September 21, 2023 | 11:09
Leaning Into the Headwind
The Canadian economy is struggling under the weight of inflation and higher interest rates, with growth expected to stagnate into 2024. Real GDP growth is expected at 1.1% this year, helped by a solid first quarter, but growth into early 2024 looks like it will struggle to hold in positive territory. That should leave full-year 2024 growth at 0.6%, still well below potential after a pickup in the latter stages of the year. While the Bank of Canada could be done raising rates, the past increases will continue to weigh, and consumer spending is expected to weaken as households adjust their budgets to account for rising mortgage costs. Business investment is choppy, while government stimulus is adding modestly to growth this year. Even the very tight job market has shown signs of softening, a theme that should continue into next year.
All provinces are grappling with these macro factors, but some will hold up better than others. Alberta and Saskatchewan are expected to lead the country this year with real GDP at 1.7% and 1.3%, respectively, and Alberta should remain atop the pack in 2024 at 1.2%. Demographic inflows and still-high oil prices are helping. Alberta has barely seen a real estate downturn, while Saskatchewan is seeing major resource-sector project build-out. Manitoba remains steady, with growth expected roughly in line with the national average this year and next.
Meantime, the real estate downturn is playing a significant role in British Columbia and Ontario performing at or below the national average this year. In B.C., residential investment carries the highest weight in real GDP in the country. While that share is proportionally lower in Ontario, the downturn there was the sharpest in the country, and the spillover into discretionary spending will likely be meaningful, although torrid population flows are masking this somewhat in the aggregate. Counter to an aggressive push by policymakers, new housing construction in these provinces could dip this year and next, depending how market conditions evolve.
Quebec also faces the broader impact of high rates and slowing U.S. demand, although the softer loonie is acting as a buffer for exports and manufacturing.
Atlantic Canada continues to grow well above rates seen in recent years, as the region is drawing in strong population flows from outside the country and other provinces. While a slowdown is likely, growth prints should remain positive and above the national average through 2024 as consumer spending and residential investment remain sturdy.
It has been a quiet summer for budget outlooks among the provinces, and as the fall fiscal update season approaches, look for relatively steady forecasts. That’s good news given the solid current position for the group, but will also be a noticeable change compared to the past two years, where fiscal projections consistently and meaningfully outperformed.
The combined provincial budget deficit is currently estimated at a modest $4.4 billion for FY23/24, or 0.2% of GDP. While that marks a deterioration from two consecutive surpluses averaging roughly $10 billion in the two prior fiscal years, the key takeaway is that the books are largely in balance.
The surge in inflation and nominal GDP over the past three years has been a boon for provincial finances, driving up revenues and the size of the economic base. The combined provincial net debt-to-GDP ratio is pegged at 29% for FY23/24, which is 1.5 ppts below pre-COVID levels. At the same time, the provincial ratio is running 14.5 ppts below the federal debt ratio, given that the latter swallowed the vast majority of COVID-related support spending and borrowing.
For oil-producing provinces, recent trends in global prices are again supporting revenue potential. In Alberta, for example, the FY23/24 budget was based on $79 WTI, and recent price moves have erased any downside risk that had built up into early summer.
This fiscal year, the provinces look to borrow $97 billion, up from last year’s total, and somewhat above the typical pre-pandemic pace—maturities and some heavy capital-spending programs account for this, despite near balanced budgets. As of early September, just under half of the borrowing program was completed.
Inflation Sweeps the Nation
Inflation remains a lingering challenge from coast to coast and, while the degrees have varied slightly, a key takeaway from this episode is that all provinces have faced a significant inflation shock. Canadian inflation now sits at 4.0% y/y, down from 8.1% y/y at the high in June 2022, but 1.2 ppts above the recent low set in June 2023. The move up in oil prices has complicated the inflation picture, with all provinces seeing an acceleration in headline price pressure in recent months. Here are a few notable current trends:
Inflation remains well above the Bank of Canada’s 2% target across all provinces. All provinces are seeing inflation rates in excess of 3% y/y as of August, four are north of 4% y/y, and core inflation trends are similarly sticky.
Cost-of-living pressures are highlighted by strong inflation rates in food and housing. Nowhere in Canada is food inflation lower than 6% y/y, with a weak loonie, high transportation costs and firm wage pressure acting similarly across provinces.
While resale real estate prices corrected, rents continue to run at a strong pace. Some areas where the population boom has been more acute—such as Ontario and Atlantic Canada—are seeing stronger gains, but nowhere in Canada is there much relief.
The better news is that goods price inflation has cooled, for the most part, across the country. Inflation in clothing, household operations and recreation/education is running below the Bank of Canada’s target in most jurisdictions.
The B.C. economy is expected to grow 0.8% this year, slightly below the national average, with a similarly-soft 0.7% expected for 2024. The weakness follows a strong outperformance through the pandemic and before the tightening cycle began. While tourism and service activity are now helping growth, housing has been a drag given that residential investment makes up the largest share of provincial real GDP in the country.
The housing market bounced back through the spring alongside brief relief in mortgage rates, but subsequent Bank of Canada rate hikes have weakened conditions again. Sales are now running roughly in line with pre-pandemic levels, while price momentum seen through the summer is fading. As of August, Vancouver's benchmark price was little-changed from a year ago, and down about 4% from the peak.
The job market remains solid, with employment up 1.5% from a year ago. But, much stronger labour force growth has pushed up the unemployment rate to 5.2%, more than a full percentage point above the 2022 low. Conditions are expected to soften into 2024, and the jobless rate could push toward 6%.
The Province of British Columbia is projecting a $4.2 billion deficit in FY23/24, or just over 1% of GDP. While hardly deep or concerning, B.C. is seemingly doing its best to run deficits at this stage. Gross provincial borrowing is estimated at a hefty $19.0 billion for FY23/24, up sharply from $9.0 billion in FY22/23.
The Alberta economy is expected to lead the country with 1.7% growth this year and 1.2% in 2024. While this would be a slowdown from the prior two years, the province is probably best positioned to handle the current challenging macro conditions. High oil prices are supporting local incomes, real estate has held up well to higher interest rates, and people are moving to the province in droves.
After slumping through the pandemic, oil production has returned to capacity levels that prevailed before 2020, although wildfires disrupted some activity. Capital spending growth in the industry looks firm for the year ahead, but the level of spending remains less than half of its 2014 peak. Even if new project investment is slow, cash flow in the sector is well-supported.
Housing is firm, and Calgary is arguably the strongest market in the country heading into fall, with prices now pushing above the pre-correction peak. Interprovincial migration flows have turned sharply positive after six years of outflows, which is helping to drive demand. That said, the commercial real estate backdrop remains tough, with high vacancy rates in the downtown office market persisting.
The job market remains tight, with the unemployment rate still holding below 6% despite labour force growth running above 4% y/y. The province has added almost 100k jobs in the past year, helping to absorb the influx. While the jobless rate is still above the national average, the gap is likely to close through 2024.
The Province of Alberta is projecting a $2.4 billion surplus in FY23/24, or 0.5% of GDP, narrowing from a hefty $11.6 billion surplus in FY22/23. This year's budget was based on a $79 WTI oil assumption, suggesting revenue upside at current levels. Total borrowing requirements are expected at $6.6 billion in FY23/24, largely for maturities and to cover the capital plan.
The Saskatchewan economy will likely grow 1.3% this year, outperforming the national average and avoiding the worst of any downturn. Exposure to the real estate correction is limited, and buildout of a major potash project is supporting employment and investment.
Agriculture output is on pace to weaken this year after a sharp rebound in 2022. While output and conditions don't look nearly as tough as 2021, wheat production is still tracking down roughly 18% y/y. Oil production is pushing higher, and incomes will be very well supported. Meantime, potash prices soared amid geopolitical turmoil, and BHP’s go-ahead of the massive Jansen project will support activity in coming years until reaching expected production around 2026. Indeed, capital spending intentions in the province look strong this year, with the highest overall growth expected since 2008, led by mining.
The unemployment rate has risen above 5%, but remains among the lowest in Canada as the job market is tight. Unlike Alberta, the province continues to see net interprovincial outflows to even stronger jurisdictions, but those flows are dwarfed by international inflows.
The Province of Saskatchewan is projecting a $1 billion surplus in FY23/24 (1.0% of GDP), down somewhat from the $1.6 billion recorded in the prior fiscal year. The total borrowing program is pegged at $1.3 billion, down from $2.7 billion last fiscal year and the lowest total in six years.
The Manitoba economy is expected to grow 1.2% this year and 0.8% in 2024, slightly better than the national average in both years. Manitoba’s diverse and steady economic base has historically helped the province outperform during periods of national economic weakness, and the risk of challenging conditions remains in place.
There are some signs of slack building in the labour market in recent months, with the unemployment rate rising to 5.7% from 4.2% at the turn of the year. Strong labour force growth has outrun new hiring over that period, even as the latter has seen strong gains. Record 3% population growth, mostly international immigration, has contributed to the increase in the labour force.
Housing activity has cooled alongside higher mortgage rates after a very strong pandemic run. Like the economy more broadly, we expect the downturn to remain more moderate in Manitoba given less froth on the way up. For example, Winnipeg’s benchmark price growth peaked at 16% y/y, less than half of that in Toronto's, and the correction since early 2022 has also been milder.
The Province of Manitoba is projecting a $363 million budget deficit in FY23/24, roughly in line with the $378 million shortfall now expected for FY22/23. The province remains well positioned fiscally during a period of uncertainty.
Ontario’s economic growth is expected to slow to 1.2% this year, slightly below the national average as higher interest rates and a housing correction bite relatively hard. The economy is expected to grow a modest 0.5% in 2024, with risk of more significant weakness around the turn of the year even with strong population growth.
Housing activity across the province retrenched, with higher mortgage rates chilling demand and buyer psychology, before a spring bounce. Now, with mortgage rates pushing 15-year highs and more listings coming to market, conditions could be tough into next year. While Toronto prices are still 10% off their early-2022 high, some smaller markets across Southern Ontario are down closer to 20%. With the extreme strength now unwound, new construction activity should also cool through 2024, but demographic support remains in place.
In the commercial real estate sector, GTA office vacancy rates continue to rise, now topping 17%, according to CBRE. Some other sub-sectors, such as industrial, remain solid, but cap rates are adjusting to higher interest rates.
The job market remains strong, with employment powering to a record high. But, job vacancies are easing and torrid labour force growth has pushed the jobless rate up a full percentage point from the spring lows. While still well contained at 5.9%, this has now drifted above the 5.5% national average. Both goods and services employment have been strong in the past year, even as accommodation and food services remain stuck below pre-pandemic levels. Finance, professional services and technology-based industries, which powered hiring earlier in the cycle, have slowed recently. Investment in the auto sector is encouraging, although near-term labour unrest is an uncertainty.
The Province of Ontario is projecting a small $1.3 billion deficit for FY23/24, roughly in line with the $2.2 billion shortfall now expected for FY22/23. These deficits are small enough that one can think of the budget as effectively balanced. Total long-term borrowing requirements are estimated at $27.5 billion, the smallest program for Ontario in seven years, with almost half completed through early September.
Quebec's economic growth is expected to slow to 0.8% this year before fading further to 0.5% in 2024, tied with Ontario for the lowest rate in the country. The slower pace partly reflects a smaller boost from population inflows relative to other provinces. This underperformance is expected despite relative affordability and a less severe housing correction compared to other large provinces.
The recent rebound in oil prices has tilted some economic strength to Western Canada, and away from Quebec. And, while the weak loonie should support exports and manufacturing through next year, U.S. demand could soften as higher interest rates weigh.
This is expected to slow the labour market, with employment growing less than 1% in 2024 and the jobless rate rising modestly to above 5%.
The housing market has seen more stability compared to markets in Ontario and B.C., both during the pandemic-era surge in prices and the cooldown from higher interest rates. Residential construction, while in line with historic norms, is expected to rise only modestly next year alongside soft population flows.
The Province of Quebec is projecting a $1.6 billion deficit in FY23/24 (0.3% of GDP), before transfers to the Generations Fund. That's little changed from the $1.7 billion shortfall now estimated for FY22/23, but also includes a $1.5 billion contingency, as well as personal income tax cuts. Total borrowing requirements are pegged at $27.5 billion in FY23/24, with more than half completed through early September.
The New Brunswick economy looks to expand 1.2% in 2023 before growth slows to 0.8% next year, just above the national average. While these growth rates are historically strong, they come off a near-6% expansion in 2021 that was the highest since the late 1990s.
Strong population inflows have been driving above-average growth, like in other Atlantic provinces. Still, the impact cannot be overstated—the province’s population has risen over 3% y/y, marking the highest rate on record going back to the early 1950s.
The unemployment rate has risen to near 8% in recent months, though remains below its long-run average, alongside an uptick in labour force participation. The latter suggests a reversal of a long-term trend.
The provincial government expects its surplus, pegged at $863 million in FY22/23, to narrow to $200 million this year. The province sits in a strong fiscal position, with the boost in economic growth lifting revenues and shrinking the net debt-to-GDP ratio to the lowest east of Saskatchewan.
Nova Scotia’s economy is expected to grow 1.4% in 2023 and outperform the national average through next year on the back of strong population flows and the ongoing rebound from tourism.
Population growth of almost 4% year-over-year is at an all-time high, driven by both interprovincial and international migrants. That inflow will support consumer spending and housing demand in the near term. The labour market is also healthy. The unemployment rate hit an all-time low in early 2023 before spiking in the summer alongside a rise in the labour force.
Activity in the resale housing market has bounced from its springtime lows, but remains well below the record highs hit in 2021 as aggressive rate hikes weigh.
Strong population flows and attractive affordability will likely leave the home price recovery firmer than the national average.
The Province of Nova Scotia is projecting a $279 million deficit in FY23/24 (0.5% of GDP), down from the $116 million surplus reported for FY22/23. Total borrowing requirements are estimated at $2 billion this fiscal year.
Prince Edward Island
The PEI economy will likely grow 1.3% this year before slowing to 0.9% next year. Record-high population growth will continue to support economic growth, as will the short-term effects from the return of tourism.
Tourism is a major driver of economic activity, and this year is poised to be the strongest for the sector since the pandemic began. Meantime, a relatively low cost-of-living environment has drawn interprovincial and international migrants into the province. That ongoing inflow is expected to support robust housing demand despite higher interest rates.
Employment has surged, and the unemployment rate, though drifting up from earlier (all-time) lows, indicates the job market remains historically tight.
The Province’s post-election budget calls for a $98 million deficit (1% of GDP) this year, a notable deterioration from the previous year’s $66 million shortfall. The province still has a $200 million borrowing program to complete as of early September.
Newfoundland & Labrador
Newfoundland & Labrador’s economy is expected to grow 1.3% this year before slowing to 1.0% in 2024. Growth is expected to stay above the national average through both years, supported by the pickup in oil production at Terra Nova in 2024.
Longer-term prospects for the economy remain tied to the direction of energy prices alongside reserve levels and maintenance constraints on production. The unemployment rate, which has bounced around 10% for most of the year, is expected to average the year at that level—marking an all-time low for the province.
Employment has been steadily grinding higher after recovering its pandemic losses, and now sits just under the record highs set a decade ago.
The stronger labour market has been supported by a population surge that, in recent quarters, has surpassed the mid-2000s boom.
The Province of Newfoundland & Labrador is forecasting a mild $160 million deficit in FY23/24 (0.4% of GDP), marking a deterioration from the sizeable $784 million surplus pegged for FY22/23 amid a pullback in oil prices. The Province looks to borrow $1.5 billion this fiscal year, and has completed 40% of the program as of early September.