The Canadian economy is growing at a solid pace despite ongoing pandemic uncertainty, supply constraints and weather-related events. Consumer spending and housing are strong, while the labour market has recovered all of the pandemic-era job losses. While rarely without at least a few challenges—Omicron uncertainty abounds, and B.C. flooding will temporarily exacerbate supply-chain issues—the groundwork is set for strong and above-potential growth through 2023. We look for 4.0% growth in Canadian real GDP next year, following 4.5% growth in 2021.

Regionally, all provinces are expanding, and strong prints are expected across the country next year. British Columbia looks to lead the pack at 4.6%, as post-flood repair and rebuilding add to growth (though don't characterize that as a good thing). Regardless of any disaster-related swings in reported GDP, the province looks fundamentally strong.

Alberta, Saskatchewan and Newfoundland & Labrador are also benefitting from the rebound in oil prices. We look for WTI oil to trade in the low-$70 range over the next year, which will provide added income support to these provinces. Alberta is likely seeing real GDP growth lead the country this year, in part thanks to a rebound in oil production, and growth should remain near the top of the pack in 2022. Longer term, there's no question that the broader shift away from fossil fuels will force some adjustment in these regions, but the near-term outlook is solid.

Manitoba is traditionally the most stable economy on the provincial landscape, with a diverse industry providing a cushion. Although hit with high COVID case counts, the province saw a less dramatic economic outcome than some other regions, and growth will likely settle in slightly below the national average in 2022.

Ontario’s economy entered the pandemic with the strongest growth trends in more than 15 years. But, with the largest urban centre, the province struggled more than most with the shape of its COVID curve and among the most aggressive restrictions in North America. The province was late to re-open which weighed on 2021 growth, but real GDP should expand 4.3% in 2022, above the national average. Torrid housing and consumer spending performances should moderate as interest rates rise, but Ontario and the Greater Toronto Area will remain key drivers of the Canadian economy.

Similarly, Quebec was enjoying multi-decade highs for economic growth before the pandemic, but struggled early with COVID cases and lockdowns. As a result, the province underperformed to start the pandemic, but sidestepped a number of recovery-dampening factors (e.g., auto shortages and drought) to lead the country with 6% growth in 2021. That pace is expected to fade to 3.7% in 2022, but the theme of relative strength in Quebec's economy is likely to continue post-pandemic.

Finally, Atlantic Canada fared has very well, but the economy was nevertheless impacted by COVID. As travel flows gradually resume, the region will stand to benefit, especially with U.S. visitors expected to return to levels that more closely resemble normalcy next summer. Population flows are also a positive story, as migration from other regions of Canada is driving demand.

Fiscal Themes

If there’s one group quietly rubbing their hands together over strong demand conditions, highly accommodative monetary policy and rising prices, it’s provincial Finance Ministers. Employment has recovered, consumer spending is robust and price gains (be it goods, resources or wages) are lifting the tax base. The past few months revealed that the combined provincial FY20/21 (last year) deficit came in at $47.7 billion, or 2.2% of GDP, down massively from the $96 billion expected at the worst point in late-2020. The current fiscal year is also tracking much better than expected, with the combined deficit now pegged at $38.0 billion, also down massively from $77 billion expected at the end of the 2021 budget season.

Why so much upside? It really boils down to federal transfers and the economy. First, as has been well documented, Ottawa carried the vast majority of the pandemic load, and now more than $30 billion of federal-to-provincial transfers (above and beyond ongoing programs) have directly cushioned the provinces. The FY20/21 provincial deficit (2.2% of GDP) compares to the 16% of GDP likely at the federal level. Meantime, Ottawa’s massive support aimed at households and businesses boosted taxable incomes more broadly, part of which flowed to provincial coffers and likely disrupted traditional recession modelling. And, the speed of the economic recovery has trounced even the most optimistic budget assumptions, while a swift rebound in resource prices has also helped.

Where do we go from here? To start, provincial borrowing requirements are coming in much lower than expected this fiscal year, with some of last year’s windfall still flowing through to the bottom line. Requirements are now pegged at $108 billion, with 68% completed. That said, with provincial funding markets favourable and rates rising, we could see pre-borrowing ahead of FY22/23. From a credit perspective, it’s clear that some of the negative ratings action that we saw earlier in the year was premature. As for the pace of deficit reduction, we could see momentum cool, as the economic growth outlook has more visibility now, and upside surprises will become less dramatic. At the same time, federal transfers will revert to more trend-like levels as pandemic supports fade. That said, there was an appetite in the federal election campaign to boost such transfers—the Liberal platform, for example, added at least $4 billion per year in transfers by 2025.

All told, provincial deficits should settle in at less than 2% of GDP overall, leaving the group in a solid position for the next stage of this cycle.

British Columbia

The B.C. economy is expected to grow 4.6% in 2022, the strongest among the provinces amid reconstruction efforts following the extreme flooding in November.

The province entered the downturn in a position of strength, and had earlier success in flattening the COVID curve than Quebec and Ontario. But, recent challenges, including an uptick in cases and the flooding, will hamper the near-term outlook.

The unemployment rate is expected to be among the lowest in Canada, at 4.9% for all of 2022, versus 5.7% nationwide. The B.C. labour market has so far had one of the strongest recoveries in Canada relative to pre-COVID levels, with employment already 2.1% above that mark.

Housing market activity has remained strong following an impressive summertime surge, with sales and prices remaining at elevated levels. Residential construction activity is relatively steady.

The Province expected a $1.7 billion deficit in its latest projections, or 0.5% of GDP, much smaller than the budget forecast. Net debt is expected to be the lowest in Canada, at just over 17% of GDP.

Alberta

The Alberta economy is expected to grow 4.4% next year, stronger than the 4% gain expected nationally and following an impressive 6% rebound in 2021.

The surge in oil prices will support the recovery in the near term. Production has already bounced back, with September levels up 13% from a year ago. Longer term, the sector will remain challenged by a shift toward renewable energy. But, near-term cash flow from projects already completed will remain strong and supportive of domestic incomes. Still, oil prices around $70 likely won't trigger another wave of new project investment, especially when now set against a more uncertain long-term fossil fuel backdrop.

The unemployment rate peaked above 15% and is expected to average 6.6% for all of 2022, versus 5.7% for Canada.

The Province is expecting a $5.8 billion deficit in FY21/22, or a moderate 1.7% of GDP. The latest update posted a massive improvement since the budget—equivalent to roughly 4% of GDP—given a stronger oil price backdrop. The net debt-to-GDP ratio is estimated at just over 19%, compared to almost 25% in the budget.

Saskatchewan

The Saskatchewan economy is expected to expand by 3.4% next year, slower than the national average.

The province came into the downturn with an already-weak economic backdrop, as the resource sector was challenged by low prices and 2021 was hit with tough crop conditions. Now, Saskatchewan is struggling with one of the highest COVID case rates among the provinces. The provincial government has so far resisted calls to meaningfully tighten restrictions further, but that could be a risk given rising case loads.

The unemployment rate is expected to average 6.5% for all of 2022, higher than the 5.7% projected for Canada. The relatively weak backdrop has caused population growth in Saskatchewan to be choppy, with many people leaving for other provinces during the pandemic.

The Province is expecting a $2.7 billion deficit in FY21/22, and is among the few provinces projecting a meaningful deterioration this year. Still, this deficit is expected to be a moderate 3.1% of GDP. Net debt is on track to finish the year among the lowest shares of GDP (19.4%) in Canada.

Manitoba

The Manitoba economy is expected to grow by 3.5% next year, less than the national rate. Manitoba has typically weathered downturns much better than the rest of Canada, but COVID-related disruptions still weighed heavily. Case numbers have started to rise in the province once again, prompting officials to warn that tighter restrictions are imminent.

Meantime, 2021 was a very tough year for farmers, with crop production severely hit by drought. National wheat production was down almost 40% on the year, which cut into real GDP growth.

The unemployment rate is expected to be 5.1% for all of 2022, among the lowest in Canada. Despite a relatively shallow hole during the pandemic, employment has been slower to recover, with jobs still below their Feb/20 level as of November (vs. a full recovery Canada-wide).

The Province has rolled out roughly $2 billion in support measures (plus various tax deferrals). The FY21/22 deficit is estimated at $1.6 billion, or 2.1% of GDP, while net debt is expected to rise to 40% of GDP, still comfortably below Ontario and Quebec.

Ontario

The Ontario economy is expected to grow 4.3% next year, above the national average after lagging slightly in 2021. The province entered the downturn in a position of strength, but was somewhat behind others in re-opening its economy. Now, with the highest vaccination rate among the provinces, we assume any future restrictions will be milder and more targeted.

Employment has now fully recovered its pandemic losses, and the unemployment rate has declined steadily since the spring. We expect the jobless rate to average 5.9% for all of next year.

The housing market has surged during the pandemic, with pent-up demand, record-low mortgage rates and shifting preferences lifting both sales and prices.

The Toronto condo market is heating up following earlier signs of softness, while suburban/rural markets have moderated after initial strength. Overall Toronto benchmark prices are up 28% y/y, while Ottawa is up 17% y/y and smaller markets in southwestern Ontario are heated (around +30% y/y).

The Province of Ontario's recent fiscal update projected a $21.5 billion deficit in FY21/22 (2.3% of GDP), almost $12 billion better than expected in the previous budget. That leaves net debt at about 43.4% of GDP, much improved from the near-50% it had previously expected. Note that we also expect additional tax relief/spending measures over the next year as the province will go to the polls in 2022.

Quebec

The Quebec economy is expected to grow 3.7% next year after a strong 6% surge in 2021. Following more widespread shutdowns early on in the pandemic, the province has implemented more targeted restrictions amid a high vaccination rate.

The unemployment rate has been steadily decreasing since the spring, and we expect it to average 4.4% in 2022, the lowest rate among the provinces.

The housing market is extremely strong, with sales and prices accelerating again since the summer. This strength reflects the impact of record-low mortgage rates and increased demand for larger homes.

Montreal's benchmark price was up 21% y/y in October led by single-detached homes.

The Province of Quebec is expecting a $3.6 billion deficit in FY21/22 in its most recent update. The economy has massively outperformed the government's forecast since the budget, with the revised growth estimate almost 5 ppts higher. The latest estimate of net debt is under 40% of GDP, an improvement from last year. Additional spending measures could be in the works as Quebec goes to the polls in 2022.

New Brunswick

The New Brunswick economy is expected to grow 2.3% in 2022, much less than the expansion expected nationally. While COVID-related disruptions will still weigh heavily, the pandemic curve has been flatter in Atlantic Canada, and re-opening was earlier than in the larger provinces.

After hitting double digits in 2020, the unemployment rate is expected to fall to 8.5% next year. Broad-based industry weakness weighed on the labour market during the pandemic, though employment is now back to pre-COVID levels as of November.

The province has seen a recent boost in population, and post-COVID immigration flows should be a medium-term support to economic growth.

New Brunswick was the only province to post a surplus through the pandemic and is projecting a narrower $38 mln surplus this year, equivalent to 0.1% of GDP. Net debt will fall to just over 34% of GDP. Given the heavy fiscal burden absorbed by the Federal government, the impact on the smaller Atlantic provinces has been more mild.

Nova Scotia

The Nova Scotia economy is expected to rebound 2.5% this year, slower than the growth expected nationally.

While COVID-related lockdowns still weighed heavily, the pandemic curve has been much flatter in Atlantic Canada. The Atlantic bubble prevented surging caseloads early on in the pandemic, at least to the extent seen in some other provinces. The flip side is that travel flows were restrained and restrictions were not loosened until the middle of this year's summer season.

The unemployment rate has fluctuated this year, most recently hitting 8.1% in November. We expect it to average 7.6% in 2022.

Resale housing market activity has held firm, with sales remaining near record levels amid pent-up demand. Residential construction has held steady, with little impact this year. And, generous federal support measures have supported household income and spending.

The Province of Nova Scotia is expecting a $445 million deficit in FY21/22, or 0.9% of GDP—that's modest compared to its peers. Net debt will rise to 37.4% of GDP, but the Province has made solid fiscal progress in recent years.

Prince Edward Island

The PEI economy is expected to grow 2.5% next year, much milder than the rate expected for Canada. Keep in mind that PEI was enjoying a significant boom before COVID broke out, and experienced the smallest contraction (-1.7%) in 2020.

The pandemic curve has been much flatter, and the re-opening was quicker, than other provinces given the small and closed-in nature of the island.

The labour market has been slower to bring jobs back than the other provinces. Still, employment reached its Feb/20 level as of November. The unemployment rate has fluctuated in recent months, though at 8% is currently at its pre-pandemic average.

Tourism and seasonal visitors during the summer months are major drivers of local economic activity, and both of those sources were down this year given the Atlantic bubble. An influx of international immigrants has boosted housing demand in recent years, which should support the economy in the medium term as post-COVID inflows recover.

The FY21/22 deficit is pegged at $112 million, or a moderate 1.5% of GDP. Net debt is tracking at 35% of GDP, among the lowest east of Saskatchewan.

Newfoundland & Labrador

The Newfoundland & Labrador economy is expected to expand 2% in 2022, weaker than the growth expected nationally and the lowest rate among the provinces.

The province was already in a challenged position pre-COVID, and it was exacerbated by pandemic disruptions and the decline in oil prices. Despite the recent surge in the latter, the province's ongoing structural challenges mean that the recovery will be slower to take hold.

The unemployment rate jumped above 14% (the highest annual average in Canada) in 2020, and has been slow to come back down. We expect the jobless rate to average 12% next year.

The Province of Newfoundland & Labrador is estimating a $0.6 billion deficit in FY21/22, or 1.6% of GDP. That is running smaller than initially expected, and will shrink the net debt-to-GDP ratio to 45.5%, still the highest in Canada.