Provincial Credit Watch
February 05, 2025 | 10:13
Provincial Credit Watch: February 2025
Economics
Economics
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Provincial Returns |
Long provincial returns were positive to start the year alongside a rally in GoC yields. The Bank of Canada cut interest rates by 25 bps on January 29th as widely expected, and we see further easing this year, albeit now at a more gradual pace. Risk appetite was tested around the turn of the month as threatened U.S. tariffs came down to the 11th hour, before being delayed by 30 days. GoC yields fell, with the 5-year hitting the lowest level since 2022. Provincial spreads, however, widened alongside higher risk, but long spreads are still well within the range seen over the past three years. Total provincial returns over the past 6- and 12-month periods continue to run at a solid 4% and 6.7%, respectively. |
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Relative Performance |
Long provincial spreads were wider across the board in January. A few provinces hinted at significant stimulus/support measures in the event of a prolonged trade war with the U.S., which has yet to materialize. A number of provinces also prepared initial responses to U.S. tariffs, which included measures such as pulling U.S. products from provincial liquor outlets, crowding out U.S. bids on provincial contracts, and fast tracking infrastructure projects. Again, these measures were not triggered, but worth keeping in mind as the year unfolds. On the political front, Ontario will go to an election on February 27th. As it stands now, the incumbent Progressive Conservatives still hold a substantial lead in the polls, but it's still early to pick up the impact of Premier Doug Ford's tariff response. At any rate, a renewed PC majority is the consensus at this point. |
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Fundamentals |
Most provinces are expected to see growth pick up in 2025, but a set of major macroeconomic factors could make for an interesting landscape. Lower interest rates should filter through and drive firmer growth, especially in areas that were struggling with tough housing and consumer spending backdrops. At the same time, an abrupt slowdown in population growth and the U.S. political backdrop will have varying degrees of impact across the country. In the meantime, business confidence will be impacted by tariff threats even if not implemented, and we've trimmed our 2025 growth call by 0.2 ppts as a result (mostly in Central Canada). Tariff Risk DelayedThe wildcard, of course, is what happens on the trade front. For Canada overall, the tariffs (and retaliation) that didn't go through on February 3rd would have seriously impacted growth. A couple quarters of contraction would've been well within the realm of possibility. With little confidence given the lack of historical precedent, we estimate that the tariffs would reduce real GDP growth by about 2 ppts to roughly zero in 2025. For a full look at the potential impact, should we go down that road gain, see: Trade War Impact: First Pass At the provincial level, direct exposure to U.S. trade varies across the country, and so will the impact. B.C. carries a relatively low share of goods exports in its economy, and roughly half of those are destined for markets outside the U.S, but some industries (e.g., forestry) will come under duress. Alberta and Saskatchewan, because of hefty energy exports, carry the largest exposure (exports to the U.S. are 25%-to-36% of GDP); but, the lighter 10% tariff on such products, and the assumption that a portion will be passed to the U.S. consumer, leaves the impact to run smaller in these provinces—at least in the short run. Non-energy U.S. export exposure is highest throughout Central Canada. In Ontario, for example, U.S. goods exports top 17% of GDP with a wide range of industries exposed (e.g., autos, machinery, metals and consumer goods). Quebec’s industrial metals and manufactured goods will be vulnerable, as will Manitoba’s diverse manufacturing base. Atlantic Canada is susceptible because of a few highly-concentrated industries, even if the broad economic impact appears smaller—think the Newfoundland & Labrador fishery, and PEI packaged food goods. All told, we would expect the economic impact to hit hardest in Ontario and the rest of Central Canada; significantly impacting some concentrated industries in Atlantic Canada and B.C., while dealing a lesser immediate blow in oil-producing provinces. For now, though, we wait... |
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Recent Publications of Interest25% Tariffs: What If? We judge that a 25% tariff could pull Canadian growth down by nearly 2 ppts and weigh on the loonie, but monetary and fiscal policy would not stand still. Full analysis here. Provincial Monitor: Most provinces are expected to see growth improve in 2025, but a set of major macroeconomic factors could make for an interesting landscape. Full analysis here. Housing Outlook: A Long Way Home: The Canadian housing market should post modest sales and price gains this year, but don’t expect another exuberant takeoff. Changing secular forces also suggest it’s still a long way back to the 2022 highs. Full analysis here. What 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. 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. |
FY24/25 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 Province of British Columbia mid-year fiscal update. 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 |