Provincial Credit Watch
January 06, 2026 | 10:12
Provincial Credit Watch: January 2026
Economics
Economics
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Provincial Returns |
Provincial returns weakened into the end of 2025 as long yields broadly rose. The 30-year GoC yield backed up roughly 25 bps in the final month of the year, although the impact on provincials was contained by tighter spreads amid limited issuance. For all of 2025, long provincial total returns were just about flat (very slightly negative), outperforming GoCs by roughly 4 ppts. That too was, of course, thanks to a strong market risk appetite and tighter spreads through the year, most notably after the early-year tariff trauma. |
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Relative Performance |
Long spreads tightened for most provinces in the past month, with the exception of Quebec. For all of 2025, Quebec lagged significantly, tightening just 5.5 bps in the 30-year space versus tightening moves of 12 bps in Ontario, 13 bps in Alberta and even more in Atlantic Canada. Indeed, Quebec has quickly fallen out of favor heading into 2026 given less fiscal discipline and a looming election that will surely wake up the separatist chatter in the lead-up to the vote. On the flip side, Alberta continues to hold the strongest fundamentals in Canada, while Ontario quietly performs well despite the impact of the tariff dispute. |
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Fundamentals |
Provincial Economic Outlook 2026The provinces are seeing growth run below potential, and calendar-year growth is expected to soften for most in 2026. After a post-pandemic era of very uniform economic conditions across Canada, we should see regional performance vary further in the year ahead. Shaping that variation will be U.S. trade exposure and the ongoing uncertainty over tariffs and the USMCA; a sharp slowdown in population growth; and, the ongoing real estate market adjustment. Alberta is expected to lead the country with 2.6% growth, while Saskatchewan runs around 2%. The tariff impact on energy exports is relatively low, and Alberta specifically will see less of an impact from nonpermanent resident caps, while still drawing in migration from other provinces. Interestingly, the general size and direction of interprovincial migration trends should remain similar next year, but the driving force could begin to shift away from a housing affordability arbitrage, and more toward relative job market conditions. British Columbia is also relatively sheltered on trade, carrying the lowest U.S. export exposure in Canada, although forestry remains hard hit. Population growth, however, will slow disproportionately given the highest international student share in Canada. We’re expecting 1.7% real GDP growth in the province in 2026. Western Canada more broadly also stands to benefit from the increased priority placed on major resource sector project development, although this is something that will likely play out beyond the upcoming year. Central Canada is feeling the impact of tariffs. Manitoba, Ontario and Quebec are expected to grow around 1% in 2026, with Quebec underperforming. These provinces carry high exposure to U.S. exports across a range of diverse manufacturing industries, including autos (Ontario), steel and aluminum. The longer trade uncertainty persists, the more likely it is that permanent damage will be inflicted on these industries. Southern Ontario also continues to grind through a housing correction, which lower mortgage rates have yet to relieve. We judge that 2026 will be more of the same in the residential real estate market, as valuations, from both affordability and investment perspectives, continue to adjust to current, more neutral, borrowing costs. Finally, Atlantic Canada remains mixed, with a few pockets of varying industry trade exposure. Growth in the region is expected to cool to the 1.0%-to-1.5% range in 2026. The region is still catching up to past population growth even if that will continue to slow next year, and the housing market remains relatively tight. At the same time, higher federal defence spending targets should disproportionately benefit some areas of the region, such as Halifax/Nova Scotia
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Recent Publications of InterestCanada’s Population Estimates: On a quarter-over-quarter basis, the population fell 0.4% annualized the sharpest, and only second, quarter-over-quarter decline on record dating back to the 1940s. Full analysis here Canadian Housing Monitor: Canada’s housing market remained balanced overall heading into the quiet depths of winter, with soft sales activity and prices still correcting in some markets, while others hold firm. Full analysis here 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. Provincial Monitor: Canadian economic growth has struggled with uncertainty caused by U.S. tariffs, as businesses hold back on major investment and hiring decisions. 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. Surveying the Provincial Landscape: The 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. 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. Canada’s Population Estimates — Down the Mountain: A major population adjustment is now well underway; before that trade war broke out, it was arguably one of the biggest economic stories in Canada. 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 |
FY25/26 Budget ReportsThe Province of British Columbia is projecting a $10.9 billion deficit in FY25/26. Full analysis here B.C. mid-year update projects an $11.2 billion deficit for FY25/26. Full analysis here The Province of Alberta is projecting a $5.2 billion deficit in FY25/26. Full analysis here Alberta mid-year update projects a $6.4 billion deficit for FY25/26. Full analysis here The Province of Saskatchewan is projecting a small $12.2 million surplus in FY25/26. Full analysis here The Province of Manitoba is projecting a $794 million summary budget deficit in FY25/26. Full analysis here The Province of Ontario: The Province of Ontario is projecting a $14.6 billion deficit for FY25/26. Full analysis here Ontario mid-year update projects a $13.5 billion deficit for FY25/26. Full analysis here The Province of Quebec is projecting a record $11.4 billion deficit in FY25/26. Full analysis here Quebec mid-year update projects a $9.9 billion deficit for FY25/26. Full analysis here The Province of New Brunswick is projecting a deeper $599 million deficit for FY25/26. Full analysis here The Province of Nova Scotia is projecting an $898 million deficit in FY25/26. Full analysis here The Province of Prince Edward Island is projecting a record $184 million budget deficit for FY25/26. Full analysis here The Province of Newfoundland & Labrador is projecting a $372 million deficit in FY25/26. Full analysis here |