Provincial Credit Watch
February 03, 2026 | 09:45
Provincial Credit Watch: February 2026
Economics
Economics
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Provincial Returns |
Provincial returns started 2026 on solid note as spreads continued to tighten. Long provincial spreads narrowed further in the month alongside a broadly favorable risk environment. While provincials outperformed GoCs by roughly 90 bps, corporates were even stronger to start the year. The Bank of Canada left rates unchanged at its first meeting of 2026, and we suspect it is going to take a significant change in either the growth or inflation backdrop to move the needle on policy rates this year. |
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Relative Performance |
Long spreads tightened for all provinces in the past month, extending the across-the-board tightening for provincial borrowers seen over the past year. In many cases, the 12-month tightening move has now topped 20 bps. Ontario continues to perform very well despite sitting on the front line of the Canada-U.S. trade dispute. Ontario is now the strongest-priced credit on the provincial landscape. Meantime, Quebec continues to lag, now sitting around 10 bps back of Ontario. Less fiscal discipline versus recent years, a relatively soft economy and a looming election will all keep pressure on Quebec spreads this year. With the 2026 budget season ahead, a few provinces (namely Ontario and Quebec) have completed their FY25/26 borrowing requirements and have begun to pre-fund the upcoming year. In general, issuance has been light, and the group has been active in non-C$ markets which has taken some domestic supply off the table. |
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Fundamentals |
Population Projections Highlight New Demographic EraNew population projections show a significant demographic adjustment is underway in Canada. Population growth is projected to fall to roughly zero this year, before gradually climbing back to around 0.7%-to-0.8% by 2029, under StatCan’s refreshed M1 medium-growth scenario, consistent with new federal immigration targets. This is not only a step down from the 1.1% annualized growth seen in the decade through 2019, but a major swing from the 3% explosion seen in 2024. Here are five simple but important themes and implications from the new population outlook: We all slow down: Canada is not alone with respect to rapidly-slowing population growth. U.S. population growth was reported at just 0.5% in 2025, matching the slowest (non-pandemic) print since WWII. That came as international immigration was cut by more than half, to 1.3 million. Look for downward employment and labour force revisions to come. More broadly, G10 population growth is now running below 1% across the board. This implies that potential growth continues to grind down across the developed world, and productivity gains will have to drive any improvements. Provincial variation: The population slowdown won’t be even across Canada. Immediate shifts in the immigration program figure to pull down growth more sharply in Ontario and B.C. than the rest of Canada through 2028, simply because they saw the largest buildup in nonpermanent residents as a share of their populations. Over the next decade, however, Quebec is on pace to see roughly zero population growth, lagging the rest of Canada. At the other end of the spectrum, relatively young populations in the Prairies (namely Alberta) should drive continued strong growth in excess of 1.5%, assuming provincial migration trends don’t swing wildly. This will factor into relative housing performance and fiscal pressures.
Baby bust: Canada is projected to see births decline over the next decade as fertility rates continue to fall and the Millennial cohort ages. In fact, net births-minus-deaths are projected to turn negative in 2028 for the first time on record. This reinforces the need for a well-managed immigration program going forward. First-time buyers be gone: The Millennial cohort entering their first-time homebuying years was a major factor driving the past-decade boom in home prices, but that is now peaking. In the 10 years through 2019, population growth in the 25-39 cohort grew almost 1.5% per year, and exploded to 5.3% by 2023. The peak of the Millennial cohort is now 35 years old, and growth in the 25-39 group is expected to turn negative through 2028, before holding below 0.5% through 2035. Immigration swings are a factor, but the dynamics of Canada’s existing population are also at play and should steadily temper housing demand. Note that the secular bear market in housing through the 1990s came alongside a similar aging of the Baby Boom. What’s a central banker to think? Slower population growth and, by extension, labour force growth, will pull down the rate of potential growth. In its simplest terms, an economy can grow by having more people working (labour), or each worker producing more stuff (productivity). The BoC’s latest Monetary Policy Report notes that potential output growth is expected to slow to around 1% over the projection. Thus, even muted growth of around 1.5% in 2026 could chip away at the output gap.
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Recent Publications of InterestHousing Outlook: What You See is What You’ll Get: As we continue to work through the secular downturn in Canadian housing, expect more of the same for sales and prices in 2026. This year figures to bring a weaker Canada’s Population Estimates: On a quarter-over-quarter basis, the population fell 0.4% annualized the sharpest, and only second, quarter-over-quarter decline on record dating back to the 1940s. Full analysis here Canadian Housing Monitor: Canada’s housing market remained balanced overall heading into the quiet depths of winter, with soft sales activity and prices still correcting in some markets, while others hold firm. Full analysis here Federal Budget: The highly anticipated 2025 budget lands in the middle of a trade dispute, and at a time when the economy is struggling to grow. Full analysis here. Provincial Monitor: Canadian economic growth has struggled with uncertainty caused by U.S. tariffs, as businesses hold back on major investment and hiring decisions. Full analysis here. Canada’s Job Market: Decoding the Disruptors: Canada’s job market is exhibiting signs of slack, which could still tilt the BoC toward easing. Notable longer-term disruptions include the trade war, a leaner federal government, high youth unemployment and the proliferation of AI. Full analysis here. Surveying the Provincial Landscape: The trade war threatens to drive a wedge between economic performance in provinces with high and low exposure to U.S. trade. At the same time, a new federal government is expected to push through various policy measures that will impact the provincial landscape in the coming years. Full analysis here. Supply, Meet Demand: Housing affordability will return to pre-pandemic norms through a combination of market dynamics, income growth, a modest reduction in borrowing costs and firm construction activity. Full analysis here. Guns N’ Bonds: Ottawa’s sudden shift to higher defence spending will also have implications for the budget deficit and, potentially, long-term interest rates. Full analysis here. 2025 Election — The Same, but Different: The Canadian election results are still being finalized, but Mark Carney and the Liberals appear to have secured a strong minority government mandate. Full analysis here |
FY25/26 Budget ReportsThe Province of British Columbia is projecting a $10.9 billion deficit in FY25/26. Full analysis here B.C. mid-year update projects an $11.2 billion deficit for FY25/26. Full analysis here The Province of Alberta is projecting a $5.2 billion deficit in FY25/26. Full analysis here Alberta mid-year update projects a $6.4 billion deficit for FY25/26. Full analysis here The Province of Saskatchewan is projecting a small $12.2 million surplus in FY25/26. Full analysis here The Province of Manitoba is projecting a $794 million summary budget deficit in FY25/26. Full analysis here The Province of Ontario: The Province of Ontario is projecting a $14.6 billion deficit for FY25/26. Full analysis here Ontario mid-year update projects a $13.5 billion deficit for FY25/26. Full analysis here The Province of Quebec is projecting a record $11.4 billion deficit in FY25/26. Full analysis here Quebec mid-year update projects a $9.9 billion deficit for FY25/26. Full analysis here The Province of New Brunswick is projecting a deeper $599 million deficit for FY25/26. Full analysis here The Province of Nova Scotia is projecting an $898 million deficit in FY25/26. Full analysis here The Province of Prince Edward Island is projecting a record $184 million budget deficit for FY25/26. Full analysis here The Province of Newfoundland & Labrador is projecting a $372 million deficit in FY25/26. Full analysis here |