Thursday, October 18, 2012

Provincial Economic Growth Forecasts - Modest Growth At Best

Economic growth across the world's advanced economies has been very modest at best for months now.  While the United States and Canada are still showing some economic strength albeit lukewarm, downward revisions in GDP growth seem to be the order of the day.  With North America's two largest economies being inextricably linked and both nations having Europe as a major trading partner, Canada's economic future will parallel that of the United States and Europe.  With that in mind, how are things in Canada looking at the provincial level?  This issue is critical since it is provincial economic growth that will prevent debt levels from reaching levels that are unserviceable.

A report by TD Economics suggests that economic growth in 2012 will be below the 2 percent in eight provinces and less than 3 percent in both Alberta and Saskatchewan, reflecting the global economic risks.  These projections, in most cases, are down from what was forecast in the second quarter of 2012 as shown on this bar graph:

The author, Jacques Marcil, suggests that regional growth gaps will be related to three issues:

1.) Resource wealth - this factor will positively impact growth in Newfoundland and Labrador, Alberta and Saskatchewan.

2.) Housing markets - this factor will negatively impact growth in parts of Ontario (the Greater Toronto Area), Quebec (Montreal) and British Columbia (the lower mainland).  The housing markets in the remainder of the provinces will be impacted to some degree by the implementation of stricter mortgage lending regulations.

3.) Debt and deficit levels - this factor will affect all provinces except Saskatchewan which is running the nation's only provincial surplus.  Budget deficits for 2012 are expected to run between 0.2 percent of GDP for Quebec and 2.2 percent for Ontario.  Although most provincial treasurers have targeted 2013 to 2015 for a return to balance, my suspicion is that this will not happen for the majority.

Let's look at the economic forecasts for the three main regions from west to east, keeping in mind that overall national economic growth is expected to be 1.8 percent in 2012, 2.0 percent in 2013 and 2.5 percent in 2014.

1.) Western Canada:

a.) British Columbia:  Housing price declines in Vancouver and Victoria are the key factor that will impact the economy of British Columbia as shown on this graph:

Right now, home buyers are shifting to purchasing lower-priced homes, nonetheless, resale prices in Vancouver have dropped by 7 percent and sales are down 31 percent on the year.  Overall growth is expected to be 1.9 percent in 2013 and 2.5 percent in 2014.

Near record low natural gas prices are negatively impacting resource revenues.  On the positive side, increased demand for new homes in the United States is leading to increased demand for lumber.

b.) Alberta:  The vast majority of indicators are positive and projections suggest that oil and gas exports will rise over the period from 2013 to 2014.  The labour market is strong and consumer demand is rising.  Housing does not show signs of an overheated market.  Overall growth is expected to be around 3 percent in both 2013 and 2014.

c.) Saskatchewan:  Saskatchewan is the beneficiary of a wide-range of world-class resource deposits including uranium, potash, oil and smaller volumes of natural gas.  Exports of wheat and canola round out Saskatchewan's portfolio, making the province the growth leader among all provinces in Canada in 2012.  Saskatchewan's housing market is expected to be the only provincial market with sales increases in 2013.  Saskatchewan's employment picture is very strong with jobs growth of 2 percent in both 2013 and 2014 and a projected unemployment rate between 4.0 and 4.5 percent as shown on this graph:

Saskatchewan's economic growth is expected to come in at 3 percent for 2013 and 2.9 percent for 2014, again leading the nation along with Alberta.

d.) Manitoba:  Manitoba is also the beneficiary of a very diverse economic portfolio.  Agricultural exports, metal exports including zinc and nickel, automobiles and parts and crude oil form important components of the province's economy with oil exports to the United States comprising 12 percent of the province's total exports to America.  Cautious spending by consumers, modest job growth and a slowdown in housing activity will put a drag on economic growth which is expected to grow at around 2.1 percent for 2013 and 2.5 percent for 2014.

2.) Central Canada:

a.) Ontario:  Ontario's economy is showing mixed results with some sectors showing slowing activity (automotive) and some still showing growth (commercial construction).  Households are beginning to show caution as the highly leveraged housing market is showing signs of strain.  For 2013 and 2014, growing demand for automotive exports, lumber and mineral will boost the economy.  On the negative side, the housing market in the GTA is expected to lose more than the national average, resulting in depressed retail demand by consumers.  Additionally, negative pressure on growth will be exerted by the provincial government as it struggles to return to fiscal balance as shown here:

With the nation's highest nominal debt and deficit levels (2.2 percent of GDP), reining in spending will result in reductions in the size of the public service, negatively impacting consumers.  These factors suggest that Ontario's growth will be 1.8 percent in 2013, rising to 2.5 percent in 2014, its highest level since 2010.

b.) Quebec:  Over 2012, Quebec's employment picture will show no improvement, it appears that retail sales will also drop on an inflation-adjusted basis and import growth is stalled.  These factors will result in a lukewarm growth rate of only 1 percent for 2012.  Potential ramping up of mining projects and exports to the United States will support some growth in labour.  Unfortunately, for 2013, it appears that housing market downward readjustments will result in a modest growth rate of only 1.7 percent for 2013 rising to 2.2 percent in 2014.  It will be interesting to see if Quebec's new government can stick to the 2013 - 2014 target for a balanced budget.

3.) Atlantic Canada:

a.) New Brunswick:  For 2012, New Brunswick is facing minimal growth in both jobs (a 10 percent unemployment rate) and exports as its economy attempts to transition away from the primary forestry and fishing industries.  Economic growth this year is expected to be in the 1 percent range, rising to only 1.4 percent in 2013 and 2 percent in 2014.  A stronger housing sector in the U.S. will lead to greater demand for lumber and spillover from the Nova Scotia shipbuilding program will assist in economic growth.

b.) Nova Scotia:  GDP growth in 2012 is expected to be 1.3 percent on the backs of lower natural gas revenues.  The recently announced shipbuilding contract is expected to lead to growth in employment as shown on this graph:

This project is expected to create 8500 net new jobs on average over the next three decades, resulting in  economic and job growth above the national average.  Economic growth related largely to this project will result in economic growth of 2.0 percent in 2013 and 2.8 percent in 2014.

c.) Prince Edward Island:  Increased immigration over the last few years has helped Canada's smallest provincial economy.  Despite having the nation's second highest unemployment rate, the province's emerging aerospace sector has pushed job creation higher than the national average.  Economic growth for 2012 is expected to reach 1.8 percent, falling to 1.4 percent in 2013 and 1.6 percent in 2014.  If the economic situation in the U.S. improves, the growth in P.E.I.'s tourism industry should help boost the economy.  On the negative side, the Island's large share of federal government employees means that the local economy will be hard hit by federal cutbacks.  A big issue facing P.E.I. is its burgeoning debt level which has risen to $2 billion, up 50 percent in the last 5 years.  The Ghiz government will have to implement meaningful budget cuts before this situation reaches the critical phase since the province's small population is not capable of servicing a large debt load.

d.) Newfoundland and Labrador:  Two main issues faced Canada's easternmost province in 2012.  First, the maintenance shutdown at both Terra Nova and White Rose resulted in a 30 percent drop in oil production as shown here:

Second, the cut in federal transfer payments resulted in a loss of 7 percent of total revenues.  In combination, these two issues resulted in very modest 2012 GDP growth of 0.9 percent, well below the national average.  Fortunately, oil production should return to normal in 2013 and new mining infrastructure in Labrador should help boost 2013 GDP growth to 2.3 percent and 2014 growth to 2.5 percent.  Increased exports of high-priced oil and metal ore to Europe will aid in economic growth, however, volatility in the world's oil markets could have a sharp negative impact on provincial revenues.

As you can quite quickly see, growth in Canada’s provincial economies is linked strongly to growth in the American and European economies.  Should either of our largest trading partners find their economies heading toward recession, all provincial economic growth bets are off.

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