Roaring Back

The Canadian economy is poised for a strong run of growth through the second half of the year, with jurisdictions across the country easing pandemic-related containment measures. The economy is expected to grow a solid 6.0% this year, with most of the strength coming in the second half. Monetary policy remains highly accommodative, fiscal support is still flowing, while pent-up demand for services, entertainment and travel will provide a boost from households with plenty of savings. That momentum should carry into 2022, when growth is expected to run at a still-strong 4.5%.

All Canadian provinces are largely re-opening after challenges during the third wave of COVID-19 through the spring. British Columbia is expected to grow at a strong 6.3% pace this year, following a much shallower-than-average decline in 2020. Indeed, relatively mild pandemic restrictions, along with strength in resource prices and a booming real estate market, have helped the province fare among the best in Canada.

Alberta is expected to lead the country in 2021, with a strong 7.2% rebound in real GDP, led by a bounce back in oil production. The strength in oil prices has supported incomes and government finances, while the province was also quicker than most to ease restrictions earlier in the year. While longer-term challenges for the oil sector remain, near-term cash flow is well supported. Saskatchewan and Newfoundland & Labrador should also benefit from an improved energy-price environment, with growth rates in the 4.5%-to-5.5% range.

Manitoba is traditionally the most stable economy on the provincial landscape, with a diverse industry base providing a cushion. True to form, the province saw a shallower decline than the rest of Canada last year, but will likely see a softer rebound in 2021, at 5.4%.

Ontario’s economy entered the pandemic with the strongest growth trends in more than 15 years. But, with the largest urban centre and longer-lasting restrictions, the growth rebound was somewhat slower to take shape this year. That will leave growth slightly below the national average at 5.5% for all of 2021. That said, torrid housing and consumer spending performances are helping, and pent-up demand for services and travel will support a very strong second-half performance, leading to above-national growth in 2022.

Similarly, Quebec was enjoying multi-decade highs for economic growth before the pandemic, but has struggled heavily with COVID cases. That prompted aggressive lockdowns early on, but the recent re-opening was relatively quick. As a result, Quebec will likely outperform slightly with 6.2% growth this year, and the province should remain in a position of relative strength beyond the pandemic.

Finally, Atlantic Canada fared well on the COVID front on a relative basis, but much of the regional economy was nevertheless impacted. The 'Atlantic Bubble' has been a success from a health care perspective, but hurt activity in a number of sectors (think travel & tourism) that depend on flows from other regions. With the U.S. border opening in early August, some of the 2021 tourism season will be salvaged, but we expect a more complete recovery in 2022.

Small Business Revival

Main Street businesses bore the brunt of the pandemic from an economic perspective, with closures of restaurants, travel and close-contact services across much of the country. Fiscal policy stepped in to provide unprecedented support through wage and rent subsidies and interest-free business loans, but the fallout was still severe.

Now, with vaccinations broadening, we're optimistic that the health impact of future COVID waves will limit the economic disruption, and small businesses will have a smoother path ahead.

Through the first six months of 2020, an unprecedented 387k Canadian businesses closed shop, leading to a net decline of more than 100k firms over that period. Recent trends are more encouraging and supportive of a strong post-COVID expansion. Business openings are now running comfortably above pre-pandemic trends, at about 45k per month, outpacing what is now a normal level of closures (Chart 1). While losses were inevitable given the scope of the shock, it's encouraging that new businesses are quickly backfilling those holes.

Indeed, the hole left among small businesses was historically deep. Employment among firms with fewer than 100 workers fell by more than 20% through the initial stages of the pandemic (Chart 2). There are two key takeaways. First, smaller firms suffered much deeper declines than large firms, where employment fell by a more modest 9%. While this could reflect the fact that larger businesses have bigger capital buffers to outlast such a shock, it also reflects the fact that COVID hit much harder on Main Street. However, the second takeaway is that employment among smaller businesses is recovering fast, and by June was within the range of pre-pandemic levels. It's highly likely that small businesses will drive continued employment gains through the second half of the year in Canada.

That said, challenges are emerging that largely relate to the supply side, and small businesses will continue to face them as demand rebounds. According to the Canadian Federation of Independent Business, more than 21% of firms face input shortages, nearly 18% face distribution constraints and almost three-quarters are dealing with labour shortages (Table 1). Notably, these issues (especially the first two) have seen the largest increase versus pre-COVID norms. On the flip side, demand-side concerns have fallen. It's clear that as the economy opens more broadly, demand won't be the concern, but the ability to meet that demand could remain an issue, starting with getting employees back into the labour force.

In the meantime, these bottlenecks have led many small businesses to raise prices, or plan to do so. Indeed, the average price gain expected in the year ahead is near 3.5%, the strongest in at least 12 years, with almost 40% of firms planning to raise prices by 5% or more (Chart 3). At the same time, a rapidly-tightening job market could force wage increases, with plans now pushing later-cycle extremes despite still being in early stages of re-opening. To this point, bottlenecks on the goods side of the economy have been a much larger issue amid torrid demand for renovations, household items and recreational equipment. Looking ahead, as spending shifts more toward services, labour availability could become the bigger challenge.

The Bottom Line: Smaller businesses are likely to lead the next leg of the recovery as Main Street activity bounces back strongly. Any challenges will likely be on the supply side rather than the demand side, assuming major further disruptions are avoided.

National Overview

While the experience has varied by industry, for over 16 months Main Street businesses across the country have by and large been in a fight for survival—smaller businesses have recorded almost double the rate of job losses as mid-sized and large firms. Knowing how important these businesses are to local communities and to our country’s economy, governments and other partners—BMO included—have stepped in to support and help them find ways to adapt.

While this has been a period of uncertainty, it’s time to look ahead. We now expect a period of opportunity. Not unlike what was seen in the 1920’s, as our country fully opens back up, we expect activity to roar and are already starting to see this spark across the country—entrepreneurs in Ontario, New Brunswick, and Nova Scotia are looking to start new ventures and more will surely follow. Meanwhile, for existing businesses, this is an opportunity to tap into strong "buy local" sentiments from consumers itching to get back out.

This opportunity will not sit idly by for businesses that aren’t willing to change. Businesses in the post-COVID world are going to be greeted by a different consumer—entrepreneurs and business owners will have to find ways to adapt to compete and win in a more virtual and fragmented economy. It’s no longer about simply opening up, it’s about reinventing how to engage those consumers and accelerating digital efforts—imperatives that are as a relevant to BMO as they are to our customers. Websites, accepting electronic payments, and considering mobile apps will be crucial and, in part, may be the tip of the iceberg. The Main Street businesses that reinvent will be better positioned and more competitive in a post-COVID economy.

The technology sector has been a shining light during the COVID-19 pandemic, and we expect to see the benefits carry forward over the long term. We are seeing investments from provinces and cities to create more supportive environments, which should help with attracting and retaining talent. The shift to digitization over this time has also greatly benefited the sector, and we don’t expect this to slow down as re-opening continues. The businesses operating in this sector are ones to watch—we see incredible potential that will help spur local, regional, and national growth.

Businesses in Atlantic Canada have been in a more enviable position. With COVID cases kept under better control, many Main Street businesses didn’t face the same lockdowns and restrictions, which has contributed to a more positive business sentiment. Some of the Atlantic provinces also started to see population growth from other parts of Canada. The relative strength of businesses in the province—coupled with population growth—leave a good portion of Atlantic Canada in a stronger post-COVID position; we will be watching their growth closely for the balance of this year.

For businesses in industries hardest hit by lockdowns, there is still more we need to do to help them back up. This will be an uneven recovery, and challenges will persist for those businesses. But, as Canada’s bank for business, we remain committed to standing with our customers in both prosperous and challenging times. This is what sets us apart. We are here to ensure that Main Street Canada, as a whole, is on the path to recovery and growth.

British Columbia

The B.C. economy is expected to grow 6.3% this year, slightly ahead of the 6.0% rate estimated for all of Canada. That also follows a more mild 3.8% decline in 2020, one of the lightest hits in the country.

The province did not face the same per-capita COVID case burden as the other large provinces, and containment measures have been much less severe, including a relatively early re-opening.

The unemployment rate is expected to remain below the national average, and average 5.2% in 2022, among the lowest in Canada. Employment has fully recovered pandemic losses as of June, with B.C. the only province able to make such a claim.

The housing market remains extremely strong even if momentum has dialed back from early-year extremes. Vancouver benchmark prices were up 14.5% y/y as of June, led by renewed strength (+22% y/y) in single-detached homes.

The Province is projecting a $9.7 billion deficit for FY21/22 (3.1% of GDP). While that figure should improve as the year plays out, persistent deficits and higher borrowing prompted S&P to the cut B.C.'s credit rating from AAA to AA+.

In B.C., our clients are starting to feel more optimistic—certainly more than last year and even more than just a few months ago. There will always be an underlying uncertainty as we collectively try to emerge from the COVID-19 pandemic. There aren’t many clients who are truly bullish just yet. But people are coming together and showing a strong “buy local” sentiment. They feel the call to action to support local small businesses, with a mantra of “local, valued, and protected.”

B.C.’s economy does have the benefit of being fairly well diversified. This has allowed it to weather the pandemic restrictions better compared to some other parts of the country. This should stand the province in good stead as we move towards reopening.

One issue holding optimism back is a labour shortage—particularly in the hospitality sector. Labour-intensive industries in general are having a hard time finding staff. But at the same time, many businesses are looking forward to receiving some of the pent-up savings of BC consumers. It will be important for those businesses to find ways of re-attracting their existing clientele and getting them to spend.

Among industries themselves, there’s been a broad range of effects of the pandemic. Hospitality has bounced back nicely outside Vancouver; occupancy rates are going up and regional travel has increased. In Vancouver itself, the reliance on international travel will mean the city remains in a tough spot until that resumes.

Among smaller businesses, a lot of them were very hard hit early on in the pandemic. Those that were able to pivot to online activity have been relatively successful under the circumstances; we still see a great deal of opportunity on digital platforms and encourage businesses to move to that as best possible—even now.

Alberta

The Alberta economy is expected to rebound 7.2% this year, leading the country after posting the deepest decline in 2020. COVID-related restrictions came off relatively early after the third wave, while consumer and business confidence are carrying positive momentum into the second half of the year.

The rebound in oil prices is providing support, with WTI trading above $70 through the summer. While President Biden's scrapping of a key KXL pipeline expansion permit highlights longer-term capacity constraints, near-term cash flow in the sector looks well-supported. This is especially true given that oil sands projects sink most capital up front. Oil production was up nearly 16% y/y in May versus prior-year lows.

The job market is gradually recovering, but the unemployment rate was a still-high 9.3% in June, versus the 7.8% national average. The unemployment rate is expected to average 8.6% this year, before falling to 6.7% in 2022.

After a multi-year period of weakness, housing markets in Calgary and Edmonton have strengthened, as seen across much of the country. Home prices in Calgary are still slightly below the 2015 peak, but they are up 12% from a year ago and the gap is closing quickly. The current pace is the strongest since the heated days of 2007. The commercial real estate backdrop remains tough, with high vacancy rates in the downtown office market.

The Province is expecting an $18.2 billion deficit in FY21/22, which weighs in at a hefty 5.4% of GDP, but upside is building thanks to a stronger economic recovery and higher-than-expected oil prices.

Alberta’s businesses have been facing the dual challenges of the COVID-19 pandemic and difficulties in the oil and gas industries. This has led to a back-to-basics mentality among many of our clients, with a corresponding move towards diversification.

It’s been encouraging to see this trend, with different employment opportunities, a shift to a “start-up” mindset and an active attempt to move away from dependencies on other industries. To cite just one example, we’re starting to see a push by clients into the franchise space—particularly in the area of fast food.

We’re still early in the business cycle; while we haven’t seen a major shift in GDP growth as a result, the potential for the broader economy is strong. With Calgary and Edmonton coming in as two of our top-performing markets in the country, the likely benefits in the coming years are clear.

Indeed, urban areas have been showing good strength relative to their more rural counterparts. This shows the power of diversity in these centres and bodes well for them. Those areas are showing more momentum and stimulus and more recovery, even though they started from a deeper trench than more rural marketplaces.

On the agriculture side, farmers are in a good spot given rising commodity prices but are facing challenges with extreme weather. After more than a year of the pandemic with its corresponding disruption to food production and distribution, farmers have successfully navigated new supply chain needs and continue to show strength.

That said, it can’t be denied that the past few years have hit the province hard. Oil & gas has borne the brunt of this, with corresponding downturns in related parts of the economy such as office space. While energy prices have risen compared to last year, these challenges are expected to continue.

Saskatchewan

The Saskatchewan economy is expected to rebound 5.3% this year, reversing the decline seen in 2020. While Saskatchewan was among provinces with the lightest COVID-related lockdown measures, it could not escape a broad downturn.

The resource sector has been challenged after a multi-year lull, but strength in oil prices is encouraging, as is a broader recovery in resource prices globally.

The unemployment rate sat at 6.7% at mid-year, below the national average and down from a high of 12.4%. Still, the relatively soft job market is likely to persist beyond the pandemic, and the province will continue to lose population to other provinces.

The Province is expecting a $2.6 billion deficit in FY21/22, or a hefty 3.2% of GDP. But last fiscal year finished better than expected, and strong oil prices should set the deficit on a lower track than projected in this year's budget.

Businesses in Saskatchewan tell us they feel cautious optimism. Understandably, many business owners are taking a wait-and-see approach. Upon re-opening in the middle part of summer, they’ll be able to digest what the return looks like and proceed.

As has been the case in many places across the country during the COVID-19 pandemic, the pivot to digital has been crucial for many companies to maintain their operations. They have also benefited from strong local support, ensuring many businesses could keep operating. Interestingly, Saskatchewan had a relatively low uptake of government support programs during the pandemic—with the exception of CEBA.

Currently, we see solid growth in franchises—particularly new restaurants. We’ve also seen a hot housing market, both in terms of sales and renovations; this has gone along with a good commercial real estate market at the same time.

In agriculture, producers have benefited from good crop prices. We are seeing extreme drought conditions in parts of the province, which is putting downward pressure on optimism. The majority of exports, meanwhile, have been up, unlike some other parts of the country. Cattle farmers, on the other hand, are remaining cautious—particularly given the bottlenecks they saw when processing plants shut down last year.

We’re particularly enthusiastic about investments we’re seeing from larger firms in the agriculture space—we expect to see new jobs coming to the province, particularly in Regina, to support these investments.

The technology sector, meanwhile, continues to show excellent potential. With Innovation Saskatchewan putting government money in the hands of upstart industries, we’re seeing some economic diversification—particularly in the urban centres. It’s still early days, but the potential benefits to the wider economy are clear.

Manitoba

The Manitoba economy is expected to grow 5.4% this year, trailing the national increase, but only after shallower decline in 2020. The relative stability of Manitoba's economy showed through last year, despite a tougher COVID challenge and aggressive containment measures.

The unemployment rate sits at 7.6%, still up 2.5 ppts from pre-COVID levels. That partly reflects a strong rebound in the labour force early this year. Full-time employment has recovered all pandemic losses, with part-time positions still down 14%. Housing activity is extremely strong, as in the rest of the country. Average prices in Winnipeg have surged 16% in the past year, to record levels, and the market has rarely been tighter.

The Province of Manitoba is expecting a $1.6 billion deficit in FY21/22, or a relatively modest 2.1% of GDP, and it looks like the province is past peak fiscal shortfalls.

Ongoing lockdowns to battle the COVID-19 pandemic have led to significant challenges for Manitoba businesses over the past year. But with vaccination rates increasing, the province will have the opportunity to open up sooner than originally anticipated. We are seeing a glimmer of optimism, but it is tempered by the ongoing realities of the pandemic.

Manitoba boasts better affordability than in most other parts of Canada. If we combine that with pent-up demand, the possibilities of strong growth are clear. We also believe that Manitobans will keep spending inside the province, to benefit the local economy.

By and large, the Manitoba story is a tale of two economies: urban centres like Winnipeg and Brandon, and everywhere else. This isn’t a new phenomenon of course, but it’s increasingly relevant as we look to move past the pandemic. Once the lockdowns ease, we are likely to see incremental growth opportunities concentrated in the two cities; the expectation is that those opportunities will propel the province.

Among sectors, we are seeing capital injected into agriculture businesses, such as through the acquisition of new equipment; this is helping to buoy sentiment as the sector faces volatility related to weather challenges.

We’re seeing a number of net new businesses opening up, thanks in part to good underlying infrastructure that is supportive of small businesses. Meanwhile, we’re seeing strength in the real estate market, on both the retail and commercial sides.

We do see some key sectors continuing to struggle from the pandemic—retail and hospitality in particular. Food service firms have done their best to move into the takeout business to drive revenue in the meantime.

Ontario

Ontario’s economy is expected to rebound 5.5% this year. Tougher and longer-lasting pandemic restrictions likely weighed on activity in the first half of the year, leading to a modest underperformance versus the national average. But strong growth is expected in the second half of the year as services resume more broadly.

The unemployment rate has bounced around in recent months, consistent with rolling containment measures, and sat at a still-elevated 8.4% in June. Employment was down 2.5% from pre-COVID levels in the month, largely in accommodation, restaurants and close-contact service industries. As these industries re-hire, the jobless rate should fall to average around 6% in 2022.

Housing markets across Ontario are still exceptionally strong, especially outside the GTA, even if sales have peaked. The benchmark price in Toronto is now up almost 20% y/y, with strength in both single-detached and condos. Some smaller towns, rural and cottage markets are up 40% or more from pre-COVID levels. While peak sales and price momentum have likely passed, interest rate hikes that would cool the market are still at least a year away (the impact of other macroprudential measures has been limited).

In the commercial real estate sector, downtown office vacancy rates have jumped to 7.2%, according to CBRE, from around 3% a year ago. This segment will remain challenged, and face a longer-term adjustment as post-COVID work practices change.

The Province of Ontario is estimating a $33.1 bln deficit for FY21/22 (3.7% of GDP). Last year's $38.5 bln shortfall likely marked the worst of this cycle, and there is likely room for meaningful improvement given a stronger economic and revenue backdrop.

Greater Ontario

Business clients throughout Ontario have faced downward pressure during the third wave of COVID-19, with lockdowns extending throughout the winter and spring months for non-essential business. There is general fatigue with government restrictions and some confusion around what is permissible or deemed safe. But the situation is not without its positives.

Businesses have benefited from the relief programs provided by governments; many of our clients have taken advantage of government programs such as CEWS, CERS, and HASCAP to obtain the necessary capital to sustain their businesses throughout the extended lockdown. While the success of the programs is clear, small businesses are having to deal with the labour shift created by CERB - employers had to revisit compensation and provide offers to attract employees back who were fearing the lack of stability re-entering the labour force.

Early in the pandemic, we saw multiple businesses trying to monetize the shift in our economy and consumer patterns—from manufacturing PPE to transforming to a delivery-based model. Today, we see far less of this phenomenon and a growing appetite to get back to “business as usual”.

A number of our clients pivoted their sales and delivery models during the pandemic for online ordering and curbside pick-up and invested in social media marketing to build their brand recognition with storefronts closed. Several have gained a solid amount of success using this strategy.

Meanwhile, we are also seeing clients take advantage of low interest rates to purchase rental properties or upsize their primary residence. We are seeing a rise in financing requests for new businesses, particularly in franchise and transportation, and entrepreneurs looking to open new locations, purchasing real estate, and making upgrades to their spaces. As well, several Business Associations are planning in person events for the fall, so we expect to see increased activity as a result of these networking opportunities. All together, it is signalling confidence in the outlook.

Travel and tourism has significant potential for growth. The Ontario government is providing one-time payments of $10,000 to $20,000 to support eligible small tourism and travel businesses. Many are counting on a stronger 2021 summer/fall season.

GTA

The Greater Toronto Area has been affected by the longest and among the strictest COVID-19 lockdowns in North America. The next few months will be vital in determining whether many businesses will be able to regain prior strengths. In the downtown core, uncertainty remains around the return of workers; business owners recognize that at least at the beginning, most of the downtown workforce will stay at home for at least part of each week. Outside the core, we’re starting to see some optimism trickle in.

The good news is customers are indeed starting to return; the focus now is managing supply and ensuring adequate staffing levels. At the same time, Shop Local initiatives had a big impact on businesses staying open as communities rallied to support one another. Now with the “We’re Ready Toronto” initiative to jumpstart downtown core businesses, we’d expect to see a spark for Main Street businesses in the area as workforces come back to the downtown core.

In the restaurant business, we’ve actually seen a good amount of success—mainly where the restaurant was not primarily dependent on in-house diners to drive revenue. We’ve observed a good appetite to expand “small footprint” / quick-serve style restaurants, who’ve leveraged growing partnerships with delivery services such as UberEats, DoorDash and SkiptheDishes to maintain or even grow their revenues during lockdown. With Ontario now opening up, indoor and outdoor dining is once again booming across the Province and GTA.

One industry particularly challenged has been salons and spas, given the multiple lockdowns keeping their doors closed. The most recent lockdown didn’t provide enough notice for business owners who rely on having the right products to offer services; many owners increased or ordered additional product that could not be used. Some salons and spas have offered curb side pick-up or online sales of retail products, but it is not enough to get a strong return on investment. With reopening happening in Ontario ahead of schedule, these businesses are now fully booked weeks or even months in advance and are rebounding rapidly after a very difficult start to 2021.

Quebec

The Quebec economy is expected to grow 6.2% this year, a strong recovery after the pandemic significantly disrupted activity in 2020. Recall that Quebec entered the pandemic in a position of strength, and the fundamentals still argue for outperformance as the economy returns to more normal conditions.

Earlier and more aggressive shutdowns through the middle of 2020 weighed on output, but the province has been quick to re-open. The unemployment rate has fallen sharply to 6.3%, the lowest in Canada as of June. That comes alongside a near full recovery in the participation rate.

The housing market is extremely strong, with sales and prices in Montreal still surging. Montreal's benchmark price was up 27% y/y in June. This partly reflects the impact of record-low mortgage rates and increased demand for larger homes, consistent with other major cities. Residential construction has responded, with housing starts averaging a record pace over the latest 12-month period.

The Province of Quebec is expecting a $9.2 billion deficit in FY21/22, which is on the lower end of the spectrum at 2.0% of GDP. Keep in mind that Quebec was running sizable surpluses before the pandemic, so the deterioration is still significant. Net debt will top 45% of GDP, still below Ontario.

Despite Quebec’s COVID-19 lockdowns and corresponding prolonged curfew, our business clients are generally optimistic on the reopening of the economy.

Stimulus programs have provided companies the relief they were looking for; many appear to be doing better than anticipated. As well, our clients have been creative in keeping their operations afloat through the use of part-time openings, pivoting to online sales, and introducing new product lines to capitalize on the increased demand brought about by the pandemic.

Hospitality businesses that moved away from sit down service into a takeout and delivery model saw revenues and cash flow improve. Some have told us their results have returned to pre-pandemic levels, with revenue comparable to 2019 results.

The transport and delivery industries continue to do relatively well, with some looking to expand as their business has picked up.

Real estate remains robust in and around the greater Montreal area; supply continues to be limited for good quality properties. Meanwhile, we’re not seeing much of a slowdown in the construction industry. Our clients—mostly trade contractors and material suppliers—have been preforming well throughout 2020 and into the first part of 2021. Their major challenge remains retaining and attracting employees.

Some industries continue to struggle, however. Restaurants that couldn’t pivot to take out have had significant difficulties; some have had to close their doors. Similarly, businesses located in large office buildings have lost all their customers who have been working from home.

Unsurprisingly, the pandemic has also exposed those companies that had been struggling prior to COVID—exacerbating their challenges.

We do note that the HASCAP program has been beneficial in providing companies with much needed liquidity. The program has helped companies meet their financial obligation as well as remain current with their rent payments. The program has been welcomed by some companies as an offensive play to prepare for the reopening.

New Brunswick

The New Brunswick economy is expected to grow 3.8% in 2021, much milder than the rebound expected nationally. Keep in mind that the contraction in 2020 was also much milder than most other regions, at 3.7%. More recently, COVID-related measures have been lighter than in the larger provinces, and travel has begun to open up.

The unemployment rate is trending just above 9%, though that is well down from pandemic highs. Employment in impacted industries, such as trade and accommodation & food, have fully recovered their 2020 declines, leaving service-sector employment above pre-COVID levels.

While the province has seen a recent boost in population, demographic flows will be a medium-term issue post-COVID, potentially dampening a previous support.

The Province of New Brunswick is projecting the smallest deficit in Canada relative to the size of its economy, at $245 million in FY21/22, or just 0.6% of GDP. Net debt will fall to just over 36% of GDP, leaving New Brunswick as the only province with a ratio not above pre-COVID levels.

Throughout New Brunswick, businesses are telling us that they think they can come out of the COVID-19 pandemic in a stronger position. The province didn’t experience the same shutdowns as the hotspots in other parts of Canada, and activity—despite some reduced capacity—has remained steady.

At the banks, we’re all overwhelmed with client demand for loans. Combined with added savings and significant funds sitting in accounts from government relief programs, we see businesses looking to deploy this capital in the economy. The likelihood of solid growth as a result is clear.

Much like other parts of the country, many of our clients have adapted to provide online services to help with sales. But since so many small businesses have remained open, there hasn’t been the same urgent need to make this pivot. Still, those businesses that made the change can now provide their goods and services to a broader market—placing them in a position of strength.

One of New Brunswick’s biggest historical strengths has been transportation. As a major transport hub, the province is a gateway for all of Atlantic Canada. Despite the pandemic, national players in the market are continuing to do well; we still see lots of activity.

In housing, the real estate market has never been as strong as it is right now. This has largely been driven by population growth, with many Canadians choosing to settle in the province. We’re even seeing houses sell for over asking, which was extremely rare until the past year. Construction, meanwhile, has been strong in concert with the robust housing market, although the sector has been held back somewhat by delays in receiving materials.

Nova Scotia

The Nova Scotia economy is expected to grow 4.4% this year, reversing the 3.2% decline reported for 2020. Atlantic Canada more broadly has been relatively sheltered from COVID cases and associated lockdowns.

Still, various modest measures that have been implemented have chipped economic activity, and travel flows have been restrained, weighing on tourism. The outlook for the second half of 2021 is brighter as domestic travel resumes, while fully-vaccinated U.S. travelers will be welcomed as of early August.

The unemployment rate sat at 9.0% in June, still up a full percentage point from pre-COVID levels after some softness in recent months. The second half of the year should see more progress with restrictions eased.

Resale housing market activity is extremely strong, with sales surging to record levels amid pent-up demand and shifting preferences toward locations outside urban cores. The average price in Halifax has jumped 38% since the start of the pandemic. Residential construction has held firm.

The Province of Nova Scotia is expecting a $585 million deficit in FY21/22, or 1.2% of GDP—that's modest compared to its peers.

Throughout the COVID-19 pandemic, Nova Scotia has fared better than most other parts of the country. Our clients have typically not needed to tap into government relief programs to the same extent as what has been seen in other parts of the country, and our deposit base is strong—possibly stronger than it has ever been. With the province opening up and vaccination rates high, overall business sentiment is extremely positive. Consumer sentiment is also more positive this summer, so we can expect that business activity will pick up over the summer months.

We’re particularly encouraged by the level of entrepreneurial spirit in the province at the moment. We are seeing a good number of our clients take out loans to start new businesses such as restaurants. It’s important to note that the takeout business in the food sector performed incredibly well over the last few months; residents have been very generous in their support of these local businesses.

We’ve also been pleased to see the shift to digital even though the province has not had as much of a need as elsewhere in the country. Businesses are giving their customers more options to interact with them, leading to better opportunities for growth. It has also been encouraging to see the provincial government creating a more favourable environment to help companies start up and scale. This should serve the province well over the long-term and help attract businesses and employees.

Tourism remains a vital industry for Nova Scotia; it was clearly hit hard by the drop in travel. More so than last year, businesses that rely on summer tourism are pushing the province to open things back up so that they can take advantage of the season.

Interestingly, we’re starting to see a lot of population growth from out of province. This growth, and the resulting market demand, is driving up costs—construction and housing costs in particular. House prices are now relatively expensive; it used to be uncommon to see houses sell for over asking, but now it’s the norm.

Prince Edward Island

The PEI economy is expected to grow 3.5% this year in a solid recovery from a COVID-plagued 2020. Keep in mind that the province was enjoying a significant boom before the virus broke out, leading the country in economic growth in 2019.

While COVID-related lockdowns have still weighed heavily, the pandemic curve has been much flatter given the small and closed-in nature of the province. Re-opening was quicker than most other provinces through last year, with more limited second and third waves.

The unemployment rate had dipped below 8% around the turn of the year, but a pullback in jobs and a jump in the labour force through early summer lifted it back to 12.5% by June. This latest move should prove temporary.

Tourism and seasonal visitors during the summer months are major drivers of local economic activity, and both of those sources remain challenged again this year. Atlantic and Canadian travel has opened back up, while U.S. travel is expected to return as of early August. Meantime, an influx of international immigrants has boosted housing demand in recent years, but that looks to be at risk in the near term until immigration returns more strongly (and we expect that it will).

The FY21/22 deficit is pegged at $112 million, or a moderate 1.5% of GDP. Consistent with most of Atlantic Canada, the fiscal impact has been contained.

Unlike most parts of the country, P.E.I. has had some strong momentum over the course of the COVID pandemic which is positively impacting the economy. There has been a rebound in foreign immigration, which is continuing to serve the province well. Additionally, there has been a significant jump in people relocating to the province to take advantage of its generally lower cost of living and lower COVID case count. With employers offering flexible work options and employees no longer needing to work from a designated space, we expect to see this momentum carry forward.

The province has made allowances for foreign workers, so the industries that rely on that workforce have not been impacted as originally anticipated. The fisheries sector is one such industry that is reliant on foreign workers, but processors are optimistic right now—buoyed by their current workload and strong lobster prices.

The real estate market, generally, in the province is also strong. The one drag on the market is a shortage of trades people, which is having a knock down effect on the process: there are delays in the construction of new homes, higher labour costs, and on-going supply issues. Ultimately, the costs are being passed onto homebuyers but it hasn’t yet dampened market activity.

As we look at the Main Street businesses across the province, most seem to be in a position of strength right now but we continue to be in a holding pattern to wait until relief measures end to see the full impact. Overall, a tempered optimism across these businesses as they look to navigate a post-COVID economy.

Newfoundland & Labrador

The Newfoundland & Labrador economy is expected to grow 4.5% this year, after a deep 5.3% decline in 2020.

The province was already in a challenged position pre-COVID, but pandemic disruptions and the decline in oil prices exacerbated the headwinds. That said, a strong rebound in oil prices is encouraging for the strength of the recovery, as incomes and government finances will get some support.

The unemployment rate jumped to almost 18% (highest in Canada) at one point last year, but has now settled in around 13%, which is more normal for the province, as jobs have almost fully recovered. Tourism-related employment remains the clear weak spot, with travel flows still depressed versus pre-COVID norms.

The Province of Newfoundland & Labrador is projecting a $825 million deficit in FY21/22, which marks a strong year-over-year improvement. The FY20/21 shortfall is estimated at $1.6 billion. Still, at 2.3% of GDP and with the net debt-to-GDP ratio running at 47%, longer-term fiscal consolidation will remain a key theme.

While the province is starting its return to normal—consumer traffic is starting to pick up for retail operations, and the service industry is beginning to see a steadier inflow of customers (although still limited by some restrictions)—difficulties related to government finances continue to weigh down the overall economic outlook for Newfoundland and Labrador.

There are, however, a number of positives across industries in the province. With tourism being a significant growth driver, many are feeling more upbeat with Newfoundland and Labrador opening back up for travellers across Canada. This comes just in time to, hopefully, capture spending from pent-up travellers. Looking more centrally in the province, we are seeing a modern-day gold rush with a significant amount of mining activity happening. Several gold discoveries are starting to move to the production phase, and this is a critical boost for the province as it drives business investment and jobs.

Compared to some of the other Atlantic provinces, Newfoundland and Labrador hadn’t seen the same uptick in housing sales at the height of the pandemic. That has, however, changed with sales now up significantly and prices reaching back up to peak levels. The action in the housing market is being largely driven by the activity in several of the province's key industries.

We are seeing the technology sector play a positive part in the economy—while it isn’t a significant growth driver yet, there is optimism around the sector’s long-term potential. Our local university plays a critical role in this sector with their incubator program and have already seen some incredible success stories. One headwind for the university’s incubator program, which we are keeping a close eye on, is the increase in annual tuition—a result of the province’s financial challenges. While we are in a wait and see period, the increase may have a trickle-down effect on attracting foreign students. As the province is the only one in Canada with a shrinking population, there are not enough students locally to support the university at the scale it needs.

We expect the focus on the technology sector across the province to help drive economic growth and attract both workers and companies to the province in the coming years and, hopefully, acting as a counter to the shrinking population.