Provincial Credit Watch
June 03, 2025 | 09:44
Provincial Credit Watch: June 2025
Economics
Economics
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Provincial Returns |
Market volatility continued over the past month with ongoing concern over U.S. tariffs. At the same time, the U.S. Administration's plan to run larger budget deficits (bill subject to adjustment in the Senate) has put further upward pressure on long-term Treasury yields, some of which has filtered into Canada. Canadian 30-year yields topped 3.6% near the end of May, the highest since November 2023. However, long provincial spreads remain very well-behaved, tightening to below 90 bps by the end of the month—that's just about the middle of the range seen over the past three years. All told, long provincial total returns were modestly positive over the past month, and the group continues to outperform Canadas on a one-year basis. |
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Relative Performance |
Long spreads tightened for all provinces in the past month, helped by a better overall risk appetite. All provinces have also now tabled their FY25/26 budgets, with Ontario's document (the last of the group) laying out a fiscal plan that was perhaps less negative than some might have feared given the trade war. |
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Fundamentals |
Almost all provinces are expected to see growth slow in 2025, but the regional disparity will widen. Alberta and Saskatchewan are expected to lead with growth at around 2%. Demographic flows and housing activity are solid, and the tariff impact on energy exports will be low. British Columbia is also relatively sheltered and should expand 1.5%, carrying the lowest U.S. export exposure in Canada—more B.C. trade flows to Asia. Ontario, Quebec and Manitoba will certainly feel the impact of the trade war, posting growth around 1%. These provinces carry high exposure to U.S. exports across a range of diverse manufacturing industries, autos, steel (Ontario) and aluminum (Quebec). Indeed, even as tariffs broadly have been walked back from the worst threats, those on autos, steel & aluminum remain. At the same time, Southern Ontario remains in the grips of a housing correction, which lower mortgage rates have yet to relieve. A glut of condo supply is now pulling down both prices and rents, when combined with slower population growth. Finally, Atlantic Canada could look more mixed this year, with a few pockets of varying industry trade exposure. That said, the region is still catching up to torrid population growth even if that will slow sharply this year, and the ‘Buy Canadian’ movement could drive domestic tourism activity this summer. Growth in the region is expected to land in the 1.0%-to-1.5% range. Budget Season in the BooksAll provincial governments have now published their 2025 budgets, and the general trend is toward a deterioration in fiscal balances, along with robust borrowing programs. The combined provincial budget deficit is on track to widen to $45.0 billion (1.4% of GDP) in FY25/26 from $20.1 billion in FY24/25 (Chart 3). While that is still very manageable, it marks a fourth straight year of deterioration and is the deepest (non-pandemic) shortfall as a share of GDP in 13 years. |
Revenue growth, which had been robust thanks to the post-pandemic recovery and high inflation, has cooled amid softer economic growth. Meantime, program spending growth remains firm, partly reflecting upward pressure on public sector wages, while interest costs are also on the rise. Torrid population growth has also stressed infrastructure, necessitating large capital spending programs. And, this is not isolated: every province in Canada, with the exception of Saskatchewan, is forecasting a deficit for this fiscal year (Table 1). It’s also worth noting that every province has taken a somewhat different approach to accounting for the impact of the trade war. Many have built some form of tariffs into their outlook (Alberta, Ontario, Quebec, Nova Scotia and Newfoundland & Labrador), while others have ignored them; some have built in larger contingencies, while others have built in none. As a group, there is more than $12 billion worth of explicit forecast allowances underlying the FY25/26 deficit. That should keep the downside risk to the current combined provincial budget deficit relatively modest. Total borrowing requirements are currently pegged at a hefty $139 billion for FY25/26. In addition to operating deficits, provinces almost across the board are funding large capital expenditures. In some cases, credit rating agencies have taken notice, with the post-pandemic wave of upgrades now turning the opposite direction, albeit in only limited cases at this point. For a few more post-budget season/post-election themes, and updated growth outlook, see Surveying the Provincial Landscape. Full analysis here. |
Budget Season NotesThe Province of Ontario is projecting a $14.6 billion deficit for FY25/26 (1.2% of GDP), a significant deterioration from $1.5 billion last forecasted in the fall fiscal update, and following a $6.0 billion shortfall (0.5% of GDP) now estimated for FY24/25. While last fiscal year is tracking somewhat better than expected, the near-term fiscal outlook has clearly deteriorated as trade uncertainty clouds the outlook for economic activity and, thus, tax revenues. The deficit is expected to narrow to $7.8 billion in FY26/27 before the Province barely returns to surplus (of $0.2 billion) in FY27/28—a year later than previously forecast. Meantime, the net debt-to-GDP ratio is expected to jump 1.6 ppts to 37.9% this fiscal year. Although Ontario is not alone in publishing a weaker fiscal outlook this budget season, it's worth highlighting that we view the Province as the most vulnerable to tariffs. Full analysis here
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Recent Publications of InterestSurveying the Provincial Landscape: The trade war threatens to drive a wedge between economic performance in provinces with high and low exposure to U.S. trade. At the same time, a new federal government is expected to push through various policy measures that will impact the provincial landscape in the coming years. Full analysis here. Provincial Monitor: All provinces are expected to see growth slow in 2025, but the regional disparity will widen notably. Full analysis here. 2025 Election — The Same, but Different: The Canadian election results are still being finalized, but Mark Carney and the Liberals appear to have secured a strong minority government mandate. Full analysis here Canadian Housing Monitor: Canada’s housing market remained under pressure in March, with sales and prices both weakening further. Full analysis here 25% Tariffs: What If? We judge that a 25% tariff could pull Canadian growth down by nearly 2 ppts and weigh on the loonie, but monetary and fiscal policy would not stand still. Full analysis here. Housing Outlook: A Long Way Home: The Canadian housing market should post modest sales and price gains this year, but don’t expect another exuberant takeoff. Changing secular forces also suggest it’s still a long way back to the 2022 highs. Full analysis here. What Canada’s Immigration Shift Will and Will Not Do: Ottawa’s dramatic about-turn on immigration will turn Canada’s fiery 3%+ population growth of the past two years to an icy near-zero pace in coming years. This may have some important economic effects, but there are already many misleading narratives that have emerged since the announcement. Full analysis here. Canadian Job Market: “We’ll Be in Touch”: The job market has gone from extremely tight to exhibiting some clear signs of weakness. We explore some of the reasons why, and the implications for policy. Full analysis here. Extraordinary Population Delusions and the Trouble with Crowds: Canada’s population has exploded by 1.3 million people in the past year, or 3.2%, the fastest pace since the 1950s. This surge is rooted in sound principles, but has clearly run amok. Indeed, the narratives around the population boom have, in our view, been off the mark. Here are five pieces of the narrative that are worth challenging. Full publication here. |
FY25/26 Budget ReportsThe Province of British Columbia is projecting a $10.9 billion deficit in FY25/26. Full analysis here The Province of Alberta is projecting a $5.2 billion deficit in FY25/26. Full analysis here The Province of Saskatchewan is projecting a small $12.2 million surplus in FY25/26. Full analysis here The Province of Manitoba is projecting a $794 million summary budget deficit in FY25/26. Full analysis here The Province of Ontario: The Province of Ontario is projecting a $14.6 billion deficit for FY25/26. Full analysis here The Province of Quebec is projecting a record $11.4 billion deficit in FY25/26. Full analysis here The Province of New Brunswick is projecting a deeper $599 million deficit for FY25/26. Full analysis here The Province of Nova Scotia is projecting an $898 million deficit in FY25/26. Full analysis here The Province of Prince Edward Island is projecting a record $184 million budget deficit for FY25/26. Full analysis here The Province of Newfoundland & Labrador is projecting a $372 million deficit in FY25/26. Full analysis here |