The Canadian economy is grinding out moderate growth as past interest rate hikes weigh and the job market softens. Real GDP growth is expected at 1.1% this year, helped by some improved, albeit still below-potential, growth early in the year. The ongoing Bank of Canada easing cycle, which we believe will take the overnight rate down to 3% by the middle of 2025, should allow growth to firm to 1.8% next year. Indeed, inflation continues to moderate, with all major core metrics now running at less than 3% y/y. Meantime, the job market is softening as labour supply rises at a brisk pace. That has lifted the unemployment rate to 6.6%, or 1.8 ppts above the cycle low. With the Federal Reserve also likely to cut interest rates through 2025, the loonie should hold firm.

Most provinces are running at sub-potential growth rates, and the disparity in economic performance across the country is relatively narrow. British Columbia looks to post growth slightly above the national average, and should perform in line with the rest of Canada in 2025. The province carries the highest share of residential investment in the country, a sector that is still grappling with high mortgage rates.

Alberta is expected to lead among the larger provinces with 1.6% growth this year, as firm oil prices support incomes and demographic inflows surge. Saskatchewan carries less leverage to oil and is seeing interprovincial outflows, which should lead it to underperform slightly at 1.0%. Manitoba’s diverse economy remains steady, with growth expected to be just below the national average this year. While these two provinces are seeing below-average population growth, they should benefit from favourable crop conditions.

Ontario’s economy is holding up well despite the real estate correction. Population growth is running at a massive 3.5% y/y, or nearly 550k new bodies, which is adding to consumer and residential construction demand. The consequence remains stressed infrastructure and high living costs. Real GDP is on pace to grow 1.4% this year, with scope to accelerate to 2.1% in 2025 as rate cuts are felt more broadly. Quebec, however, has seen activity struggle in recent quarters, including some swings around public-sector strike action. Growth is expected at 1.0% this year and a below-average 1.4% in 2025. Unlike Ontario, softer 2.5% population growth hasn’t been as big of a growth driver, nor as big of a stressor. Looking ahead, the outcome of the 2024 U.S. Presidential election could have significant implications for Central Canada, and keen eyes will be on any changes in the trade file.

Atlantic Canada continues to grow at a solid clip, largely due to outsized population growth—both from international immigration and ongoing interprovincial in-migration. Most of the region should see growth at or slightly below prior-year rates in 2024 as residential investment and consumer spending hold firm.

All Quiet on the Fiscal Front

Provincial governments are in the process of rolling out their FY23/24 finalized public accounts and issuing first-quarter fiscal updates for FY24/25. To this point in the fiscal year, there has been very little change in the fundamental story underlying provincial finances—we await more meaningful mid-year fiscal updates in the fall.

The combined provincial budget deficit is on track to widen to $26.5 billion (0.9% of GDP) in FY24/25 from $9.9 billion in FY23/24, with pressure coming on multiple fronts. 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 is strong, partly reflecting upward pressure on public sector wages, while interest costs are also on the rise. Torrid population growth is stressing infrastructure, necessitating large capital spending programs. Every province in Canada, with the exception of Alberta, is currently forecasting a deficit for FY24/25, so this is not a case where there are one or two bad actors. To be fair, deficit sizes are not overly large, with perhaps the exception of B.C. (above 2% of GDP and already the recipient of negative credit-rating action). But, it’s indicative that the easy years for provincial finances are behind us.

Total borrowing requirements are currently pegged at a hefty $130 billion for FY24/25. But the provinces have been active early (with some also having pre-borrowed). To date, just over three-quarters of the borrowing program has been completed.

Softening Provincial Job Markets

Canada’s job market has worked through a significant shock in recent years, and conditions continue to soften. Some differences exist at the provincial level, while longer-term trends have been toward convergence.

Canada’s unemployment rate has risen to 6.6% as of August, the highest level (outside the pandemic shock) in almost seven years. That marks a hefty 1.8 ppt increase from the cycle low, and a 1.1 ppt increase from a year ago—those are typically moves reserved for recession. All provinces have seen unemployment rates rise from recent lows but, in all regions, the increase has been entirely driven by labour supply. Recently-announced measures to curb the inflow of international students and temporary foreign workers should cool labour force growth through 2025.

While job loss hasn’t proliferated across Canada, labour demand has clearly stalled and the job vacancy rate has fallen to 2019 levels. The biggest declines have been concentrated in B.C., Quebec and Ontario, where vacancy rates are now below 2019 levels, while the Prairies and Atlantic Canada remain relatively tight. Pressure points still exist in some corners of the job market, reflecting structural imbalances. The vacancy rate in health care, for example, is still almost 2 ppts above 2019 levels. Construction, while off its high as the housing market has cooled, continues to see shortages of skilled labour amid robust building activity (strong evidence in Alberta). And, some sectors like accommodation & food services, which likely saw permanent loss of labour supply during the pandemic shutdowns, are also elevated.

On the flip side, sectors that are being driven more by cyclical forces, such as real estate (not homebuilding specifically), trade, manufacturing and finance, have seen vacancy rates fall below 2019 levels. There's evidence of this in Ontario, Quebec and B.C.

Finally, from a big-picture perspective, unemployment rates continue to converge. Over the past 12 months, the absolute difference in jobless rates across the ten provinces was the lowest in at least 45 years. Historically high province-to-province migration seems to be helping balance job market conditions; yet there is still more that could be done to ease provincial trade barriers and the free movement of labour.

British Columbia

B.C. is expected to grow 1.2% this year, before picking up to 1.8% in 2025. That would run roughly in line with the national average but is still below potential for the province. Real estate activity is stabilizing, while some major projects, such as LNG Canada and the TMX expansion, have passed peak construction.

Housing has stabilized but remains subdued. Vancouver sales volumes were weak through the summer despite Bank of Canada rate cuts, while the benchmark price is stable at about 5% below peak levels. Despite a soft resale market, construction activity remains firm with new starts expected at 46k this year.

The job market is sturdy with employment growth running under 2% y/y, but just able to keep pace with labour force growth. That has left the unemployment rate hovering below 6%, or about 1 ppt below the national average. Conditions are expected to remain largely stable through 2025 as an expected slowdown in population growth drives cooler labour force growth.

The Province of British Columbia is projecting a $9.0 billion deficit in FY24/25, or more than 2% of GDP. The 2024 budget did not include a path to balance. The borrowing program jumps yet again, to $27 billion in FY24/25, then further to $30 billion in the following year. The province lost its AAA credit rating from S&P in the wake of the budget. B.C. will go to the polls in October.

Alberta

The Alberta economy is expected to lead the larger provinces with 1.6% growth this year. The province has arguably been best positioned to handle tough macroeconomic conditions—and it has—while high oil prices and strong demographics support growth. Growth is expected to pick up to 1.9% next year.

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—a positive combination.

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. Interprovincial migration flows are running at a record positive inflow, in addition to international immigration, leaving overall population growth above 4% y/y. The commercial real estate backdrop, however, remains tough with persistent high vacancy rates in the downtown office market.

Job growth is solid, but still can’t keep pace with the influx of labour. That has lifted the unemployment rate back above 7% from a low of 4.9% earlier in the cycle. Still, pockets of labour scarcity remain—for example, skilled trades amid robust residential construction demand.

The Province of Alberta is projecting a $2.9 billion surplus in FY24/25, or 0.6% of GDP, the strongest fiscal position in Canada. In fact, the province is on pace to post the lone balanced budget this fiscal year. Total borrowing is expected at a heavy $19.8 billion in FY24/25 ($17.7 billion in term debt), although that includes pre-borrowing to cover future maturities into FY25/26.

Saskatchewan

Saskatchewan's economy will likely grow 1.0% this year, continuing on a slow but steady growth path before picking up to 1.6% in 2025. Limited exposure to the real estate correction, cooler population growth and build-out of a major potash project is supporting employment and investment.

Agriculture output is a wildcard, but favourable conditions should help output this year, although trade uncertainty around canola is a risk. Oil production is pushing higher, and incomes will be well supported by high prices. Meantime, potash prices soared amid geopolitical turmoil, and BHP’s go-ahead of the massive Jansen project will lift activity in coming years until reaching production around 2026. Capital spending intentions in the province have been strong this year.

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 more than offset by international inflows.

The Province of Saskatchewan is projecting a $354 million deficit in FY24/25 (a small 0.3% of GDP), although that’s a deterioration from the $182 million surplus reported for FY23/24. The next provincial election will be held by October 28, 2024.

Manitoba

The Manitoba economy is expected to grow a subdued 0.8% this year, slightly below the national average before accelerating in 2025. Manitoba’s diverse and steady economic base has historically helped the province avoid major swings in growth, and that trend should continue.

Agriculture output should get a boost from favourable growing conditions, continuing the swings of recent years, although trade uncertainty around canola is a risk. The labour market has been steady, but is struggling to absorb the influx of supply. While job growth has held firm, the unemployment rate has risen to almost 6% alongside a surge in the labour force.

Housing activity has cooled alongside higher mortgage rates after a very strong run. Like the economy more broadly, the downturn has been 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, and the correction since early 2022 has also been milder—prices are now moving higher again.

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. The year-over-year improvement only comes after the FY23/24 deficit was revised sharply higher. The Province sees a return to balance, but not until FY27/28.

Ontario

Ontario’s economy is expected to grow 1.4% this year, before picking up to 2.1% in 2025. Growth momentum improved in the first half of 2024, but the province faces a mix of factors—high interest rates and a tough real estate market are weighing, while torrid population growth is supporting aggregate demand. These factors should all pivot through 2025.

Housing activity across the province remains subdued, with sales down and inventory building, especially in the Toronto condo segment. Overall resale listings haven’t been higher in Toronto since the 2009 recession. Still, the market balance has held up just enough to keep prices from cascading lower. While condo prices are under pressure, GTA single-detached prices are steady. Look for stable activity and prices through the rest of the year before interest rate cuts help more meaningfully in 2025. Construction activity looks to remain solid.

In the commercial real estate sector, GTA office vacancy rates continue to rise, now topping 19%, according to CBRE. Multifamily cap rates are also increasing, and nonpermanent resident caps should weigh particularly hard on Ontario’s population growth given a high concentration of international students. Population growth should cool into the 1% range gradually through 2025 if current federal plans are met.

Job growth remains positive, but can’t keep up with population inflows. While job growth has ebbed below 2% y/y, labour force growth has accelerated to 3% y/y, pushing the unemployment rate above 7%. Unemployment is particularly high among youth and lower-skilled workers who are competing with massive nonpermanent resident inflows. Investment in the auto sector is encouraging, although EV production in Oakville has been delayed by two years until 2027.

The Province of Ontario is projecting a $9.8 billion deficit for FY24/25, versus a $3.0 billion shortfall now estimated for FY23/24. The near-term fiscal outlook has clearly deteriorated on a combination of weaker revenues and firm spending demands. The Province sees a $4.6 billion deficit for FY25/26, before a return to balance in FY26/27, a year later than previously planned.

Quebec

After an anemic 0.2% in 2023, Quebec’s economic growth is expected to pick up to 1.0% this year and to 1.4% in 2025. That is still among the weakest growth rates in the country, and well below the province’s long-run average. The softness reflects less fiscal stimulus, a smaller boost from population inflows relative to other provinces, and some labour market disruptions.

On the positive side, the economy has been helped by the prolonged weakness in the Canadian dollar, which has buoyed exports and the manufacturing sector. That said, some of this support is expected to fade as the loonie looks to strengthen modestly through 2025. Meantime, the labour market has loosened with the unemployment rate up more than a full percentage point in the year to August. Still, at 5.7%, it remains well below the national average.

Quebec’s housing market has been more stable than markets in other large provinces during the pandemic- and rate-driven swings in recent years. Combined with relatively low population inflows, that has kept home prices comparatively affordable in Montreal and Quebec City.

The Province of Quebec is projecting an $8.8 billion deficit in FY24/25 (1.5% of GDP), before transfers to the Generations Fund. That would mark the deepest deficit on record for Quebec in dollar terms (and the deepest since the mid-1990s as a share of GDP). Looking ahead, Quebec will run deficits right through the subsequent four-year forecast horizon, a notable shift from prior plans to balance the books by FY25/26.

New Brunswick

New Brunswick’s economy looks to expand 1.2% in 2024 before picking up to 1.5% next year, supported by strong population inflows. While the population story mirrors trends in other Atlantic provinces, it’s notable that year-over-year growth in New Brunswick (near 3%) has not yet meaningfully stepped down from all-time highs.

The labour market has benefitted from a stable participation rate, ending a multi-decade downward trend. Even so, the unemployment rate has not risen as quickly as in other provinces; at around 6.5%, it is below pre-pandemic norms.

The Province of New Brunswick is projecting a $28 million deficit for FY24/25, flipping from a small surplus in its latest pre-election update. The election is scheduled to take place by October 21, 2024.

Nova Scotia

The Nova Scotia economy is expected to grow 1.3% in 2024 and accelerate to 1.6% in 2025, helped by strong population inflows. Despite the pickup, growth is expected to lag the national average as other provinces also recover next year.

The major driver of activity seems to have peaked with population gains down from all-time highs in recent quarters, though still historically strong. Still, the inflow is expected to continue supporting near-term consumer spending and housing demand. The population surge has led to a looser labour market, with the jobless rate rising almost a full percentage point in the three months to July. The rate is expected to continue climbing and average 7.9% next year, in line with historical trends.

The combination of relative affordability and a surging population kept resale housing activity stable despite elevated interested rates. As a result, the price correction has been shallower in Halifax and the rest of the Atlantic region, compared to the national average. Lower mortgage rates will support activity and could result in a partial reversal of demand being diverted from elsewhere in the country. Still, the affordability calculation will continue favouring the region.

The Province of Nova Scotia is projecting a $467 million deficit in FY24/25 (0.8% of GDP), a notable turn after three years in the black. Nova Scotia has seen strong revenue upside but has also ramped up spending in a number of priority areas.

Prince Edward Island

The PEI economy looks to expand 1.8% this year and a similar 1.7% in 2025. Recently, the growth outlook has been driven by record-high population inflows and a post-pandemic rebound in tourism. While population growth has stepped down from its all-time high in recent quarters, it remains historically elevated.

The province’s relatively low cost-of-living has helped it attract more interprovincial and international migrants in recent years. That’s pushed growth in the adult population up to a record pace, keeping housing demand sturdy. In turn, an expanding labour force has driven the unemployment rate above 8%, higher than pre-pandemic levels albeit in line with historical norms.

The Province’s latest budget calls for a $85 million deficit (0.8% of GDP) this year, matching the previous year’s shortfall. The twin deficits are the first following a run of five surpluses over the preceding six years. Long-term borrowing is estimated at $400 million this year, twice the size of the FY23/24 plan.

Newfoundland & Labrador

Newfoundland & Labrador’s economy is expected to lead the country with a 2.3% growth rate this year, recovering from two years in contraction. The rebound is driven by elevated oil prices and a pickup in production, though growth looks to slow to 2.0% in 2025 (still above the national rate) as those supports cool off.

The unemployment rate, at 9.7%, is expected to remain the highest in Canada, though Newfoundland & Labrador could be the only province whose jobless rate looks to step down from its 2023 average. The province’s long-term outlook is 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 Province of Newfoundland & Labrador is forecasting a mild $152 million deficit in FY24/25 (0.4% of GDP), better than the $433 million shortfall pegged for FY23/24 amid a broad economic recovery. The Province looks to borrow $2.8 billion this fiscal year, including $1.2 billion in maturities.