Growth to return thanks to commodity price rebound and widespread fiscal
TORONTO, June 25 /CNW/ - 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
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 oilsands ($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
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.
For further information:
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