports are destined for markets outside the U.S. Ontario, on the other hand, sees goods exports weigh in at 26% of GDP, with more than 80% destined for the U.S. There is nuance because the provinces have vastly different product composition. For example, Alberta has high U.S. exposure, but it’s mostly oil, which we would deem at relatively low risk of trade action. Autos take up a significant share in Ontario, but one wonders if the deep integration of that sector (where parts cross the border multiple times before a product is finished) would lead to some exemptions. Manufacturing and industrial products more broadly, however, look more exposed. In general, when we consider each province's U.S. export share, and how exposed each province's industry composition leaves it, it looks like Central Canada and parts of the Atlantic region are most at risk. |
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Recent Publications of InterestWhat 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. Canada’s Housing Market in Charts: The following is a chart-based tour of the market as it stands now, and where it might be headed. Full analysis here. Slicing the Provincial Growth Pie: Economic growth remains slow across the country, and some provinces have seen their job market soften more than others. But the dispersion of unemployment rates has never been tighter. Full analysis here. Provincial Monitor: The Canadian economy is grinding out moderate growth as past interest rate hikes weigh and the job market softens. 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. The workout last time involved a major price correction followed by a long period of stagnation. Is there a less painful route back to affordability this time, and, if so, how long will it take? 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. |
2024 Budget ReportsThe 2024 Canadian federal budget lands at a time when the economy is struggling to grow, the Bank of Canada is still leaning on inflation pressures, the loonie is under stress, and the impact of torrid population growth pervades across much of the country. Full analysis here The Province of British Columbia is projecting a $7.9 billion deficit in FY24/25, or almost 2% of GDP, with a hefty borrowing program. Full analysis here The Province of Alberta is projecting a small $367 million surplus in FY24/25, or 0.1% of GDP, narrowing from the $5.2 billion surplus now expected for FY23/24. Full analysis here Province of Alberta mid-year fiscal update. Full analysis here The Province of Saskatchewan is projecting a $273 million deficit in FY24/25 (a small 0.2% of GDP), a touch narrower than the $483 million now estimated for FY23/24. Full analysis here The Province of Manitoba is projecting a $796 million summary budget deficit in FY24/25, improved from the hefty $2.0 billion shortfall expected for FY23/24. Full analysis here The Province of Ontario is projecting a $9.8 billion deficit for FY24/25, substantially deeper than the $5.3 billion last forecasted in the fall fiscal update, and the $3.0 billion shortfall now estimated for FY23/24. Full analysis here Province of Ontario mid-year fiscal update. Full analysis here The Province of Quebec is projecting a much deeper $8.8 billion deficit in FY24/25 (1.5% of GDP), before transfers to the Generations Fund. Full analysis here Province of Quebec mid-year fiscal update. Full analysis here The Province of New Brunswick is projecting a small $41 million surplus for FY24/25, in a pre-election budget that largely stays the course. Full analysis here The Province of Nova Scotia is projecting a $467 million deficit in FY24/25 (0.8% of GDP), a notable turn after three consecutive years in the black. Full analysis here The Province of Prince Edward Island is projecting an $85 million budget deficit for FY24/25, little changed from the prior fiscal year. Full analysis here The Province of Newfoundland & Labrador is projecting a small $152 million deficit in FY24/25 (0.4% of GDP), an improvement from the worse-than-expected $433 million shortfall now estimated for FY23/24. Full analysis here |