The Canadian economy has slumped, with growth slowing sharply in 2019Q4. The prospects for 2020 are brighter, with housing markets in the biggest cities accelerating, oil production poised to pick up on a calendar-year basis, and federal fiscal stimulus expected to add a moderate boost. Still, business investment remains subdued, and net exports will continue to be plagued by global uncertainties. All told, national growth is expected to improve slightly to 1.7% this year from 1.6% in 2019. Regionally, Ontario, Quebec and British Columbia continue to see the strongest overall economic performance, though eased oil production curtailment will also boost Alberta's growth numbers, despite broader softness.

British Columbia looks to lead the pack this year, with growth picking up to 2.1% from an expected 1.9% pace in 2019. Assuming last year's slowdown is correct, it would mark the coolest annual pace since 2009, in part the result of a correction in housing. But, housing momentum has turned and should be supportive again this year, while the massive LNG project should ramp up and add more meaningfully to the economy.

Alberta real GDP growth is likely to rebound to 1.8% this year from just 0.5% in 2019. Mandated oil production cuts have been scaled back throughout the year after initially reducing output by 325k bpd, which will result in a meaningful addition to calendar-2020 growth. More broadly, capital spending, housing and consumer activity set a still-sluggish backdrop for the province. Saskatchewan looks to be relatively stagnant, as well, around the 1% mark, with slower population growth and an overhang of past housing supply still weighing on home prices. Manitoba should continue its steady performance, with growth expected at 1.5% this year.

Ontario’s economy is sturdy, with particular strength in-and-around the Greater Toronto Area—arguably the strongest labour market in Canada right now. Real GDP is expected to grow 1.8% this year, a touch stronger than last year. Recall that average growth in the prior five years ran at 2.4%, so this marks a meaningful cooldown. The downshift largely reflects a move back toward potential for the province, with some key sectors, such as housing and consumer spending, coming off the boil. That said, the housing market has firmed alongside a substantial decline in five-year fixed mortgage, and we expect momentum to continue through the spring selling season.

In Quebec, housing market activity is strong (especially in Montreal), as demographic demand is supplemented by increased nonresident activity. And, consumer spending and business investment remain solid. Real GDP is likely to grow 1.9% this year, downshifting somewhat from a massive 2.8% rate in 2019. While expected to slow, growth will remain above potential, and conditions supportive for employment, investment and real estate.

Finally, a population boost has lifted growth in much of Atlantic Canada well above potential over the past few years. While that is persisting into 2020, we believe the process of gradually returning to trend will play out in this part of the country as well. One challenge will be retaining recent immigrants in a relatively weak (albeit tightening) labour market, versus stronger regional economies. Some provinces in the region are also starting to see a lull after a number of major private- and public-sector capital spending projects reached completion.

Budget Season Preview

After a stronger-than-expected FY18/19, the overall provincial fiscal picture is likley to be mixed this coming fiscal year. The combined provincial deficit came in at $5.1 billion in FY18/19, the narrowest combined budget shortfall in a decade. Notably, that was much smaller than the $16.1 billion expected after the spring 2018 budget season. Almost all Provinces finished the year better than expected, including multi-billion-dollar improvements in B.C., Alberta and Quebec. Ontario was the lone province to end with a deeper deficit, but the modest deterioration from the original plan (by $700 million, to $7.4 billion) is actually good news. Recall that after the new government took office, they guided to a deficit as deep as $14.5 billion at one point.

Now, with mid-year fiscal updates for FY19/20 in hand, it’s clear that the broad provincial-deficit reduction was temporary. As of publication time, the combined deficit is pegged at $14.6 billion for FY19/20, with Alberta and Ontario slipping deeper into the red, while large surpluses in B.C. and Quebec have shrunk.

Looking ahead to FY20/21, with the budget season set to begin, we should see a mixed picture overall. The two biggest deficits, relative to GDP, in Alberta and Newfoundland & Labrador will remain challenged by recent oil price developments. For example, Alberta’s FY19/20 budget (tabled recently in the fall), assumed $58 WTI for FY20/21, and then $63 by FY22/23 when the budget was projected to be balanced, versus recent prices around $50. While the softer loonie has helped absorb some of the downside, the Province will still need to see a strong rebound in prices before the February 27th budget date in order to avoid some revenue markdowns.

Elsewhere, British Columbia will likely continue to run with small surpluses, while the three Maritime Provinces are all in the black. The latter has been a quietly positive story on the fiscal front, with Nova Scotia, New Brunswick and PEI seeing positive credit momentum. Net debt ratios in these Provinces should continue to fall this coming fiscal year, with all in the low-30% range relative to GDP—comfortably below Ontario and Quebec.

Speaking of, Quebec remains the fiscal darling and should extend its run of surpluses this year alongside an economy that continues to outperform budget assumptions. But, tax relief and ramped-up spending have cut into the sizeable balances. Still, if it's any indication, the Province continues to borrow for less than Ontario.

Finally, Ontario is probably the biggest question mark on the landscape this year. On one hand, we've long argued that the Province was setting the expectations bar very low at the outset of the current government's mandate. Recall that talk of a $14.5 billion deficit last fiscal year ended up at just $7.4 billion. We suspect that the economic and fiscal momentum will continue to carry forward. But, the Province has also shown signs of backing off from its strict spending restraint profile with the fall update allowing roughly half of this year's revenue upside to flow back into tax relief and higher spending. For the out years, roughly $2 billion per year of upward revenue revisions were fully absorbed by a higher spending profile. All told, it looks like the Province is quietly deciding that the payoff from aggressive fiscal restraint isn't there right now (politically or otherwise).

British Columbia’s economy has moderated, with real GDP expected to advance 2.1% this year after an expected 1.9% print in 2019. Recall that growth averaged 3% in the three years through 2018.

Growth will get a boost as the $40 billion LNG Canada project ramps up. Plant construction is expected to peak around 2021 with roughly 10,000 jobs created, providing steady support to the economy. This should help offset some of the strain in sectors like forestry, which is struggling alongside weak pricing, tariffs and softer global demand.

Residential investment will likely rebound with the housing market. Home sales in Vancouver have bounced back and prices have recently firmed—mortgage rates have fallen and demographic demand is strong. We expect the spring market to be a solid one.

The labour market is mixed, with employment fading after a strong run through mid-2019. The jobless rate, at 4.5%, was the lowest in Canada as of January.

The Province of British Columbia expects a modest $148 mln surplus for FY19/20, a touch smaller than the $179 mln expected in the original budget plan. A $500 mln forecast allowance remains in place.

Alberta’s economy remains sluggish, though real GDP growth should rebound to 1.9% this year, from 0.5% in 2019, as mandated oil production cuts ease. After initially capping production at 3.56 mpbd, the limit has been bumped up to 3.81 mbpd to start 2020, where it is currently expected to remain for the year. Longer term, with oilsands production still on the rise, limited pipeline capacity will remain a pressing issue. New capital investment is expected to stay limited.

The housing market is soft but stabilizing, with prices in Edmonton and Calgary down modestly from year-ago levels. Housing starts have found a footing, though well down from pre-shock levels.

Commercial real estate also remains awash in supply with vacancy rates topping 24% in Calgary’s downtown office segment. The labour market shows slack, with employment unchanged from the start of 2018, and public-sector jobs down sharply in recent months. The jobless rate has nudged above 7%.

The first budget under the newly-elected United Conservative Party laid out a plan to balance the books by FY22/23. This will lean on a heavy dose of spending restraint, the elimination of various tax expenditures and the assumption that WTI oil will gravitate toward the $63 level by that point. Recent WTI prices of around $50 will challenge the fiscal outlook in 2020.

Saskatchewan’s economy is subdued, as the resource sector remains under pressure. Real GDP is expected to advance a moderate 1.1% this year, underperforming the national average for a sixth straight year.

The oil sector has been retrenching, and the Province expects production will fall about 3% this year. Capital investment also looks to remain weak. Potash production, however, should rebound after a down year in 2019. Trade tensions with China and the November rail strike have negatively impacted the farm sector, though the province is coming off a strong crop year.

Labour market momentum has faded recently, with employment little changed from a year ago.

The jobless rate has moved back up to 6.0% as of January, partly the result of ongoing labour force inflows. That said, population growth continues to slow, as the province is again losing migrants to other regions. That and housing supply from the past cycle have left unabsorbtions high and house prices correcting—down 5% y/y in Regina and off 16% from the 2012 high.

The Province of Saskatchewan is projecting a small $37 million surplus for FY19/20, or negligible as a share of GDP. That is improved from the $268 million deficit reported for FY18/19. Net debt remains low versus its peers at less than 15% of GDP.

Manitoba continues to grow at a steady pace, with real GDP expected to rise 1.5% this year, and again in 2021. The diverse manufacturing base and sturdy service sector continue to churn out some of the steadiest, but unspectacular, growth in Canada.

Manufacturing sales have levelled off over the past year across a range of industries, consistent with broader weakness in the sector across North America. Ratification of the USMCA should help confidence.

The labour market is sturdy, with employment growth trending around 1%. The jobless rate is hovering around 5%, slightly below the national average, with little deviation in recent years, highlighting the province’s stability.

Housing market activity should remain stable, with sales and price growth both modest, supported by solid population growth and favourable affordability. Indeed, demographic demand is supporting housing starts, which have just backed off from record levels.

The Province of Manitoba is projecting a $350 million summary budget deficit in FY19/20, a shade better than laid out in the original budget plan. That weighs in at less than 1% of GDP, and remains on a clear improving path since bottoming at more than $800 million in 2015. The provincial sales tax was cut by 1 ppt as of July, 2019.

Ontario’s economy has moderated after a powerful run. Real GDP is expected to grow 1.8% this year, up from 1.7% in 2019. While softer than the 2.4% average pace in the prior four years, it reflects a return to potential growth for the province.

The housing market has regained momentum after a wave of policy measures triggered a modest correction. But, strong demographic demand and a plunge in longer-term mortgage rates have firmed activity. Toronto sales rose 12% in 2019, new listings have fallen, and prices are rising sharply again—up 7% y/y for single-detached and 11% for condos, as of January. With interest rates holding at low levels, the spring selling season should be a very active one. Markets outside the Greater Golden Horseshoe continue to perform very well.

The labour market remains rock solid, with near-3% job growth and a 30-year low jobless rate. The job market has done well to absorb an influx of population, as migration flows from outside Canada and other provinces remain historically strong. Export volumes are rising at a modest pace, but longer-term challenges, such as relatively high labour and electricity costs, remain. That said, USMCA clarity, accelerated CCA allowances and a business-friendly policy shift should support business confidence and investment.

The Province of Ontario reported a much smaller-than-expected $7.4 billion deficit (0.9% of GDP) for FY18/19, but still expects a $9.0 billion shortfall in FY19/20—revenue upside has been partly offset by less restraint.

Quebec's economy remains strong, and has experienced its best performance in 15 years. Real GDP is expected to mellow to 1.9% this year, but only after 2.8% growth in 2019 that would match the strongest since 2002. Overall conditions remain supportive for employment, investment and real estate.

Real business investment continues to grow at a solid pace, with confidence boosted by a stable political backdrop and much-improved government finances. Export growth has also been strong.

Montreal’s housing market is seeing continued momentum, and remains one of the strongest in Canada—solid demand fundamentals, favourable affordability and increased non-resident investment have all helped. Benchmark prices are running stronger than 10% y/y, while residential construction has also been a recent boon for the economy.

The labour market is very healthy, with sturdy job growth and a below-average jobless rate.

The Province of Quebec continues to run sizeable surpluses and roll out modest tax relief.

The New Brunswick economy has softened after a healthy run, with real GDP growth expected at 0.5% this year, a touch softer than in 2019. This reflects more trend-like growth for the province.

Capital spending has retrenched recently as some major projects have wound down in the forestry and refining sectors. Forestry exports have stagnated alongside a stable U.S. housing market and softwood tariffs, though rates are poised to ease this year.

Labour market trends have been mixed. Employment growth has been choppy over the past year, but momentum has improved in recent months. The unemployment rate has steadied in the 7.5%-to-8.5% range alongside modest labour force growth.

While the province has seen a near-term boost in population, demographics remain a longer-term challenge given an aging population. In the meantime, international immigration and less outflows to other provinces have helped.

The Province of New Brunswick is projecting an $88 million surplus for FY19/20. That follows a $72 million surplus reported for FY18/19, and would mark the third straight year in the black. The Province continues to expect surpluses through FY22/23, while net debt will drift lower as a share of GDP.

Economic growth is stable and solid in Nova Scotia, with real GDP likely to expand 0.9% this year, and 0.8% in 2021. This roughly marks near-term potential growth after a multi-year run above that mark. Indeed, the province has come off its best three-year run (averaging 1.6%) since the financial crisis through 2018—demographics and nonresidential investment added a boost.

The Halifax Shipyard is busy building combat ships for the Royal Canadian Navy (through 2030). Contributions from other major capital projects, such as the Nova Centre and Maritime Link, have begun to fade—capital spending is expected to fall modestly this year. Residential construction has been strong, with the number of units under construction in Halifax just off a record high.

This is partly in response to firmer population growth through two channels: a reversal of outflows to Alberta, and a big jump in international immigration, as seen across much of the Atlantic region. A two-year extension of the Atlantic Immigration Pilot, announced last year, should help sustain these flows.

The labour market is strong, with 2019 employment growing at the strongest clip in 15 years. But, almost equally-strong labour force growth has left the jobless rate stable around 7.5%.

The Province of Nova Scotia is projecting a $37 million surplus in FY19/20 (0.1% of GDP), narrower than the $120 million surplus reported for FY18/19. That would mark the fourth straight year in the black.

The PEI economy is in the midst of an underappreciated boom, with real GDP growth averaging 3% over the past three years. Growth is expected to moderate to a still-solid 1.4% this year. Strong tourism activity, a population boost and less fiscal restraint should keep the economy performing well.

Manufacturing shipments are rising at a solid clip, led by food and transportation equipment. While U.S. demand has softened, the Canadian dollar is supportive of continued tourism activity. Public-sector restraint has given way to firmer spending growth, thanks in part to better government revenues.

Population growth is running at a very strong near-2% y/y pace. International immigration has accelerated, and net interprovincial migration remains positive.

Employment has been very strong and steady, rising more than 6% y/y in January to lead the country. That has helped pull the jobless rate below 8%, nearing a record low.

The Province of Prince Edward Island is projecting a small $1 million surplus in FY19/20, similar to the prior year and the third consecutive year in the black.

Newfoundland & Labrador’s economy remains mixed. Real GDP likely rebounded 2.0% last year after some temporary disruptions plagued 2018. Growth is expected to remain solid at 1.5% this year.

Oil production has picked up with the Hebron project coming online and ramping up output (to 150,000 bpd over the coming years), though overall growth remains modest. Capital investment has also turned higher after a major lull in recent years as some major projects wound down. The Province expects nominal investment of around $10 bln this year, up modestly from a year ago, but still well below the $14 bln peak in 2016, when Muskrat Falls, Hebron and Long Harbour were all being built-out.

Employment has weakened, partly because project development is a bigger employer than operation upon completion. Construction employment, for example, is down by about 6,000 positions since peaking earlier in the cycle. That has left the jobless rate around 12%, the highest in Canada. Also, the province hasn’t seen the population influx that most of its peers have seen. As such, retail sales and housing continue to under perform.

The Province of Newfoundland & Labrador is projecting a hefty $1.6 billion surplus in FY19/20 (more than 4% of GDP), but that is fully on the back of an accounting move that books new future Atlantic Accord revenues in the current fiscal year. Excluding this impact, the underlying deficit sits at $944 million, leaving it with the most challenging fiscal situation in Canada.