Provincial Credit Watch
July 06, 2026 | 13:25
Provincial Credit Watch: July 2026
Economics
Economics
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Provincial Returns |
Long provincial returns were very subdued over the past month, with little change in the 30-year GoC yield and mostly stable spreads. The U.S.-Iran deal pulled down oil prices sharply, with WTI entering July below the $70 mark, or roughly back in the range seen before the conflict. We continue to see the Bank of Canada firmly on hold for 2026. Year-to-date, long provincials are outperforming Canadas by just under a percentage point, at a 2.6% total return. That comes alongside a roughly 4 basis point tightening in long provincial spreads from the end of 2025. While still drubbed by other asset classes like equities, provincial investors have at least been able to pick up some extra return. The same holds from a year ago, with provincials outperforming Canadas by just under 4 ppts. |
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Relative Performance |
Spread performance was mixed over the past month, with little new fiscal news to digest. The swift pullback in oil prices will take some of the hype out of expected budget forecast revisions in Alberta and Saskatchewan, but both still see meaningful upside. Recall that Newfoundland & Labrador tabled their budget after the conflict was underway, leaving less upside. |
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Fundamentals |
Canada YayIt was nice to see the Canadian recession chatter confidently stamped out ahead of the national holiday. For the record, we were never in that camp following Q1’s second consecutive negative real GDP growth print, and the latest readings on growth in April and May already show the economy bounced back with some vigour to start Q2. As such, we upgraded our Q2 growth call to 1.8% from 1.0%, with some upside risk still on the table. That moved 2026 annual growth two ticks higher, to 0.7%. We won’t discount the challenges facing the Canadian economy right now, but they are proving manageable. Trade uncertainty continues as the July 1 USMCA renewal deadline came and went, leaving us with the status quo —but we’ve long expected this outcome. The residential real estate market is in recession in parts of the country, but a broader spillover has been well contained, and some pockets of the market look to be bottoming. And, population growth turned negative, but this was a requirement to reset net inflows to a level that is both manageable in the short term, while also providing needed labour force growth over the long term. But it’s easy to overlook the positives—and there are a number of sectors supporting the economy right now with firm growth. Here’s a quick rundown: |
Resources: Oil & gas output has expanded 6% in the past year and almost 5% annualized over the past three years. While not the capex boom of cycles past, the sector is cranking out cash flow and supporting incomes. This can be seen at the regional level, where Alberta, Saskatchewan and Newfoundland & Labrador are likely to lead the country with growth around 2%. The AI boom: It’s not the massive wave of capex seen south of the border, but output in computing infrastructure, data processing and related services is up more than 10% in the past year—this picks up some AI- and data centre-related investment. Granted, it is a tiny share of the economy from a contribution to growth perspective, but it is visible around the GTA and Alberta, among other areas. |
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Nonresidential construction: While residential construction contracts, nonresidential construction is forging ahead. Some of the AI buildout seeps into these numbers, while many provinces are running aggressive capital spending programs, and the federal government has pushed to fast-track major projects of national importance. Defence: Federal cutbacks have dampened public admin output, but that masks torrid growth in defence spending. The immediate jump in the defence budget to 2% of GDP has added roughly $10 billion to the economy this year, through both increased pay and capital outlays. Output in defence services is up almost 10% from a year ago, with the impact landing even heavier in provinces with high exposure, such as Nova Scotia. Finance: Capital markets are on a tear with a record TSX complemented by strong deal activity. Canada’s financial sector has proven resilient to the housing downturn and wave of mortgage renewals, while benefitting from favourable market conditions. It’s not all boom, but it’s certainly not all doom in Canada’s economy.
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Recent Publications of InterestStork Reality: The Economics of Fewer Babies. Fertility rates are plunging in Canada and much of the world, with many regions now well below replacement. We look at some of the reasons why and what it means for the economy and policymakers. Full analysis here Canadian Housing Monitor: The floor under Canada's hardest-hit housing markets might be firming, even if we're still unlikely to see a charged rebound. Full analysis here Spring Economic Update: Canada Strong, Deficits Long. Ottawa is projecting a $65.3 billion deficit (1.9% of GDP) for FY26/27 in the Spring Economic Update, little changed from the $65.4 billion forecast in the original budget plan. Full analysis here Canada’s Population Estimates: Shrink Nation. Canada’s population fell 0.2% y/y in Q1, the first annual population decline on record going back to WWII. Full analysis here Provincial Monitor: The Canadian economy is still dealing with the burden of U.S. tariffs, but the impact is uneven across the country, and conditions are beginning to drift apart. Full analysis here. Housing 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 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. 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. 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 |
FY26/27 Budget ReportsThe Province of British Columbia is projecting a $13.3 billion deficit in FY26/27. Full analysis here The Province of Alberta is projecting a $9.4 billion deficit in FY26/27. Full analysis here The Province of Saskatchewan is projecting a $819 million deficit for FY26/27. Full analysis here. The Province of Manitoba is projecting a $498 million summary budget deficit in FY26/27. Full analysis here The Province of Ontario is projecting a $13.8 billion deficit for FY26/27. Full analysis here The Province of Quebec is projecting a $6.3 billion deficit in FY26/27. Full analysis here The Province of New Brunswick is projecting a $1.4 billion deficit for FY26/27. Full analysis here The Province of Nova Scotia is projecting a $1.2 billion deficit in FY26/27. Full analysis here The Province of Prince Edward Island is projecting a $410 million budget deficit for FY26/27. Full analysis here The Province of Newfoundland & Labrador is projecting a $688 million deficit in FY26/27. Full analysis here |