The Canadian economy rebounded strongly in the second quarter, with growth expected at 3% after back-to-back quarters at less than 0.5%. Oil production curbs in Alberta have begun to ease, while net exports came roaring back and a decline in long-term interest rates has helped firm the housing market. Full-year 2019 growth, however, is expected to soften further to 1.4%, from 1.9% in 2018, in part because of a very weak handoff. Across the country, convergence remains a major theme, with most provinces seeing growth settle in around expected longer-run norms. And, there have been few major changes to the regional forecast since the spring.

British Columbia is expected to remain at the front of the pack, even though growth is projected to cool further to 1.8%, after already slowing meaningfully last year. A downdraft in housing-related activity and consumer spending will likely pull the province down after growth averaged above 3% during the 2014-to-2017 period. The housing market in Vancouver continues to correct, with prices falling across all major segments, and sales running at recession-like levels until recently. That said, broader economic activity should get a boost in 2020 as a major LNG project ramps up.

Alberta real GDP growth is expected to slow in part because of mandated oil production cuts that pulled 325k bpd offline in January. While curbs are gradually easing, 2019 output growth will be depressed at 1.3%. 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% range, 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 1.6% this year.

Ontario’s economy has moderated after a powerful multi-year run. Real GDP is expected to grow 1.6% this year, down from 2.2% in 2018 and an average pace of 2.5% in the four years prior to that. The downshift largely reflects a move back toward potential for the province, with some key sectors, such as housing, coming off the boil. The housing market is now firming after a wave of recent policy measures (15% tax on non-resident buyers and OSFI rules), in part because of a steep drop in longer-term mortgage rates. This highlights that, despite measures to cool price growth, fundamental supply/demand conditions are still very supportive. Also, the GTA labour market is arguably the strongest in the country right now.

In Quebec, housing market activity is strong (especially in Montreal), in contrast to many other major markets in Canada. However, consumer spending and business investment have cooled after very strong runs that peaked in late-2017. Real GDP is expected to grow 1.6% this year, down from 2.5% in 2018 and 2.8% in 2017. While slowing, this is still solid growth for the province, and conditions remain 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 2019, 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 feel a hangover after a number of major private- and public-sector capital spending projects reached completion.

Government Finances: Budget Season Recap

All Provinces but Alberta (post-election) have tabled their FY19/20 budget. Assuming the fiscal year plays out as forecast, the majority of provinces (six or more) will post balanced budgets for the first time since FY07/08. The convergence theme is playing out on the fiscal front as well, with previously strong credits in oil-producing provinces backtracking, while Quebec and parts of Atlantic Canada are seeing their debt burdens shrink. Here is a recap of the budgets as we head into the summer/fall fiscal update season:

The Province of British Columbia: Projected a $274 million surplus for FY19/20 (0.1% of GDP), which would mark the seventh consecutive year in the black. A $500 million forecast allowance is in place, along with $750 million for spending contingencies, providing plenty of wiggle room for the upcoming fiscal year, as is the norm for this province.This year's budget made much less of a splash than that of a year ago; instead, focusing modest new spending on priority areas such as clean energy and childcare.

The Province of Alberta: Projected a $6.9 billion deficit for FY18/19 in a pre-election fiscal update, improved from the prior estimate ($7.5 billion) and the original budget plan ($8.8 billion). Since then, the government reported a smaller-than-expected $6.7 billion deficit for FY18/19, and we await a full 2019 budget (likely in the fall). In the meantime, the carbon tax has been scrapped, and corporate income tax rates have begun to fall, as promised in the election campaign.

The Province of Saskatchewan: Projected a small $34 million surplus for FY19/20, or negligible as a share of GDP. That is improved from the $380 million deficit expected for FY18/19. Recall that this new fiscal year marks the third in the government’s ongoing plan to balance the books, so that promise appears on track at this point. Net debt will dip as a share of GDP, to 14.7% in FY19/20, after rising steadily in recent years, thanks to a fading capital plan.

The Province of Manitoba: Projected a $360 million summary budget deficit in FY19/20, slightly improved from the $470 million now expected for FY18/19. 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 Province continues to set a gradual track toward balance, with a small ($28 million, or effectively balanced) deficit remaining by FY22/23. Manitoba cut the provincial sales tax by 1 ppt, as long promised.

The Province of Ontario: Projected a $10.3 billion deficit in FY19/20 (1.2% of GDP), in a highly-anticipated detail of how the fiscal path might look under the new government. This follows a $11.7 billion shortfall now expected for FY18/19. Recall that the FY18/19 shortfall was originally pegged at $14.5 billion in the initial post-election report—we’ve suspected all along that the bar was initially set low, and progress has already been made. The Province expects the deficit to shrink gradually before returning to balance in FY23/24. In the meantime, net debt will edge up, peaking at 40.7% of GDP in FY19/20 and FY20/21. From a policy perspective, the government pledges to crack down on program spending through the forecast horizon—this is a marked shift in priorities from recent years.

The Province of Quebec: Projected a sixth consecutive surplus in FY19/20, while delivering another helping of policy goodies and spending increases. Before transfers to the Generations Fund (for debt reduction), the surplus is pegged at $2.5 billion (0.6% of GDP), down from a larger-than-expected $5.6 billion now estimated for FY18/19. Surpluses in the $2.5-to-$4 billion range persist through the forecast horizon. Meantime, net debt continues to decline as a share of GDP, pegged at 38.8% in FY19/20, down from more than 50% six years ago. And, on a relative basis, the move below Ontario (budget pending) has been well documented.

The Province of New Brunswick: Projected a $23 million surplus for FY19/20. That follows a small $4.5 million surplus expected for FY18/19 (originally estimated to be a $188.7 mln deficit), and would mark the second straight year in the black. That is a nice improvement for a province that has grappled with deficits for years. Looking ahead, the Province continues to expect surpluses through FY22/23, while net debt will drift lower as a share of GDP. The drop in debt will, in fact, be the first such move in over a decade.

The Province of Nova Scotia: Projected a $33.6 million surplus in FY19/20 (0.1% of GDP), roughly in-line with the $28.4 million expected in FY18/19. That would mark the fourth straight year in the black as the Province continues to operate within its means. At the same time, net debt will continue to gradually fall as a share of GDP, down to 33.8% this fiscal year, the sixth consecutive year that the burden has fallen.

The Province of Newfoundland & Labrador: Projecting a hefty $1.9 billion surplus in FY19/20 (more than 5% of GDP), fully on the back of an accounting move that books new future Atlantic Accord revenues in the current fiscal year. Recall that the Atlantic Accord Review will see $2.5 billion flow to the Province (with no restrictions on use) by 2056, with most of it front-end loaded by 2030. Excluding this impact, the underlying deficit sits at $575 million, a touch wider than the $522 million expected for FY18/19.

British Columbia’s economy is moderating along with most of Canada, with real GDP growth expected at 1.8% this year, down from 2.4% in 2018. That's a downshift from a multi-year period of growth above 3%.

Growth is expected to pick up again next year when the $40 billion LNG Canada project breaks more significant ground. Plant construction is expected to peak around 2021 with roughly 10,000 jobs created, providing steady support to growth.

Residential investment has faded as the housing market correction is ongoing. This is the result of less speculation and foreign investment, prior Bank of Canada rate hikes and stricter OSFI mortgage-qualification rules.

That said, home sales in Vancouver have begun to improve and, if the momentum continues, prices should stabilize by the fall—mortgage rates have fallen and demographic demand is strong. The labour market is solid, with employment up 4% y/y in 2019Q2, rebounding from a suspiciously weak period through the first half of 2018. The jobless rate is steady around 4.5% as the labour market is absorbing strong labour market inflows.

The Province of British Columbia is projecting a $274 million surplus for FY19/20 (0.1% of GDP), which would mark the seventh consecutive year in the black.

Alberta’s economy remains sluggish, with real GDP growth likely slowing to 1.3% this year from 2.3% in 2018.

Mandated oil production cuts have weighed on output this year, though the curbs have been rolled back to 150k bpd as of August 1^st from as much as 325k bpd. Longer term, with oilsands production still on the rise and as past projects/expansions reach completion, limited pipeline capacity will remain a pressing issue. New capital investment is expected to remain limited.

The housing market is still weak, with prices in Edmonton and Calgary still drifting lower—each is down about 4% y/y.

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 is steady, with job creation just enough to absorb growth in the labour force. The jobless rate has held steady around 6.5%, down from a recent peak above 9%, but well above pre-shock lows of 4.3%.

Albertans voted in a new government in the spring, with the United Conservative Party earning a strong majority mandate. Policy action has commenced, with a reduction in the corporate tax rate from 12% to 8% by 2022, as well scrapping of the carbon tax. We await the first full budget.

Saskatchewan’s economy remains subdued, as the effect of the oil price downturn lingers. Real GDP is expected to advance a moderate 0.9% this year, underperforming the national average for a sixth straight year, and remain subdued at 1.2% next year.

The oil sector has been retrenching, but the Province expects relatively stable production over the near term. Capital investment, however, looks to be down this year. Potash production is rising at a steady clip, but trade tensions with China have added an element of risk in the farm sector (particularly for canola).

Labour market momentum has improved recently, with service-sector jobs lifting total employment after a prolonged period of stagnation.

The jobless rate has averaged 5.3% through July after peaking at 7% just over two years ago. Population growth continues to slow, as the province is again losing migrants to other regions. That, and supply from the past cycle have left unabsorbtions high and house prices correcting—down 4% y/y in Regina and 10% over the past three years.

The Province of Saskatchewan is projecting a small $34 million surplus for FY19/20, or negligible as a share of GDP. That is improved from the $380 million deficit now expected for FY18/19. Recall that this new fiscal year marks the third in the government’s ongoing plan to balance the books.

Manitoba continues to grow at a steady pace, with real GDP expected to rise 1.5% this year, up slightly from 1.3% in 2018. The diverse manufacturing base and sturdy service sector continue to churn out some of the steadiest growth in Canada, which is often the norm for this province.

Manufacturing has had a reasonable run since 2010, but could be dragged by ongoing trade tensions a weaker backdrop for U.S. business confidence and investment. USMCA clarity, however, has helped.

The labour market is sturdy, with employment growth trending around 1%. The jobless rate is bouncing around 5.5%, close to 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 averaged a record level over the past 12 months.

The Province of Manitoba is projecting a $360 million summary budget deficit in FY19/20, slightly improved from the $470 million now expected for FY18/19. 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 will be cut by 1 ppt as of July, 2019.

Ontario’s economy has moderated after a powerful run. Real GDP is expected to grow 1.6% this year, down from 2.2% in 2018 and an average pace of 2.5% in the four years prior. This reflects a return to potential growth for the province.

The housing market is regaining momentum after a wave of policy measures (non-resident buyers' tax, rate hikes and OSFI rules) triggered a modest correction. But, strong demographic demand and a plunge in longer-term mortgage rates have firmed activity. Sales were up 24% y/y in July and the market is again balanced. Condo prices continue to rise more than 8% y/y, while detached prices have stabilized. Markets outside the Greater Golden Horseshoe continue to perform very well.

The labour market is strong, with near-3% y/y job growth in 2019Q2, the strongest in 16 years. The jobless rate, at just above 5.5%, has remained low despite a surge in the labour force as the market has absorbed the influx. The province drew in a record 215,000 migrants from outside Canada and other provinces in 2018. Export volumes are rising at a modest pace, and longer-term challenges, such as relatively high labour and electricity costs, remain. That said, USMCA clarity (eventually), accelerated CCA allowances and a business-friendly policy shift should support business confidence and investment.

The Province of Ontario is projecting a $10.3 billion deficit in FY19/20 (1.2% of GDP), following an $11.7 billion shortfall expected for FY18/19. The Province expects a return to balance in FY23/24.

Quebec is moderating after its best economic performance in 15 years. Real GDP is expected to grow 1.6% this year, down from 2.5% in 2018 and 2.8% in 2017. While slowing, this is still a solid growth rate for the province, and overall conditions remain supportive for employment, investment and real estate.

Real business investment has softened after rising sharply over the past two years. Confidence was boosted by a stable political backdrop and much-improved government finances. Export growth has been solid. The labour market performance has been strong, with sturdy job growth and a low jobless rate. Indeed, the jobless rate held at 4.9% in July, the first time on record below the 5% mark.

Montreal’s housing market is seeing continued momentum, and remains one of the strongest in Canada—solid demand fundamentals, favourable affordability and increased nonresident investment have all helped. Benchmark prices are running at a 6.7% y/y pace, and prices should be able to rise further. Residential construction has also been a recent boon for the economy.

The Province of Quebec is projecting a sixth consecutive surplus in FY19/20, with the net debt-to-GDP ratio continuing to fall—it is expected below 40% this year for the first time since FY05/06.

The New Brunswick economy has softened after a healthy run, with real GDP little changed in 2018 after 1.6% average growth in the two years prior. We expect moderate and more trend-like 0.6% growth this year.

Capital spending has retrenched recently as some major projects have wound down in the forestry and refining sectors. Forestry exports could also be challenged by a peaking (but stable) U.S. housing market.

Labour market trends have been sturdy, with employment rising in each of the past two years. The unemployment rate has held steady since mid-2017, but that comes alongside a jump in the labour force.

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 a $23 million surplus for FY19/20. That follows a small $4.5 million surplus expected for FY18/19, and would mark the second 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 looks to moderate in Nova Scotia again this year, with real GDP likely to run at 0.7%, down from 1.2% in 2018. Growth should hold around this pacethrough next year given that it roughly marks near-tem potential. Keep in mind that the province has just come off its best three-year run (averaging 1.4%) since emerging from the financial crisis—demographics and nonresidential investment added a boost.

The Halifax Shipyard is now busy with the $25 billion contract to build combat ships for the Royal Canadian Navy (through 2030) well underway. Other major capital projects, such as the Nova Centre and Maritime Link, have also supported growth recently, but their contributions have begun to fade—capital spending is expected to fall about 6% this year.

Residential construction has been strong, with the number of units under construction in Halifax at 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.

Labour market momentum has been strong, with employment surging to record levels, up 2.8% from a year ago in 2019Q2, though July was weak. That pulled the jobless rate down to a record low 6.2% at one point this spring. Job growth has been broad, across full- and part-time positions, and in both the goods and services sectors.

The Province of Nova Scotia is projecting a $33.6 million surplus in FY19/20 (0.1% of GDP), roughly in-line with the $28.4 million now expected in FY18/19. That would mark the fourth straight year in the black.

The PEI economy has run at a very solid pace, but real GDP growth will likely moderate to 1.2% this year after averaging 3.0% the prior two years. Strong tourism activity, a population boost and less fiscal restraint should keep the economy performing well.

Exports are rising at a solid clip, led by transportation equipment, as well as past gains in electronics and electrical equipment. While U.S. demand is expected to soften, 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 2.2% y/y pace. International immigration has accelerated, and net interprovincial migration has largely leveled off.

Employment has been very strong, rising to a record level in July, with all of the gains full time. That has helped pull the jobless rate consistently below 10%, after trending in the 10%-to-13% range previously.

The Province of Prince Edward Island is projecting a small $1.8 million surplus in FY19/20, as it is opening the spending taps again after a period of restraint. That will mark the third consecutive year in the black.

Newfoundland & Labrador’s economy remains mixed. Real GDP is expected to rebound 2.0% this year after a 2.7% decline in 2018, partly the result of temporary factors.

The oil sector makes up roughly 20% of GDP and 7% of employment, and the recent cycle in oil prices has impacted incomes. Production has faded after peaking in 2007, but Hebron began producing late in 2017, and should ramp up to 150,000 bpd over the coming years. Longer-term potential in the sector is solid, but near-term capital investment is facing a lull, with other projects such as Muskrat Falls also winding down. Last year’s temporary decline in iron-ore output was a drag on GDP growth that should reverse this year.

Employment has improved somewhat over the past year, but is still about 6% below the 2013 peak. But, because the province hasn’t seen the population influx that most of its peers have seen, the jobless rate fell below 12% at one point, down more than 3 ppts since the end of 2017—it rose again through mid-year. That said, retail sales and housing have underperformed since the demographic boost has been absent.

The Province of Newfoundland & Labrador is projecting a hefty $1.9 billion surplus in FY19/20 (more than 5% of GDP), 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 $575 million, a touch wider than the $522 million now expected for FY18/19. The Province expects a return to balance in FY22/23.