October 20, 2022 | 08:00
The Price of Inflation
The Canadian economy is slowing, and the largest rise in global interest rates in a generation sets the stage for an outright downturn in early 2023. Stubborn inflation readings will force further tightening by the Bank of Canada through the remainder of 2022, and the combination will likely dent consumer spending, housing and business confidence. Real GDP growth is expected to slow to zero next year after 3.2% growth in 2022, with risk of a downturn most acute around the turn of the year.
Growth prospects are also weakening across the provincial landscape, with a number of regions at risk of recession in the coming year. Negative prints are likely in British Columbia, Ontario and Quebec in 2023, with the real estate downturn playing a significant role. In British Columbia, residential investment carries the highest weight in real GDP in the country. While holding a proportionally lower share in Ontario, the downturn in real estate there will be the sharpest in the country, a theme already playing out on the ground. While weakness has already flowed through resale activity and prices, slower new construction and renovation activity don’t look far behind. Quebec faces a more modest slowdown in residential investment, but the broader impact of high oil prices and slowing U.S. demand will hit Central Canada relatively hard as well. The softer loonie is acting as a buffer for exports and manufacturing.
At the other end of the spectrum, some provinces could see resilience through the downturn. Alberta and Saskatchewan should face much less downside in residential investment, partly because those markets had already slumped for a number of years before the pandemic boom, and therefore never accumulated much froth. Oil prices, while well off their highs, continue to support local activity, incomes and government revenues. Growth will likely slow in the region but remain in the low-1% range and outperform the national average.
Atlantic Canada continues to draw in strong population flows from outside the country and from other provinces. While we see a meaningful slowdown in that region as well, growth prints should remain positive in 2023. Economic losses and rebuilding efforts post-Fiona will also shape the growth pattern.
As we have moved through 2022, our business clients have been navigating uncertainty. We’re clearly in a new way of working, and those businesses that have committed to exceptional service and quality products, along with innovation and intelligent expenditure management, tend to outperform in the market.
We need to remember that some 361,000 Canadian businesses—around one third of the total—have still not fully recovered from the pandemic. When we combine that with the current environment, characterized by rising inflation, higher interest rates and tight labour markets, it has never been more important for business owners to be actively reviewing their operations, assessing the competitive landscape and consumer trends and taking action to evolve.
At the top of the list of macro conditions currently affecting Canadian businesses we find inflation; the pressures on businesses are broadening and contributing to a rising price environment across the board impacting raw materials, operating expenses and the cost of capital.
As well, small and medium-sized businesses, in comparison to larger firms, are also less able to take on debt—particularly in the high-contact services, construction, health and social sectors. With higher interest rates, this trend will no doubt accelerate.
Meanwhile, the competition for talent represents a major challenge for Canadian businesses. Across the country, we’re seeing costs to retain and attract talent rising; given the current economic environment, those added extra expenses can’t easily be recouped elsewhere. In such a situation, companies must take this opportunity to innovate and differentiate themselves for current and potential employees, through the establishment of strong workplace cultures, more flexibility on time of work and working from home, and ensuring a community focus and strong social capital are a priority. In short, they create environments that lead to loyal and productive workforces.
Such innovations can take a number of forms. For instance, in an era of uncertain supply chains, businesses can continue to diversify their suppliers. With the issue expected to persist for a year or more, companies’ ability to survive a supply shock will be key to survival.
Companies must also know how to protect themselves. During the pandemic, many companies shifted or expanded to online sales, creating larger markets and opportunities. But they need to ensure their business models and controls are robust—particularly in the area of cybersecurity. Financial services can help in this regard; BMO’s Cash Flow Solutions, which are of particular help for digital payments, provide a good example of a helpful resource.
Advice in an uncertain time is crucial. Businesses need support from a team that understands them—a combination of help from financial services, supply partners, accountancy services, legal advisors and more, plus the invaluable mixture of expert and personal guidance provided by mentors.
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 has a pathway forward to stability and growth.
All Canadian provinces face a meaningful growth slowdown, and some are facing elevated recession risk. There are a few major themes playing out that are shaping the regional growth forecast. Resource-rich provinces are holding up relatively well, with high oil prices driving government revenues and local incomes. Demographic flows are strong across the country, led by international immigration, while some provinces are also attracting migrants from other regions of Canada. Meantime, higher interest rates have triggered a correction in almost all local housing markets, with the degree of downward pressure varying by region.
All the while, inflation remains a serious economic issue, with the headline rate in Canada running near 7% y/y as of September. It's notable that inflation is not only broad-based across spending categories, but also across the country. This reflects the massive pandemic-era increase in demand for goods, scarcity in the labour market, and a jump in commodity prices. While prices for consumer goods and resources are easing, service-sector inflation is proving very sticky, and upward pressure remains on wages.
The B.C. economy is expected to grow 3.0% this year, slightly below the national average, but a dip into negative territory is likely in 2023. The weakness follows a strong outperformance coming out of worst of the pandemic in 2021, when the province grew by more than 6%. While tourism and service activity are now helping the expansion, housing will be a heavy drag on growth in the year ahead, given that residential investment makes up the largest share of provincial real GDP in the country.
The housing market has cooled considerably alongside higher mortgage rates, with sales activity plunging through the first half of the year to levels more consistent with pre-pandemic norms. Prices have also pulled back, with the provincial average down 10% from the February high as of August.
The job market remains strong, and the unemployment rate is expected to average 5.0% in 2022, challenging for the lowest level in Canada. Employment was relatively quick to recover pandemic losses compared to provincial peers.
The Province of British Columbia posted a $1.3 billion surplus in FY21/22, and the budget estimate of a $5.5 billion deficit in FY22/23 has swung to a small surplus. B.C. has seen weakening fiscal metrics over the past few budget cycles, but the surge in revenues last fiscal year has helped considerably.
BC businesses move into a new normal of higher inflation and growing borrowing costs with concern, but cautious optimism.
Positives abound, representing good news for area businesses. As an example, major infrastructure projects are moving forward in the Metro Vancouver area, including hospitals, bridges, tunnels and SkyTrain expansions. Towers are going up in all major town centres. As a result, the construction industry shows considerable strength.
Tourism, which COVID constrained significantly, is back in a big way. As an example, cruise ships have returned to Vancouver—a major boon for the downtown economy.
In the housing sector, we’re starting to see the psychological impact of higher inflation and interest rates seeping into business owners’ thinking. Do they move forward with capital investments now, or do they choose to wait? We see cautious investment behaviour; businesses are moving forward, but only when it clearly makes sense.
This kind of thinking leads to a clear difference between stronger and weaker businesses. The strong are getting stronger, while the weaker ones have started to look themselves in the mirror.
Agriculture has seen a challenge with both fire season and supply chain difficulties. Unfortunately a number of producers have been experiencing major constraints in getting product to market; spoilage has been common.
Among the major challenges are fuel prices and labour shortages. BC has long had the highest gasoline prices in the country; this always represents a challenge for businesses, particularly in the Vancouver area. Meanwhile, lower labour supply affects businesses’ ability to find and retain talent. In particular, this problem has affected the tech sector; a number of second-tier players are choosing to take a time out. The province is also seeing more strikes, as workers seek to get pay increases in line with inflation.
The Alberta economy is expected to outperform the country with 4.3% growth this year, and hold up relatively well as the slowdown grips most of Canada into 2023. High oil prices are supporting local incomes, even if they are well down from early-2022 highs, while production and capital spending in the energy sector look solid.
After slumping through 2020, oil production has returned to, or near, capacity levels that prevailed before the pandemic. Capital spending growth in the industry looks very firm for the year ahead, but the level of spending remains less than half of its 2014 peak. Even if we don’t expect a resurgence in new project investment, cash flow in the sector looks well-supported.
Housing is less susceptible to the correction given that the market was never as extended as those in Ontario and B.C., but a slowdown will still be felt across the industry. Interprovincial migration flows have also turned positive after six years of outflows, which will help cushion the downturn. That said, the commercial real estate backdrop remains tough, with high vacancy rates in the downtown office market persisting.
The job market has tightened dramatically, with the unemployment rate falling below 5% this summer after topping 15% in early 2020. Notably, that has crossed below the national average for the first time since 2015, and we expect that will remain the case through 2023, as labour markets deteriorate more in other regions.
The Province of Alberta revised its FY22/23 fiscal projection, and is now looking for a hefty $13.2 billion surplus (2.9% of GDP), up from $511 million (0.1%) projected in the 2022 budget in February—that will give the government plenty of room to maneuver ahead of next year’s election. While that estimate suddenly looks a bit optimistic (based on $92.50 WTI oil for the fiscal year), the medium-term outlook looks well into surplus at recent levels, and a weaker loonie helps.
Across the province, businesses are telling us that Alberta is back. Confidence has returned in a broad array of sectors.
Oil and gas, of course, is always a heavy topic in Alberta, particularly since capital investment from the energy sector drives the province significantly. With world prices back up and the likelihood of some expanded pipeline capacity, we see big players expecting to do big projects.
The usual benefits for the broader economy from this strength in the sector are sure to follow; people are returning and spending, and local retail and hospitality businesses are reaping the rewards.
In the construction sector, we see stakeholders seeking out opportunities. Projects that dried up during the pandemic and the period of lower energy prices have cautiously restarted. As a result, firms are showing increasing confidence in obtaining work. Interestingly, a number of Alberta companies are responding to RFPs and RFAs next door in BC—in particular, for hospital construction in the Kootenays. This exemplifies the return of confidence in the sector.
Meanwhile, the agriculture sector has seen a positive year. The international situation has led to higher commodity prices, which in turn has provided a good opportunity in the sector—particularly in grain. We did see a wetter Spring than usual, but it has not led to major problems. Cattle farmers, as well, have been having as good year.
As seen elsewhere, labour supply has been a major constraint on business growth in Alberta. In particular, businesses have expressed concern that the lifting of the temporary foreign worker freeze—a policy implemented during COVID—is being held back by process delays. Companies are looking forward to a time when the faster and more straightforward process for obtaining foreign workers seen pre-COVID returns.
The Saskatchewan economy will likely grow a strong 5.5% this year, leading the country after underperforming in seven of the past eight years. The province should hold up relatively well in 2023 thanks to very little housing forth and a sturdy resource economy.
Agriculture is also poised to rebound after very challenging conditions in 2021 cut output. The resource sector has regained strength alongside higher oil and potash prices. Oil production is grinding higher, and incomes will be very well supported. Meantime, potash prices have soared amid geopolitical turmoil, and BHP’s go-ahead of the massive Jansen project will support activity for the next five years until reaching expected production. Indeed, capital spending intentions in the province look strong this year, with the highest overall growth expected since 2010.
The unemployment rate is falling quickly, dipping below 4% for the first time since late 2014 as the job market tightens. Still, the province continues to see net interprovincial outflows to even stronger jurisdictions, and job market momentum should cool in the year ahead.
The Province of Saskatchewan is projecting a $1 billion surplus in FY22/23 (1.1% of GDP), sharply improved from a $463 million deficit estimated in the 2022 budget. The improvement comes on the back of surging resource revenues.
Businesses in Saskatchewan have entered a new period with COVID pretty well behind them but higher inflation and interest rates, plus labour shortages, beginning to affect their operations.
The resource sector represents a vital area of good news for the province. Energy prices have risen, providing benefits for the oil & gas industry in the south of the province. As well, with world trade of potash affected by the war in Ukraine, demand for Saskatchewan’s supply of the fertilizer has risen significantly. Understandably, firms throughout the resource sector are looking to invest and expand; this represents a challenge to some degree given the tighter labour market.
In agriculture, farmers are looking forward to a rebound year. 2021 was tough for producers because of major drought conditions, so the anticipated strength of crops will be welcomed and optimism is strong. That said, cattle producers are showing more caution given the effect of higher costs. This has led to some minor producers allowing their smaller herds to be acquired by larger players.
Real estate has shown an interesting trend in the face of national difficulties; the market remains busy with homes still selling. It appears that the market is not being affected by inflation and rate increases in the same way as elsewhere in the country.
Within the service industry, we’ve started to see more consolidations with stronger companies taking over smaller ones. We’ve seen among businesses as disparate as insurance companies and fast-food franchises. Services are also challenged by labour shortages; a problem affecting a wide range of firms.
We continue to keep an eye on the potential for the technology sector in the province. Innovation Saskatchewan remains active in offering government funds to upstart industries. The resulting diversification in the larger centres should lead to greater economic benefits for everyone.
The Manitoba economy is expected to grow 4.0% this year, ahead of the national increase. Challenging crop conditions weighed heavily last year, but those look much improved for 2022. At the same time, Manitoba’s diverse and steady economic base has historically helped the province outperform during periods of national economic weakness—a direction we are likely headed through next year.
The unemployment rate fell to 3.5%, the lowest level in Canada, in July before climbing later in the summer. While the sharp decline was partly due to a drop in participation, employment has pushed to record levels. Still in the 5% range, next year’s average unemployment rate should be among the lowest in Canada.
Housing activity was extremely strong, but has cooled alongside higher mortgage rates. Like the economy more broadly, we expect the downturn to be more moderate in Manitoba given less froth on the way up. For example, Winnipeg’s benchmark price growth peaked at 16% y/y, less than half of that in Toronto.
The Province of Manitoba is estimating a $202 million budget deficit in FY22/23, or a modest 0.2% of GDP. The fiscal situation overall looks solid.
Manitoba businesses have started to emerge from the COVID pandemic with a good amount of optimism, but they must now deal with the effects of higher inflation, rising interest rates and labour shortages.
As has long been the case, Manitoba boasts one of the most diverse economies in the country. This will always provide major benefits for the province with most challenges at least partially mitigated as a result, even as Manitoba remains a tale of two economies—large centres like Winnipeg and Brandon, and the rest of the province. As always, most economic strength will flow from those urban centres.
Despite higher inflation, Manitoba still has better affordability than in most other parts of Canada. It’s clear that post-pandemic demand has arrived as advertised, so the province has been able to benefit from this. We expect this combination of positive indicators to support growth and help businesses.
We are particularly encouraged by new economic activity by Indigenous governments. In many ways, their market participation makes them de facto business entities. One excellent example of this is the Manitoba Métis Federation’s acquisition of BMO’s historic branch at Portage and Main in Winnipeg. We expect to see more such activity as these government’s strengthen their economic position over time.
The agriculture industry, like in other parts of the country, is working to recover from last year’s drought. So far, all the indicators appear to be good, and producers are looking forward to a positive year. We even see some clients providing further investment in their operations—a sure sign of growing confidence.
In the service sector, businesses continue to benefit from an underlying infrastructure that is supportive of entrepreneurs. While costs have risen, we still see potential for more businesses to open.
Ontario’s economic growth is expected to slow to 2.9% this year, below the national average as higher interest rates and a housing correction bite hard. The economy is then expected to contract 0.4% in 2023, with challenging conditions expected around the turn of the year.
Housing activity across the province is in recession, with higher mortgage rates chilling demand and buyer psychology. Unit sales have fallen below pre-COVID levels and are now tracking at some of the lowest levels of the past 20 years. Prices are also falling, with some markets roughly 20% off February’s peak level—suburban/exurban single-detached were hit especially hard early on. We’ve maintained all along that the extreme strength was driven by excess demand, the result of too-low interest rates and buyer psychology. With that now unwound, new construction activity should also cool through 2023 with a record number currently under construction, and presale activity faltering.
In the commercial real estate sector, downtown office vacancy rates have eased to below 10%, according to CBRE, from a high of 12.4%. Net absorptions have turned positive, but rent growth remains under pressure. Some other sub-sectors, such as industrial, remain strong, but cap rates are adjusting to higher interest rates.
The job market has been very strong, with employment powering to a record high as of May, before declining through the summer. Service-sector jobs also sit at a record high, despite a still-wide gap in accommodation & food services employment. Finance, professional services and technology-based industries have been hiring at a strong and almost uninterrupted clip through the pandemic, but momentum looks to be fading.
The Province of Ontario posted a $2.1 billion surplus (0.2% of GDP) in the FY21/22 public accounts, much better than the $13.5 billion deficit last expected in the 2022 budget (April 2022). This is a massive revision that resets the fiscal backdrop in Ontario for the current year and beyond, and is the first surplus for the province in 14 years.
Throughout Ontario, businesses are returning to pre-COVID activity levels, with some sectors experiencing the return faster than others. That said, the province faces challenges with supply chains, labour and rising costs.
On the positive side, local travel has continued to be robust. Business owners who manage short term rentals and campgrounds have consistently been at full capacity, to the point where they could grow their portfolio by 25% or more and still be at capacity while meeting demand. Meanwhile, business within our “border towns” have now started to see increases in foot traffic following the easing of travel restrictions.
The hospitality industry, while hit hard earlier in the pandemic, had to shift their sales models quickly to survive. Many, where possible, have reduced their footprint to smaller locations. This allowed them focus on take-out delivery to remain profitable. Front counter staff was reduced, and business owners relied on online take-out delivery operators to get their product out the door.
Ontario has focused on dealing with shortages in our labour force, especially in healthcare where we have seen reduced hours and even closed emergency departments. The construction industry has seen the same. But with borders opening and government efforts to help deal with the issue, we can see this shortage easing in due course.
In the Agriculture sector farmers continue to express feelings of concern. The rise of expenses, especially higher fertilizer prices, has affected crop yields. Farmers are faced with cutting costs in many ways—such as reducing staff—which adds more stress to the overall operation.
Many agriculture clients have requested increases in operating lines to provide a larger safety net to accommodate for the additional expenses. Certain producers who were diligent with saving are taking advantage of the lower real estate market / land prices and acquiring more farm property.
Many GTA businesses are seeing a return to pre-COVID activity levels, but are struggling with supply chain challenges, labour shortages, rising interest rates and inflation. Business owners are turning to their cash reserves or personal resources to fund working capital, in an attempt to offset higher borrowing costs.
Supply chain instability has made it attractive for businesses to source goods from local wholesalers and manufacturers to ensure reliable supply. Despite the benefits of a more stable supply chain, the cost of such supply is increasing given higher gas and transportation costs; clients are more willing to accept higher prices that can be passed on to the end consumer. Business owners are ordering supplies in bulk to meet anticipated consumer demand, with some even purchasing raw materials to build finished goods in-house—resulting in increased demand for storage, equipment and labour.
Labour shortages are hitting most industries very hard, particularly healthcare, construction, and hospitality. Over the course of the pandemic, many store-front businesses pivoted to online sales; for new businesses, online is now a staple. In the food and beverage space, we’ve seen significantly higher investment in take-out services given the now permanent addition of competition with the likes of Uber Eats, Skip the Dishes and DoorDash.
With immigration services reopening, international workers and students are not only driving more demand from businesses, but are also being used to fill labour shortage gaps. Many businesses are seeking professional services of staffing agencies and recruiting firms to locate the right talent. This includes investing in programs and services to attract and retain staff, such as retirement and benefits packages, flexible work options and wellness programs. More of our business clients are investing in automating operations to counterbalance higher labour costs and labour shortages, giving rise to a growing outlook for equipment manufacturing.
The Quebec economy is on track for solid 3.4% growth this year, ahead of the national average. That comes in part thanks to a strong performance around the start of the year, and a less severe early decline in housing activity. That said, the province will likely struggle to grow in 2023, consistent with a broad weakening across the country. We are still optimistic that Quebec will remain a relative economic outperformer over the medium term.
High oil prices have tilted some relative strength back to Western Canada, and Quebec is typically at the losing end of that shift. Still, the current situation should be more muted than, for example, the mid-2010s period of relative softness—the loonie has weakened, which will contain the impact on exports and manufacturing; the local fiscal and employment situations are much better; and outward migration has neutralized.
The housing market has slowed sharply, with existing home sales falling more than 10% y/y, back in line with pre-pandemic activity levels. Prices are also weakening, but markets like Montreal didn’t see the extreme gains that some others did, and started from a more affordable level. Still, a jump in mortgage rates from 1.5% to around 5% is a significant hit to even a less frothy market. Meantime, residential construction remains strong amid healthier demographic flows (especially fewer losses to other regions). Housing starts are expected to cool in 2022, but to a still-robust 63k units. Softer demand will likely pull that down to 51k by 2023.
The Province of Quebec is on track for a $1.8 billion surplus in FY22/23, or a modest 0.3% of GDP, sharply improved from earlier deficit estimates. But, another $6 billion of policy measures in the re-elected CAQ platform will tip Quebec back into deficit.
Since the beginning of the year, interest rates and the looming possibility of a recession are the new areas of concerns for Quebec entrepreneurs. Combined with the shortage of qualified workers, supply chain issues and increased costs, uncertainty prevails among Quebec businesses.
In real estate, higher interest rates have slowed down transactions. Some clients are choosing to move to the sidelines, while others are challenged by higher down payments. On the other hand, construction and trade contractors continue to do well and even with the increase in interest rate we have yet to see any slowdown.
For the most part, businesses seem to have adapted to the supply chain difficulties. Some have moved away from “Just In Time” to increased inventory levels. Although this higher inventory raises carrying costs and risks, the shorter turnaround time makes it all worthwhile. In some cases our importers have moved from North American Brokers to Asian Brokers for their containers. This strategy both reduced delays and costs.
We’re seeing big winners in some industries. The food sector has been strong, especially for those businesses that were not overly reliant on restaurants. Plus, with restaurants now reopened to full capacity, our clients in are growing in confidence. As well, the hospitality industry seems to be making a strong comeback with more people choosing staycations this year.
In our more densely populated areas, downtowns, and neighbourhoods around CEGEPS and universities, our clients are getting ready for a return to normal, especially given that schools are going back to in person teaching. Businesses our calling back their employees to the office. According to STM, Metro/Subway traffic is expected to near pre-COVID levels. So all the businesses that have been struggling during the pandemic given reduced traffic levels are readying themselves for the back to school and work.
The New Brunswick economy is expected to grow 1.8% this year, softer than the national average. Keep in mind that the pandemic contraction was also much milder than most other regions, so there has been less ground to make up. Growth should fade below 1% in 2023, but the region should be relatively insulated through the downturn.
The unemployment rate has trended around 7% so far in 2022, which is somewhat below rates seen in the three years before the pandemic. Employment in impacted industries, such as trade and accommodation & food, has fully recovered from the 2020 decline, leaving service-sector jobs above pre-COVID levels. The participation rate, however, continues to drift down as the population ages.
That said, population growth has surged to near 2% y/y, the fastest pace since the mid-1970s, led by a rebound in international immigration and a surge in interprovincial migrants. The latter has come as families look for space and affordability in a new hybrid/remote-work environment. The consequence has been some stress on living costs.
The Province of New Brunswick’s $777 million FY21/22 surplus will narrow to $136 million in FY22/23. Small surpluses persist through FY24/25, highlighting the strong turnaround in the Province's fiscal situation.
New Brunswick businesses successfully navigated the COVID-19 pandemic, leaving many in a strong position given the lack of shutdowns relative to other parts of the country. Activity has picked up, but now our clients are facing the new challenges of inflation, higher interest rates and labour shortages.
As one of the country’s most important hubs, transportation has been an historic strength for New Brunswick. The industry continued to do well throughout the pandemic and the reopening of economies across the country will lead to even further activity. Players in this space can feel optimistic.
The province’s housing market, which had been historically strong in the past year, has now started to cool—particularly in Saint John. The median of days on the market for a house has risen from 22 to 27, while listings have dropped. These new market conditions do mean an easing of upward pressure on prices and fewer bidding wars. However, this new market reality leads to reduced business in the construction industry, which also needs to contend with supply chain constraints and a tight labour market.
Indeed, employers across New Brunswick’s industries are struggling to find enough staff for businesses. Some businesses in hospitality, such as restaurants, in the smaller towns have had to reduce or change hours based on staffing availability. The requirement for skilled trades people is a struggle, which is starting to affect some businesses with the amount of new jobs they can take on.
Meanwhile, local fishers are experiencing a challenge with the lobster market. Lower prices compared to previous years, combined with the higher costs inherent in a higher inflation environment, has led to some fishers choosing not to fish at all this season. We are keeping a close eye on the industry’s long-term stability as a result.
The Nova Scotia economy is expected to grow 1.6% this year, cooling from a strong 5.8% surge last year, with the impact of Hurricane Fiona weighing, but still uncertain. Demographic strength and a rebound in tourism have powered well above-potential growth in the near term, but a slowing is imminent, and we see 1.0% growth in 2023—that should still outperform the national average.
By mid-year, international travel flows into Canada were up sharply from the pandemic lows, but still running at only 60% of 2019 levels. With border restrictions eased, summer 2022 was likely a better season for travel activity.
The job market is also strong. The unemployment rate has trended just above 6% in recent months, as employment continues to rise. Full-time employment has surged, while part-time jobs have been more volatile alongside choppy hotel & restaurant hiring—but they too are back to pre-COVID levels. Labour force participation is still somewhat restrained. There are early signs, however, that job market momentum is cooling.
Resale housing market activity has cooled sharply, with sales well down from extreme early-2021 highs, while prices peaked in April. Interprovincial migration flows are running at a record-high 11k per year pace. As a result, building activity remains robust and, while cooling, should lead to 6,000 housing starts next year.
The Province of Nova Scotia is estimating a $554 million deficit for FY22/23, or 1% of GDP. Shortfalls are expected to persist over the next four fiscal years, while the net debt burden gradually rises.
Nova Scotia businesses have been going strong, which has placed them in a good position in this period of higher inflation and interest rates.
Tourism has been strong this summer. Short term vacation rental properties are in high demand. Summer and particularly August is traditionally the busiest month at the Halifax airport; this year has been no different with some record setting passenger totals compared even to pre-pandemic days.
In the hospitality industry, restaurants that pivoted to contactless delivery and drive throughs during COVID have remained in a good position; we see new fast food franchises either moving into Nova Scotia or expanding locations. Some restaurant owners, however, are experiencing staffing issues, with many migrating to other industries during the pandemic.
Nova Scotia’s unemployment rate dropped to a record low 5.9% in July as employment rose and the number of people looking for work declined. Young Nova Scotians have had more success finding work this summer; however, many businesses are struggling to find enough workers. Labour shortages like this will continue to be an issue during recovery from Hurricane Fiona damage, as the province is already short of tradespeople and demand will be high.
The Commercial Real Estate market continues to be strong despite rising interest rates. We continue to see investments in multi-residential construction and sales activity. Builders and other contractors are also buying more supplies in bulk to offset the cost of materials along with supply issues.
Immigration remains strong in Nova Scotia; it continues to attract newcomers through innovative immigration programs and solutions such as the Atlantic Immigration Program. The province is aiming to double its population to two million by 2060 with a goal to attract 25,000 newcomers per year.
Prince Edward Island
The PEI economy will likely expand 1.5% this year, weighed down by the impact of Hurricane Fiona. Rebuilding efforts should boost activity next year and, while the impact is still uncertain, we're looking for 1.3% growth. Recall that the province was enjoying a significant boom before the pandemic, and also led the country with 6.6% growth in 2021. There are signs of strength continuing, including demographic flows and a return of tourism activity.
Tourism and seasonal visitors during the summer months are major drivers of local economic activity, and both of those sources have improved. With Atlantic and Canadian travel opened back up, U.S. and Canadian inbound travel should be winding down its strongest summer since the pandemic began. Meantime, an influx of migrants, both from abroad and from other parts of Canada, will continue to support robust housing demand, even as higher interest rates cool prices.
The unemployment rate fell below 5%, a record low, at one point in June before ticking back up. Employment has surged, including among full-time workers, but labour force participation hasn’t yet returned to pre-COVID levels.
The Province of Prince Edward Island is projecting a $93 million budget deficit for FY22/23, about $66 million larger than the previous year. That will weigh in at a modest 1% of GDP, though that marks a 0.7 ppt deterioration from FY21/22.
PEI businesses are seeing a mixed situation, with some industries affected more than others by the current broader situation with inflation, interest rates and supply chains.
On the positive side, PEI is benefiting from a resurgence in tourism. Visitor numbers are reaching levels not seen since before COVID, and the benefits to the broader economy, such as in hospitality, are emerging as one might expect.
In agriculture, the table stock potato industry was hit hard after the U.S. closed the border because of potato wart. Fortunately, this dispute has been resolved and product is again on the move. Growing conditions have been ideal through the year; as long as the Fall isn’t unusually wet, farmers can look forward to a good year.
On the real estate side, businesses are expecting a moderation in the market, or a small decline. The PEI market is small overall with limited supply; as a result, we don’t have a high number of tradespeople to build houses and demand is high given Hurricane Fiona reconstruction. We still expect prices to be somewhat strong but we are less likely to see bidding wars for houses.
In immigration, the province saw a reduction of incoming residents during COVID. Now, numbers are starting to pick up again with foreign workers joining the labour force and opening new businesses. This stands PEI in good stead in a period of constrained labour markets.
In the fishery industry, we see low prices and high catches in the lobster industry. Lobster fishers have been challenged as a result, with many asserting that with inflation as high as it is, they can’t make enough money on their catches to make it worth their while.
Newfoundland & Labrador
The Newfoundland & Labrador economy will see little real GDP growth this year due to some outages in the energy sector and the impact of Hurricane Fiona. However, incomes are getting a boost from surging oil prices, and rebuilding efforts will add to activity into 2023. The province was in a challenged position pre-COVID, but is emerging in better shape, with a notable boost to government royalty revenues incoming. Growth should firm very slightly to 1.2% in 2023 as oil production picks up.
While longer-term oil production remains burdened by declining reserves (Hibernia and White Rose), and a disruption at Terra Nova, Hebron continues to churn out steady output. And, the value of output has surged alongside higher prices.
The unemployment rate is well down from 2020 highs, sitting around the 10% level as of mid-2022. Employment has recovered all of the losses seen over the past two years, but the longer-term trend is likely stable around current levels. Tourism-related employment remains a clear weak spot, and part-time jobs have driven recent gains.
The Province of Newfoundland & Labrador is projecting a $351 million deficit for FY22/23, but there is upside building thanks to above-budgeted oil prices. That weighs in at less than 1% of GDP, a stark improvement from recent years.
Newfoundland & Labrador has gone through some difficult times of late, but positives have returned in a number of sectors.
With the reopening of economies across the country but more Canadians choosing to stay in country for their vacations, the province is receiving more travellers from across the country. Visitor numbers have returned to pre-pandemic levels, and the benefits for a broad range of businesses are expected to be significant.
Meanwhile, resource industries continue to look strong. New mining projects are underway, especially for gold extraction. As well, the recent visit by Germany’s chancellor and his business delegation led to the signing of memorandums of understanding to help German automakers secure access to minerals needed to build electric vehicle batteries. If these arrangements move to the production phase, the outlook for the industry is excellent. Further, the rise in energy prices means the offshore oil and gas industry becomes more financially viable.
In the construction industry, we continue to see investments in multi-residential construction and sales activity—a positive given the dislocations in the sector seen across the country given higher interest rates. Builders and other contractors are also buying more supplies in bulk to offset the cost of materials along with supply issues.
In the always important fishery, the snow crab catch is looking good for fishers given record high prices at the start of the season. Successes like this cement the industry’s position as one of the province’s most economic contributors.
However, much like in other parts of the country, tight labour markets are presenting difficulties for local employers. Businesses in the hospitality industry have been particularly affected, with several reducing hours. Skilled trades are also having similar difficulties; as a province with minimal population growth, this will likely constrain businesses going forward.