The Canadian economy has struggled with the impact of higher interest rates, but momentum has improved heading into the spring. Real GDP growth is expected at 1.2% this year, helped by a solid performance around the turn of the year. While we expect a below-potential performance to continue through 2024, Bank of Canada rate cuts by the summer should eventually allow growth to firm to 2.0% in 2025. Indeed, inflation trends have improved significantly in Canada, which should allow the Bank of Canada to pull back from its restrictive stance, but more stubborn trends south of the border could leave Federal Reserve policy higher for longer. As a result, we’ve seen notable downward pressure on the Canadian dollar. Elsewhere, business investment is choppy, while government stimulus at both the federal and provincial levels is adding to growth this year.

All provinces have grappled with inflation and higher interest rates, but a bigger disparity in performance is beginning to show through again. British Columbia looks to post growth slightly below the national average, but should see activity pick up after the real estate downturn weighed relatively hard in 2023, as the province carries the highest share of residential investment in Canada. Alberta is expected to lead among the larger provinces with 2.3% growth this year, as high oil prices continue to support incomes and demographic inflows surge. Saskatchewan carries less leverage to oil and is seeing interprovincial outflows, which should lead it to underperform slightly at 1.0%. Manitoba’s diverse economy remains steady, with growth expected to be roughly in line with the national average this year.

Activity in Ontario has picked up in recent months, setting up the province to outperform slightly with 1.3% growth in 2024. The province was hit hard by the housing correction earlier this cycle, but stands to benefit from rate cuts through the second half of the year. At the same time, population growth is running ahead of the national average, although nonpermanent resident caps should have a bigger dampening impact on Ontario in the years ahead. Quebec, however, has seen activity sputter in recent quarters, which leaves the province on pace to grow a below-average 0.7% in 2024 after just 0.2% in 2023. Part of the weakness is temporary (e.g., the public sector strike), but part reflects slower underlying potential growth trends. And, fiscal stimulus, which had been strong in recent years, has chilled amid deeper and prolonged deficits. More broadly, a weak loonie and a very sturdy U.S. economy should help trade activity across Central Canada.

Atlantic Canada continues to grow well above rates seen in recent years, as the region is drawing in strong population flows from outside the country and other provinces. Most of the region should see growth near or better than 2023, with residential investment and consumer spending holding firm.

Provincial Finances: The Shine is Wearing Off

The FY24/25 provincial budget season is complete, and the group has begun to backslide after a few years of fiscal progress. The combined provincial budget deficit is on track to widen to $28 billion (0.9% of GDP) in FY24/25 from $10.6 billion in FY23/24, with the pressure coming on multiple fronts. Revenue growth, which has been robust thanks to the post-pandemic recovery and high inflation, has cooled amid sluggish economic growth. Meantime, program spending growth is strong, partly reflecting upward pressure on public sector wages, while interest costs are on the rise. Torrid population growth is stressing infrastructure, necessitating large capital spending programs.

Here are some quick takeaway themes:

Most balanced budgets are gone: Alberta and New Brunswick are the last remaining provinces in the black. Compare that to two years ago when eight of 10 reported positive balances. Most deficits are still relatively small at less than 1% of GDP, but a few (B.C. and Quebec) are pushing closer to 2%. Six of 10 provinces will see their budget balances weaken this fiscal year.

Cautious growth estimates: All provinces underestimated growth in 2022 and 2023, leading to persistent upside revenue surprises, as the economy recovered faster than they thought, and then proved more resilient than they thought. But, 2024 estimates have now been scaled down, which has impacted revenue growth. A run of firm economic data now suggests that the provinces have gone too far to the downside with their outlooks—perhaps that’s a silver lining in an overall tough budget season.

Net debt ramping up: Total provincial net debt will jump more than $65 billion in FY24/25, a record annual increase and more than twice the underlying budget deficit. That will leave the net debt-to-GDP ratio at 30.6%, up a percentage point from a year ago, but right in line with pre-COVID (FY19/20) levels. Biggest increase? B.C., up 3.8 ppts year-over-year, although still relatively low. Biggest decline? New Brunswick, down 1.0 ppts year-over-year and a hefty 11 ppts from FY19/20.

Big borrowers: Total borrowing will likely rise to above $130 billion this year, the largest tally on record outside the COVID year (just over $160 billion). That speaks to large-scale capital spending beyond the operating budget, but also accounts for some provinces planning to pre-borrow ahead of some large 2025 maturities. Debt service costs, however, are still well contained at just over 6% of revenue.

Spending in the policy mix: There were few major policy initiatives on the tax front this year, with net tax changes/transfers at less than $2 billion. Recall that Quebec alone sent out roughly $3.5 billion in direct support payments in FY22/23. The majority of the action was in program spending and infrastructure in response to population growth. Total program spending growth looks to rise more than 4% this year, after a number of provinces backfilled FY23/24 with well above-budget spending levels.

Bottom Line: The provinces are still in good fiscal shape, but the lustre and steady positive momentum is wearing off. After a big post-COVID revenue boost, the group now faces the reality of a slower economy, public sector wage growth, higher interest rates and stress on infrastructure. Those issues were clear this budget season.

British Columbia

The B.C. economy is expected to grow 1.0% this year, slightly below the national average. That would mark an improvement from just 0.7% growth in 2023, but remains well below potential. Housing activity should firm, but some major construction projects (e.g., LNG Canada) have now passed peak activity.

Housing has been a drag on growth, with B.C. carrying the largest share of residential investment in the country. Better spring momentum should help, but we don’t see a significant rebound with mortgage rates still restrictive. As of March, the benchmark price in Vancouver was up a sturdy 4.6% y/y and the market was balanced.

The job market remains solid, with employment up 2.7% from a year ago. But, much stronger labour force growth has pushed up the unemployment rate to 5.5%, more than a full percentage point above the 2022 low. Conditions are expected to soften somewhat further, and the jobless rate could push toward 6%.

The Province of British Columbia is projecting a $7.9 billion deficit in FY24/25, or almost 2% of GDP. Importantly, the budget does not include a path to balance. That said, B.C. embeds meaningful spending contingencies in the plan to cover cost overruns or unforeseen expenses. The borrowing program jumps yet again, to $24 billion in FY24/25, before rising further to $30 billion in the following year, and the province lost its AAA credit rating from S&P in the wake of the budget. Note the province is expected to go to the polls by October 19, 2024.

Alberta

The Alberta economy is expected to lead the larger provinces with firm 2.3% growth this year. The province has arguably been best positioned to handle tough macroeconomic conditions—and it has—while high oil prices and strong demographics support growth.

Oil production continues to grow at a steady pace, as increases in oilsands output are set against stable conventional output. While capital spending in the industry looks firm for the year ahead, the level of spending remains less than half of its 2014 peak. But even if new project investment is still limited, cash flow in the sector is well-supported. With additional TMX pipeline takeaway capacity now online, producers should benefit from a tighter spread relative to WTI, all at a time when the loonie is weak—a positive combination.

Housing is firm, and Calgary is the strongest larger market in the country by a wide margin. Prices are pushing record levels and the market balance is tilted well in favour of sellers. Interprovincial migration flows are running at a record positive inflow, in addition to international immigration, leaving overall population growth at a torrid 4.4% y/y. The commercial real estate backdrop, however, remains tough with high vacancy rates in the downtown office market persisting.

The job market remains solid, with employment growth running at a steady 3.4% y/y. While the jobless rate has drifted up to 6.3%, the economy is still absorbing an impressive number of workers—the labour force has swelled by almost 200k in the past two years. While the unemployment rate is still slightly above the national average, the gap is likely to flip through 2024.

The Province of Alberta is projecting a small $367 million surplus in FY24/25, or 0.1% of GDP, narrowing from the $5.2 billion surplus now expected for FY23/24. The Province sees modest surpluses through FY26/27, and builds in a $2 billion per year contingency to buffer against revenue misses or spending pressure. The budget was based on $74 WTI oil, leaving immediate upside room early in the fiscal year. Total borrowing is expected at a heavy $19.8 billion in FY24/25 ($17.7 billion in term debt), although that includes pre-borrowing to cover future maturities into FY25/26.

Saskatchewan

The Saskatchewan economy will likely grow 1.0% this year, continuing on a slow but steady growth path. Exposure to the real estate correction has been limited, population growth is running cooler than other regions, and build-out of a major potash project is supporting employment and investment.

Agriculture output is a wildcard, but weaker prices and potential drought conditions pose a challenge. Oil production is pushing higher, and incomes will be well supported by high prices. Meantime, potash prices soared amid geopolitical turmoil, and BHP’s go-ahead of the massive Jansen project will lift activity in coming years until reaching production around 2026. Capital spending intentions in the province look strong this year.

The unemployment rate has risen above 5%, but remains among the lowest in Canada as the job market is tight. Unlike Alberta, the province continues to see net interprovincial outflows to even stronger jurisdictions, but those flows are more than offset by international inflows.

The Province of Saskatchewan is projecting a $273 million deficit in FY24/25 (a small 0.2% of GDP), a touch narrower than the $483 million now estimated for FY23/24. The latter is a modest downward revision from the most recent fiscal update, but well down from the initial $1.1 billion surplus projection. The next provincial election will be held by October 28, 2024.

Manitoba

The Manitoba economy is expected to grow 1.1% this year, slightly below the national average and in line with last year. Manitoba’s diverse and steady economic base has historically helped the province outperform during periods of national weakness, but underperform during strong growth periods.

Agriculture output could face some challenges this year from weaker prices and potential drought conditions, continuing the swings of recent years. The labour market has been steady, with the unemployment rate trending around 5%, among the lowest in Canada. Employment gains have largely kept pace with strong labour force growth. Record 3% population gains have driven the increase in the labour force.

Housing activity has cooled alongside higher mortgage rates after a very strong run. Like the economy more broadly, the downturn has been 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, and the correction since early 2022 has also been milder—prices are now moving higher again.

The Province of Manitoba is projecting a $796 million summary budget deficit in FY24/25, improved from the hefty $2.0 billion shortfall expected for FY23/24. The year-over-year improvement only comes after the FY23/24 deficit was revised sharply higher. The Province sees a return to balance, but not until FY27/28.

Ontario

Ontario’s economy is expected to grow 1.3% this year, little changed from the sluggish 1.2% rate seen in 2023. That will run very slightly ahead of the national average, but remain below potential as past interest rate hikes continue to weigh on activity.

Housing activity across the province has stabilized after the correction ran deeper than in most other regions. Home sales remain well down from 2021 highs, and at the very low end of the pre-pandemic range. New listings have been stronger, leaving the overall market balance on the soft end of historical norms. Still, there has been enough firming to stop prices from falling, especially in the GTA single-detached market. Look for stable activity and prices through the rest of the year, while construction activity looks to remain strong.

In the commercial real estate sector, GTA office vacancy rates continue to rise, now topping 19%, according to CBRE. Multifamily cap rates are also increasing, and nonpermanent resident caps should weigh particularly hard on Ontario’s population growth given a high concentration of international students.

The job market remains healthy, but strong labour force growth is creating slack in some sectors. The unemployment rate has risen to 6.7% as of March, well above the 5.1% cycle low set in early 2023. While employment continues to grow, new job creation hasn’t been able to keep pace with the swelling labour force. Investment in the auto sector is encouraging, although EV production in Oakville has been delayed by two years until 2027.

The Province of Ontario is projecting a $9.8 billion deficit for FY24/25, substantially deeper than the $5.3 billion last forecasted in the fall fiscal update, and the $3.0 billion shortfall now estimated for FY23/24. While FY23/24 is tracking somewhat better than expected, the near-term fiscal outlook has clearly deteriorated on a combination of weaker revenues and firm spending demands. Ontario is certainly not alone on this front, as this has been a common theme across the country this budget season. Over the coming few years, the Province now sees a $4.6 billion deficit for FY25/26, before a return to balance in FY26/27, a year later than previously planned.

Quebec

After an anemic 0.2% in 2023, Quebec’s economic growth is expected to edge up to 0.7% this year. That is still the weakest in the country, despite Quebec’s relative affordability and a less severe housing correction compared to other large provinces. The softness reflects the now-ended public sector strike, less fiscal stimulus, and a smaller boost from population inflows relative to other provinces.

On the positive side, the prolonged weakness in the Canadian dollar continues to support exports and manufacturing, though we expect some reversal as the loonie appreciates modestly next year. And, the labour market remains relatively healthy with the jobless rate hovering near 5%, below its long-run average.

The housing market has seen more stability compared to Ontario and B.C., both during the pandemic-era price surge and the subsequent cooldown from higher interest rates. As such, home prices in Montreal and Quebec City remain relatively affordable versus comparative cities.

The Province of Quebec is projecting an $8.8 billion deficit in FY24/25 (1.5% of GDP), before transfers to the Generations Fund. That would mark the deepest deficit on record for Quebec in dollar terms (and the deepest since the mid-1990s as a share of GDP). Looking ahead, Quebec will run deficits right through the subsequent four-year forecast horizon, a notable shift from prior plans to balance the books by FY25/26.

New Brunswick

The New Brunswick economy looks to expand 1.3% in 2024 before picking up to 1.5% next year. Strong population inflows drive the above-average growth rates in both years. While the population story mirrors trends in other Atlantic provinces, it’s notable that year-over-year growth in New Brunswick (at over 3%) is at its highest going back to the early 1950s.

Alongside the population boom, the participation rate has largely stabilized following a historic downward trend. Still, growth in employment, while robust by historic standards, has been unable to keep up with labour force growth. The jobless rate has risen to 7.8% as of March, though that’s still below its long-run average.

The Province of New Brunswick is projecting a small $41 million surplus for FY24/25, in a pre-election budget that largely stays the course. That marks eight consecutive years in the black—impressive considering the ups and downs of recent years. The election is scheduled to take place by October 21, 2024.

Nova Scotia

Nova Scotia’s economy is expected to grow 1.5% in 2024 and accelerate to 1.6% next year on the back of strong population inflows. Despite the pickup, growth is expected to lag the national average as other provinces recover in 2025.

While population growth has recently stepped down from all-time highs, it remains elevated at near 3% year-over-year. That inflow will continue to support consumer spending and housing demand this year.

The demographic inflow has also underpinned a relatively healthy labour market. While the unemployment rate has risen from the all-time lows hit in early 2023, it remains well below pre-pandemic levels.

Activity in the resale housing market remains muted as elevated borrowing rates weigh, though population strength has kept a floor under the market. The relatively friendly affordability picture means that house price performance remains strong in Halifax, and other Atlantic cities, compared to the national average.

The Province of Nova Scotia is projecting a $467 million deficit in FY24/25 (0.8% of GDP), a notable turn after three consecutive years in the black. Nova Scotia has seen strong revenue upside through the fiscal year, but will turn that momentum around by ramping up spending in a number of priority areas.

Prince Edward Island

The PEI economy will likely grow 2.3% this year before slowing to 1.7% next year. Record-high population growth and solid tourism activity propped up the growth outlook in recent years, before the economy is expected to cool below the national average in 2025.

A relatively low cost-of-living environment has attracted more interprovincial and international migrants into the province. That’s led to the adult population surging at a record pace, a full percentage point above the national rate. This inflow is expected to support housing demand despite elevated interest rates.

The labour market has also benefitted from the population boom. The rise in the labour force has pushed the unemployment rate up modestly, though it remains historically low.

The Province’s latest budget calls for an $85 million deficit (0.8% of GDP) this year, little changed from the previous year’s shortfall. The twin deficits are the first following a run of five surpluses over the preceding six years. Long-term borrowing is estimated at $400 million this year, twice the size of the FY23/24 plan.

Newfoundland & Labrador

Newfoundland & Labrador’s economy is expected to grow 3.0% this year, one of the strongest rates in the country, supported by elevated oil prices and the pickup in production. This follows a period of contracting activity in three of the four years through 2023. Growth looks to slow to 2.0% in 2025 as this year's supports cool off.

Over the long term, the economic outlook is tied to energy prices, along with reserve levels and maintenance of production capacity. This leaves broad economic activity, and the labour market, susceptible to large year-over-year swings. The unemployment rate, pegged at 10.5% in 2024, is expected to be the highest in the country once again.

The Province of Newfoundland & Labrador is forecasting a mild $152 million deficit in FY24/25 (0.4% of GDP), better than the $433 million shortfall pegged for FY23/24 amid a broad economic recovery. The Province looks to borrow $2.8 billion this fiscal year, including $1.2 billion in maturities.