Focus
May 30, 2025 | 13:54
Surveying the Provincial Landscape
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Surveying the Provincial LandscapeThe 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. |
|
Canadian economic growth is expected to struggle this year as the uncertainty surrounding the trade war, and the reality of any U.S. tariffs, bites confidence and business investment. BMO Economics is forecasting 1.3% real GDP growth in 2025, down from 1.6% in 2024. A modest contraction in the economy can’t be ruled out through the middle stages of the year, before growth rises back toward potential through 2026. As of the time of writing, the tariff situation between the U.S. and Canada is still evolving, so some forecast revisions should be expected. On the positive side, past Bank of Canada easing continues to filter through the economy and interest rates should fall gradually further through the rest of the year. And, a significant wave of federal fiscal stimulus will begin to roll out, including income tax cuts and hefty infrastructure spending. |
Almost all provinces are expected to see growth slow in 2025 (Chart 1), but the regional disparity will widen. Alberta and Saskatchewan are expected to lead with growth at around 2%. Demographic flows and housing activity are solid, and the tariff impact on energy exports will be low. British Columbia is also relatively sheltered and should expand 1.5%, carrying the lowest U.S. export exposure in Canada—more B.C. trade flows to Asia. Ontario, Quebec and Manitoba will certainly feel the impact of the trade war, posting growth around 1%. These provinces carry high exposure to U.S. exports (Chart 2) across a range of diverse manufacturing industries, autos, steel (Ontario) and aluminum (Quebec). Indeed, even as tariffs broadly have been walked back from the worst threats, those on autos, steel & aluminum remain. At the same time, Southern Ontario remains in the grips of a housing correction, which lower mortgage rates have yet to relieve. A glut of condo supply is now pulling down both prices and rents, when combined with slower population growth. Finally, Atlantic Canada could look more mixed this year, with a few pockets of varying industry trade exposure. That said, the region is still catching up to torrid population growth even if that will slow sharply this year, and the ‘Buy Canadian’ movement could drive domestic tourism activity this summer. Growth in the region is expected to land in the 1.0%-to-1.5% range. |
|
Budget Season in the BooksAll provincial governments have now published their 2025 budgets, and the general trend is toward a deterioration in fiscal balances, along with robust borrowing programs. The combined provincial budget deficit is on track to widen to $45.0 billion (1.4% of GDP) in FY25/26 from $20.1 billion in FY24/25 (Chart 3). While that is still very manageable, it marks a fourth straight year of deterioration and is the deepest (non-pandemic) shortfall as a share of GDP in 13 years. |
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 remains firm, partly reflecting upward pressure on public sector wages, while interest costs are also on the rise. Torrid population growth has also stressed infrastructure, necessitating large capital spending programs. And, this is not isolated: every province in Canada, with the exception of Saskatchewan, is forecasting a deficit for this fiscal year (Table 1). It’s also worth noting that every province has taken a somewhat different approach to accounting for the impact of the trade war. Many have built some form of tariffs into their outlook (Alberta, Ontario, Quebec, Nova Scotia and Newfoundland & Labrador), while others have ignored them; some have built in larger contingencies, while others have built in none. As a group, there is more than $12 billion worth of explicit forecast allowances underlying the FY25/26 deficit. That should keep the downside risk to the current combined provincial budget deficit relatively modest. Total borrowing requirements are currently pegged at a hefty $139 billion for FY25/26. In addition to operating deficits, provinces almost across the board are funding large capital expenditures. In some cases, credit rating agencies have taken notice, with the post-pandemic wave of upgrades now turning the opposite direction, albeit in only limited cases at this point. |
|
Post-Election LandscapeWith the federal election now wrapped up, we can layer on a few more themes that could impact provincial growth and finances in the coming years: Political stability: Ontario settled on another majority PC mandate earlier in the year, leaving Newfoundland & Labrador the lone province still to go to the polls in 2025 (November 24). Even with a minority mandate at the federal level, and no budget expected until the Fall, we believe the Liberal government is strong enough that it will be able to govern largely as planned in the year ahead. Quebec (October 2026) is the next big one to watch. Federal spending surge: The Liberal platform was loaded with roughly $20 billion of infrastructure spending over four years that could filter down to the provincial level. That includes transportation and trade infrastructure, the electricity grid, health care and community infrastructure. Even if not fully through direct transfers, those outlays will take incremental pressure off rising provincial borrowing for the same purposes—and there is a lot of it. Defence boom: All major parties committed to raising Canadian defence spending to 2% of GDP. The national defence footprint is highest in absolute terms in Ontario and Quebec but, in relative terms, Nova Scotia could be a big beneficiary. Proportionally, that province sees the largest military/defence footprint as a share of GDP in Canada, and it also has significant naval/shipbuilding infrastructure. |
Population caps: Most parties supported a more sustainable immigration framework, and the Liberal platform will follow through with changes already implemented ahead of the election. That is, the share of nonpermanent residents in Canada is targeted to fall from above 7% to 5% in the coming years. Population growth has already fallen significantly, to 1.8% y/y (1% annualized quarter-over-quarter) at the turn of the year, from above 3%. Ontario and British Columbia, with the largest nonpermanent resident shares, are seeing the most significant slowdown (Table 2), while Alberta continues to draw in significant interprovincial migrants. In fact, Alberta’s relatively low nonpermanent resident, and strong interprovincial inflows, leave population growth still running at 3.5%, even as all other provinces have fallen below the 2% mark. |
|
An ‘energy superpower’: That was the tagline in the Liberal platform, but the focus of investment dollars and incentives was almost entirely on clean/renewable energy. This will arguably be a win for provinces like Quebec and B.C. (vast hydroelectric resources) and Ontario (recent investments in critical minerals and batteries), even as the EV market has cooled. Alberta’s traditional oil & gas sector is on the other end of this trade, and the tone in the next few months of the new mandate will be critical in keeping provincial sentiment from fracturing further—early talk has been supportive. Provincial trade barriers and labour mobility: Look for the federal government to act quickly to remove federal barriers to interprovincial trade and push for easier labour mobility. This is low-hanging productivity fruit and, while the economic impact is likely overstated, it remains a cheap and unambiguously positive area of pro-growth policy change. Meantime, continued progress toward mutual recognition (licences and credentials) in the labour market would ease the movement of labour between provinces. It just so happens that uniform economic conditions now have created the lowest provincial jobless rate dispersion since at least the early-1970s, but that won’t always be the case given varying economic exposure across the group—a prolonged trade war, for example, would begin to fracture relative performance. |