TORONTO, June 25, 2009 – While
the current recession has had a significant and widespread impact on
the economies of all Canadian provinces, and almost all will see real
GDP contract this year, sights are now set on a coming economic recovery,
according to the new Provincial Outlook report from BMO Capital Markets
Economics.
“Thanks to a rebound in commodity prices, widespread fiscal stimulus
and some of the lowest interest rates in a generation, all provinces
are poised to participate in the recovery,” said Douglas Porter,
Deputy Chief Economist, BMO Capital Markets.
Western Canada has
been hard hit this downturn as last year’s
plunge in commodity prices and tighter credit conditions slashed investment
activity in the energy sector. With job losses mounting, consumer activity
has contracted, house prices had fallen by about 15 per cent from peak
levels before rebounding in recent months, and residential construction
activity has been sliced to less than half year-ago levels. As a result,
annual real GDP in B.C. and Alberta is likely to contract for a second
consecutive year.
However, the rebound
in commodities should breathe some life back into Western Canada in
2010. Production costs have fallen sharply amid slackening
labour markets and lower input prices, and oil prices have now moved
back above break-even levels for the oil sands ($60-$65). As a result,
the region is likely to experience an above-average rebound in 2010 with
growth averaging slightly above 2 per cent.
Central Canada continues to
grapple with the challenges facing manufacturing, namely significant
erosion in foreign demand and, more recently, a rebound
in the Canadian dollar. Ontario’s auto sector came to a near standstill
to start the year amid restructuring efforts, and employment in the assembly
and parts sectors has fallen to the lowest level since the early-70s.
Meantime, Quebec’s more favourable manufacturing-sector mix has
helped the province better weather the recession. Looking ahead to 2010,
the region will likely see a recovery that is in line with the national
average, though a rebound in auto production should give a slight tilt
to Ontario. Still, the long-term restructuring challenges in the region
remain, and should lead to continued underperformance in the medium term.
Atlantic Canada has held up
well during this recession thanks to renewed population growth, fiscal
stimulus and sturdy non-residential investment
activity. While real GDP should decline in all provinces this year, the
contractions will likely be less severe than the national average (Newfoundland & Labrador
is the exception, amid lower oil output). As 2010 rolls in, the region
will likely see a near-average recovery as public- and private-sector
investment activity combats ongoing manufacturing weakness.
The recession
has quickly altered the Canadian fiscal landscape as the fiscal 2009/10
budget season saw a return to deficit for
most provinces.
Only two provinces—Saskatchewan and Manitoba—managed to stay
out of the red this budget season. While declining revenues are a major
factor behind the deteriorating fiscal position, provincial governments
are also committed to maintaining a strong rate of spending growth. Overall
revenues are projected to fall 1.5 per cent, with double-digit declines
seen in the commodity provinces. Commodity revenues are forecast to fall
40 per cent year-over-year on the back of lower prices and production
volumes, cutting their share of total provincial revenue to about 5 per
cent from nearly 9 per cent in fiscal 2008/09. Meantime, spending is
slated to rise a solid 5.4 per cent, led by double-digit growth in Ontario
and Newfoundland & Labrador. Only two provinces, Alberta and Saskatchewan,
penciled in lower spending this fiscal year. Infrastructure investment
was the dominant theme this fiscal year, as the Provinces are running
with the torch lit by the federal government
to help counter the recession. Total provincial infrastructure spending
will be about $40 billion this fiscal year, or nearly 3 per cent of GDP,
up about 25 per cent from the prior year. Ontario will invest the most
as part of its two-year, $27.5 billion program, while Newfoundland & Labrador
is the most aggressive relative to GDP. Alberta is the only province
that will see infrastructure spending fall, but it continues to invest
heavily, a legacy of the commodity boom. These strong and widespread
levels of infrastructure investment will help to reinforce the coming
economic recovery.
At the same time,
the trend in provincial tax rates remains down this fiscal year, with
Ontario and New Brunswick serving up fundamental changes
to their tax systems. In Ontario, the Province proposed a harmonization
of the provincial sales tax with the federal goods and services tax in
mid-2010, while also cutting the general corporate tax rate to 10 per
cent by 2013 from 14 per cent last year. Meantime, New Brunswick also
concluded its tax-system review with a simplified two bracket/two rate
system (to be fully phased in by 2012), overall personal tax reductions
through fiscal 2012/13 and a general corporate tax rate cut to 8 per
cent by 2012 from 13 per cent last year.
Deficits and robust infrastructure investment have ramped up provincial
borrowing requirements this fiscal year. Total borrowing is projected
to be $68.3 billion, up from $55.6 billion in FY2008/09, broken down
about equally between refinancing and new borrowing. Through late-June,
almost half of this requirement had been funded.
The complete report can be found at www.bmocm.com/economics.
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