The Canadian economy continues to show resilience through the pandemic, though another wave of containment measures across many parts of the country still poses a challenge. We remain optimistic that growth in the second half of the year will break out to the upside again, allowing full-year growth of 6.0% for the country overall. Regionally, all provinces have been hit by the pandemic, and many are currently dealing with third wave restrictions. That said, all provinces are expected to post strong growth numbers in 2021, with recovery from last year's pandemic lows well underway across the country.

British Columbia looks to outperform slightly this year, after experiencing a much more modest decline last year than most of the country. Real GDP is expected to grow 6.3% in 2021, as overall health care outcomes and necessary restrictions run better than its larger peers.

Alberta, Saskatchewan and Newfoundland & Labrador have caught some relief from a strong rise in oil prices, which will help the group rebound after a difficult 2020. Oil production is running well above year-ago levels in Alberta, while higher prices lend much-needed support to incomes and government finances across all three provinces. Our forecast is based on $60 for WTI on average in 2021, which could provide some upside risk.

Manitoba is traditionally the most stable economy on the provincial landscape, with a diverse industry providing a cushion.True to form, the province saw a more modest decline last year, with real GDP contracting 4.8%, but recent COVID trends suggest the province will still take some time to reach something that looks like a more complete and sustained recovery.

Ontario’s economy entered the pandemic with the strongest growth trends in more than 15 years. But, with the largest urban centre, the province continues to struggle more than most with the shape of its COVID curve, and strict lockdowns. Still, that can't stop torrid housing and consumer demand, which continue to cushion the blow, even as impacted Main Street businesses are forced to constantly adapt to changing rules. The economy should expand a solid 5.5% this year despite ongoing challenges.

Quebec's recovery is well underway, with growth expected at 5.9% this year. The path has been smoother so far this year, at least compared to more aggressive measures taken in 2020.

Notably, the province now has the lowest jobless rate in the country, and full-time employment is almost back to pre-pandemic levels. We continue to believe that Quebec will remain among the growth leaders as the pandemic passes.

Finally, Atlantic Canada fared very well on the COVID front on a relative basis, but much of the region is now dealing with outbreaks, border restrictions and other containment measures. The region outperformed in 2020, and will likely see softer growth than the national average in 2021. While the shallower downturn was certainly good news, a delayed return of travel & tourism means that a broader recovery in some key areas of the economy will be held back until 2022.

Budget Season Wrap

The FY21/22 budget season is almost complete, with all provinces but Newfoundland & Labrador tabling their documents. After a tumultuous year, provincial governments have re-set longer-term fiscal plans now that there is more certainty on the economic outlook and vaccination program. Here is a review of some key themes:

The worst deficits are behind us: Provincial deficits have likely peaked, and we’ve already started to see some positive in-year revisions in the latter stages of FY20/21. The combined FY20/21 deficit is currently pegged at $83.7 billion, or 3.8% of GDP, but that is already nearly $10 billion smaller than expected just a few months ago. And, it is expected to narrow to $76.8 billion (3.2% of GDP) this fiscal year. Over the medium term, the pace of deficit reduction is expected to be very gradual, with cautious revenue estimates and some support spending still the norm.

Ottawa carried the load, but transfers will fade: The federal government supported the provinces with roughly $24 billion in pandemic-related transfers, over and above ongoing programs. While underlying programs will continue to grow at their predictable rates, they will be offset by declining pandemic-related funding. Most provinces are seeing federal transfers drag on their revenue lines (down roughly 15%) this fiscal year.

Commodities helping, for a change: Alberta’s FY21/22 budget assumed $46 for WTI oil prices, yet prices are above $60 at this point—all else equal, that’s about a $3 billion revenue boost. Broader resources prices are also strong, which starts the fiscal year on a positive note.

Bank of Canada support ends: The Bank of Canada’s Provincial Bond Purchase Program has wound down (early-May), after already being tapered and seeing its maximum size reduced. The market has been fully able to handle the shift, and post-PBPP spreads will be driven more by the broader risk appetite in financial markets and individual fiscal performance.

Issuance will remain high: Still-wide deficits and chunky refinancing will leave total provincial borrowing very high this coming fiscal year. While we’re unlikely to match the massive near-$170 billion requirement in FY20/21, the total could still reasonably come in around $140 billion.

Borrowing costs off the lows: Provinces will still tap markets at very low interest rates, but those rates have begun to jump. Ten-year GoC yields were up as much as 93 bps in 2021 at one point and, while provincial spreads are slightly tighter, they haven't been nearly enough to offset the move in underlying interest rates.

Policy measures: Major new measures have been relatively light in the few budgets, with the focus still on pandemic-related spending. Notably, many provinces maintain large buffers in their fiscal plans that can absorb spending upside (if needed) or revenue downside (if it materializes).

British Columbia

The B.C. economy is expected to rebound 6.3% this year, slightly ahead of the 6.0% advance expected nationally. While a recent increase in COVID cases has forced some containment measures, including restrictions on travel, the province has made it through the pandemic with less disruption than most.

Meantime, broad-based strength in resource prices, especially lumber, is helping drive a strong recovery in nominal GDP and incomes.

The unemployment rate is expected to remain below the national average, at 6.5% for all of 2021, versus 7.5% for Canada.

Housing market activity accelerated through the pandemic, with sales and prices gaining momentum into 2021. Residential construction activity is also firm.

The Province of British Columbia is projecting a $9.7 billion deficit in FY21/22, which weighs in at 3.1% of GDP. The good news is that FY20/21 is tracking meaningfully better than last expected, with the deficit last fiscal year now estimated at $8.1 billion, down from $13.6 billion expected in the fall fiscal update.

Alberta

The Alberta economy is expected to lead the country with 7.2% growth this year, though that follows a year in which the province was estimated to have seen the deepest decline in Canada.

Oil prices have rebounded strongly, which is helping drive a rebound in provincial income, and production is on pace to rebound firmly this year. Longer term, the sector will remain challenged by the price environment (not high enough to incentivize new capital investment) and the shift toward renewable energy.

The housing market has strengthened and, unlike some other markets, the post-COVID surge in housing has helped firm up markets that were in prolonged decline in Calgary and Edmonton.

The unemployment rate jumped to 15.5% at the height of the pandemic, but has fallen to 9.0% as of April, though still well above the national average.

The Province of Alberta is projecting an $18.2 billion deficit for FY21/22 (roughly 5.4% of GDP), as higher oil prices are expected to modestly narrow the deep current-year shortfall.

Saskatchewan

The Saskatchewan economy is expected to grow 5.3% this year, softer than the national average, but keep in mind that the province saw a more modest hit in 2020, as containment measures were much lighter than the larger provinces.

The province came into the downturn with an already-weak economic backdrop, as the resource sector was challenged by low prices, but the strong rebound in oil prices will add some support.

The unemployment rate is expected to average 7.0% for all of 2021, versus 7.5% for Canada. Provincial migration flows remain a drag, and it's unlikely we'll see a big turnaround after the pandemic.

The Province of Saskatchewan is projecting a $2.6 billion deficit in FY21/22, notably deeper than the $1.9 billion shortfall now expected in FY20/21. The deterioration comes as spending ramps up sharply this fiscal year in response to COVID, offset partly by improved revenues.

Manitoba

The Manitoba economy is expected to rebound 5.4% this year, milder than the national rebound. Manitoba has typically weathered downturns much better than the rest of Canada, but COVID-related disruptions have still weighed heavily. In fact, past measures in and around the Winnipeg area targeting restaurants, bars, clubs and casinos have been relatively strict, which will dent early-year growth. The latter half of 2021 should look much firmer.

The unemployment rate fell as low as 6.8% after topping 11% last year, and the 6.6% expected average for 2021 should be among the lowest in Canada. Meantime, full-time employment is already back above pre-COVID levels. Part-time service industries will be last to recover.

The Province of Manitoba is projecting a $1.6 billion summary budget deficit in FY21/22, slightly improved from the $2.1 billion now expected for FY20/21. That weighs in at a modest 2.0% of GDP, and sits at the lower end of the provincial pack.

Ontario

The Ontario economy is expected to grow 5.5% this year, trailing the national average. The province is currently battling a tough COVID challenge, with a third wave of restrictions in place. While the economy powered through second-wave measures relatively well, this is another setback ahead of a more sustained expansion later in the year.

Employment has recovered quickly, and was down just 1.6% from pre-COVID levels as of March, though another setback arrived with April restrictions. The unemployment rate sat at 7.5% in March, before jumping to 9.0% in April. Recovery through the summer will likely be strong and fast.

The housing market has surged, with pent-up demand, record-low mortgage rates and shifting preferences lifting sales and prices. Suburban/rural markets are leading, while the Toronto condo market has begun to strengthen after a lull in 2020. Overall Toronto benchmark prices were up 16% y/y, while Ottawa was up 29% y/y and smaller markets in Southwestern Ontario are even more heated.

The Province of Ontario is projecting a $33.1 billion deficit for FY21/22. That will weigh in at about 3.7% of GDP, and is down from the $38.5 bln (4.5% of GDP) shortfall still expected for FY20/21. Indeed, there has been precious little change in the near-term fiscal picture, with a modest bump in revenues offset by higher spending.

Quebec

The Quebec economy is on pace to rebound 5.9% this year, after contracting 5.3% in 2020. The province struggled more than most through the earlier stages of the pandemic, with various containment measures impacting the economy. Still, growth managed to show resilience through the turn of the year, and prospects for the second half of 2021 remain bright.

The unemployment rate has fallen sharply to 6.0% by April, the lowest level in Canada. This is an impressive turnaround after surging to 17% a year ago. Full-time employment has almost fully recovered.

The housing market is extremely hot, with already-strong conditions magnified by the pandemic. The benchmark price in Montreal has accelerated to a 22% y/y pace.

The Province of Quebec is projecting a $9.2 billion deficit in FY21/22, before transfers to the Generations Fund (for debt reduction). That said, the deficit is narrower than $12.0 billion expected for FY20/21, and it weighs in at a very reasonable 2.0% of GDP.

New Brunswick

The New Brunswick economy is expected to grow 3.8% in 2021, reversing the 3.7% contracting in 2020. The shock last year was much milder than most of the rest of the country. While COVID-related disruptions still weighed heavily, the pandemic curve has been much flatter in Atlantic Canada.

The unemployment rate is down to 8.5%, total employment has fully recovered its pandemic losses, and the participation rate is trending around pre-COVID norms. This is arguably one of the least disrupted labour markets in Canada by these headline measures.

While the province saw a boost in population before the pandemic, demographic flows will be a medium-term issue, potentially dampening a previous support.

The Province of New Brunswick is projecting the smallest deficit in Canada this year relative to the size of its economy, at $245 million or just 0.6% of GDP. Net debt will dip to 36.4% of GDP, thanks to a shallow deficit and recovery in nominal GDP.

Nova Scotia

The Nova Scotia economy is expected to grow 4.4% this year, which lags the national average after outperforming in 2020, and as the latest wave of COVID forces more containment measures.

In general, the pandemic curve has been much flatter in Atlantic Canada, with the Atlantic bubble mostly keeping a lid on severe health care outcomes. The flip side is that travel flows have been restrained, weighing on tourism activity. At this point, it's probably premature to expect a strong rebound in tourism activity in the 2021 season.

The unemployment rate has settled in around 8%, which is consistent with pre-COVID levels. The level of employment is also fully recovered, and participation is back to 'normal' levels.

Resale housing market activity has boomed like most of the country, with sales rising to record levels and prices in Halifax-Dartmouth up about 40% from early-2020 levels. Net interprovincial migration is running at the strongest level since the 1980s.

The Province of Nova Scotia is projecting a $584.9 million deficit in FY21/22 (1.2% of GDP), lower than the $705.5 million deficit now expected in FY20/21. Nova Scotia expects to post successively smaller deficits until the end of the fiscal plan, when it estimates a $10.5 mln surplus for FY24/25.

Prince Edward Island

The PEI economy is expected to rebound 3.5% this year. That will underperform Canada by a wide margin, but keep in mind that PEI saw the shallowest decline in a very tough 2020.

Overall, 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 last year, though challenges still remain early in 2021.

The biggest challenges are external, with tourism and seasonal visitors during the summer months likely to remain weak this year. We'll hold out more hope for 2022. Additionally, an influx of international immigrants boosted housing demand in recent years, but those flows are on hold for now. Post-COVID immigration targets are expected to remain high.

The unemployment rate is effectively back to early-2020 lelvels just above 8%, but labour force participation remains down from pre-pandemic norms.

The Province of Prince Edward Island is projecting a $112 million budget deficit for FY21/22, almost $8 million smaller than the previous year. That will weigh in at modest 1.6% of GDP, only 0.1 ppts better than last year.

Newfoundland & Labrador

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

The province was already in a challenged position pre-COVID, but pandemic disruptions exacerbated the headwinds. Despite being relatively sheltered and having a flat COVID curve, the province saw more small business shut-downs than most through the height of the pandemic. The rebound in oil prices certainly helps local incomes, but longer-term fiscal challenges will continue to weigh on confidence.

Employment in the province has been in long-term decline since 2013. While jobs have rebounded from recent lows, the longer-term trend is still in place. The 13.9% jobless rate is still the highest in Canada.

The Province of Newfoundland & Labrador is yet to table a FY21/22 budget. The deficit last year was pegged at $1.8 billion, or a hefty 6% of GDP. A more challenging economic and demographic situation will make post-COVID deficit reduction more difficult that in most other jurisdictions.