Summer 2012
Economy and Strategy Group
Highlights
(514) 879.2529
Stéfane Marion Chief Economist & Strategist Paul‐André Pinsonnault Senior Fixed Income Economist Krishen Rangasamy Senior Economist Marc Pinsonneault Senior Economist Matthieu Arseneau Senior Economist Marco Lettieri Economist
CONTENTS ECONOMIC BACKDROP
2
PROVINCIAL ECONOMIES Quebec: Waiting for exports to recover
5
Ontario: Expansion, but at a moderate pace 7 Atlantic Provinces
9
Western Provinces
13
FORECAST TABLE PROVINCIAL BUDGETS SUMMARY 2012‐2013
19
20
In Canada, we expect economic growth to moderate to 1.9% in 2012 and 2.0% in 2013. Domestic demand is expected to slow, with government retrenchment in spending growth and investment acting as a drag, consumers taking a breather and residential construction pulling back in 2013. Strong business investment, especially in resource development, will provide some offset. Despite the strong loonie, international trade will contribute to growth over the forecast period, reversing the experience of previous years. While drag from the public sector will apply more or less to all provinces, growth will be uneven from region to region. The four Western provinces will exceed the national average, the others will lag. We expect subpar growth in Newfoundland and Labrador due to natural decline in oil extraction and to maintenance shutdowns. Apart from oil extraction, growth will be very strong this year as a result of a construction peak in resource development. In the Maritimes, Nova Scotia’s economy will expand at almost the national average rate. Some weakness will persist in New Brunswick and Prince Edward Island. Though international trade is set to contribute to growth in Quebec and Ontario for the first time in a decade, their expansion will be modest because of limited growth in domestic demand. Manitoba enjoys an ideal mix of resource endowment and highly diversified manufacturing, as well as demographic growth. Resource development and demography are the key drivers of growth in Saskatchewan and Alberta. Resource development and business investment will feed growth in British Columbia.
Provincial Economic Outlook
Economic backdrop The global economy has become vulnerable to the combined effects of deepening recession and unresolved sovereign‐debt crisis in Europe. Many banks in the monetary union, especially in debt‐ridden countries, are struggling to stabilize their balance sheets and keep their capital ratios healthy. Among euro‐zone governments there is a high degree of polarization on the question of how to manage the debt problems facing some of them. Meanwhile, austerity is losing popular support. Europe is likely to veer toward pro‐growth policies as an emboldened new French socialist government joins Spain and Italy in challenging Germany’s view of the debt crisis and how to deal with it. In the near term we expect monetary policy to play an increasing role in mitigating the difficulties of the zone, whose GDP is likely to contract 1% this year. Greater activism on the part of the European Central Bank would buy time for politicians to improve national competitiveness and long‐tem growth potential. Credit markets remain functional Financial stress index 6.0
index
5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
The woes of the euro notwithstanding, the global economy continues to grow, led by still‐healthy emerging economies and by ongoing expansion in North America. In contrast to 2008‐09, financial markets remain functional – a necessary condition for continued global growth. While recent data point to some deceleration of powerhouses like China, we remain confident about the prospects for the world’s second‐largest economy. In addition to monetary tools that can be put to work in the short run, Beijing has fiscal stimulus options. Assuming that the European financial crisis does not go global, we expect global growth of about 3% this year, accelerating to about 3.6% next year. National Bank (data via Federal Reserve)
Global growth holds firm Contributions to global GDP growth 6
NB forecast %
3.6% 3.0%
Emerging Advanced
4
2
0
-2 1981
1985
1989
National Bank (data via IMF)
1993
1997
2001
2005
2009
2013
2 Summer 2012
Provincial Economic Outlook Recoveries tend to be uneven, of course, and the first half of 2012 seems to be a case in point. There are indications – deceleration in GDP growth and job creation – that the U.S. economy has hit a soft patch. Yet the data remain consistent with expansion, albeit slow. Consumers are taking a breather after a strong first quarter. A softening of the labour market and a multi‐year low in the savings rate may be restraining spending. Fortunately, lower gasoline prices leave consumers more room for discretionary spending. Low interest rates have spurred demand for mortgage loans and the inventory of unsold homes is shrinking. In the circumstances, we continue to expect that the current slowdown will be limited by the accommodative stance of the Federal Reserve. The FOMC has just extended its program for purchase of long Treasuries (Operation Twist) to the end of 2012, and the Fed chairman has reiterated that further action to support job creation or to keep financial markets functional will be forthcoming if needed. Apart from the risk of European contagion of global financial markets, the major concern for the U.S. economy is arguably the so‐called fiscal cliff. If legislation now on the books is left unchanged, fiscal drag in 2013 is likely to send the U.S. back into recession. We put the odds of that happening at no more than 30%. We expect Congress to adopt both a fiscal path that will dodge that outcome and a credible plan for fiscal sustainability. In the circumstances, our baseline scenario is one of U.S. GDP expanding at close to 2% annualized in the coming months. The Canadian economy, meanwhile, shows moderate growth in sync with the United States. Domestic demand decelerated in Q1 and is likely to remain soft this year as consumers cool their spending – the household savings rate is low and employment growth is unlikely to maintain the red‐hot pace of Q2. Business investment is likely to take up some of the slack, leaving Canadian growth near 2% this year. We anticipate a similar pace next year, as housing‐market slowdown and household deleveraging rein in domestic demand and U.S. fiscal drag weighs on trade. The Bank of Canada now stands alone among major central banks in considering monetary tightening despite a slow‐growth outlook. The Bank has concerns about household debt accumulation, which it sees as “the biggest domestic risk.” Fortunately, consumer credit growth has cooled lately and is now the slowest in almost two decades. In addition, the federal government has again tightened mortgage lending rules, reducing the maximum amortization period for government‐insured mortgages to 25 years from 30 and reducing the equity that can be withdrawn from a home, by 5 percentage points to 80% of its value. Canada: Consumer credit growth moderates Residential credit growth remains solid in February 15 14
y/y % chg.
Residential credit
13 12 11 10 9 8 7 6 5 4
Consumer credit
3 2
Lowest in almost two decades
1 0 1992
Total Household credit
1994
1996
1998
2000
2002
National Bank (data via Statistics Canada)
2004
2006
2008
2010
2012
3 Summer 2012
Provincial Economic Outlook Such macroprudential measures lift some weight from the shoulders of the central bank at a time when Canadian growth faces too many risks from both domestic and foreign sources. Although Bank of Canada governor Mark Carney has maintained his tightening bias for the time being, we expect that below‐potential GDP growth in coming months will keep him from raising rates before mid‐2013. We see the Canadian economy expanding 1.9% in 2012 and 2% in 2013. Financial markets Financial markets were hit in Q2 with a bout of risk aversion that intensified in the last month of the quarter. Risk premiums on global equities have soared in response to the prospect of renewed financial crisis in Europe. Several national indexes have fallen into bear‐market territory. In Greece and Spain the losses have been devastating. In North America, the U.S. large‐cap indexes have corrected less than their Canadian counterparts. Much of the difference can be laid to the exposure of Canadian indexes to resource equities, which are down significantly. Current developments suggest that the balance of risk has moved to a worse‐than‐expected recession in Europe and increased stress on the European financial system, implying the possibility of lower‐ than‐expected earnings growth. The yields of North American government bonds reached new cyclical lows in the second quarter. They are unlikely to rebound much in the face of ongoing euro‐zone uncertainty and declining inflationary pressures.
4 Summer 2012
Provincial Economic Outlook
Provincial economies
Quebec: Waiting for exports to recover In 2011, Quebec’s economy grew at an estimated rate of 1.7%. The year was characterized by two phenomena. First, growth in final domestic demand slowed to 2.1%, compared to 4.6% the previous year, due to a 1.7% rise in consumer spending (versus 3.3% in 2010), a levelling‐off of residential construction and government capital spending, and a reduction in government current expenditure. Second, apart from a spike in December, international merchandise exports stagnated. International merchandise exports Constant 2002 dollars, monthly average by quarter 39
$ billion
$ billion 6.4
38
6.2
37 36
6.0
35
Canada (L)
34 33 32 31 30 29 28 27
From Q4 2009 to Q1 2012 Quebec: Canada: Aerospace: -$164M Oil & gas: +$ 686M Aluminium: +$ 62M Machines, equip.: +$ 849M Electricity: -$108M Ind. goods: +$ 790M Other ind. goods : +$ 68M Autos & parts: +$1,765M Other: +$108M Other: +$ 80M TOTAL: -$ 34M TOTAL: +$4,170M 02
03
04
05
06
07
08
5.8 5.6
+14%
5.4 5.2
-0,7%
5.0 4.8
Quebec (R) 09
10
11
4.6
12
National Bank, Statistics Canada and ISQ data In fact, exports have been stagnating since the beginning of 2010. Indeed, in real terms, they were at the same point in first quarter 2012 as in the last quarter of 2009. By comparison, exports for Canada as a whole were up 14%. Recent growth in Canadian oil and gas and automotive product exports, goods of which Quebec exports relatively little or none, is partly responsible for this gap. But there is also a marked difference in machinery and equipment and, to a lesser extent, industrial goods, for which 23% of Canadian exports in either category come from Quebec. In Quebec, these two categories are more than 40% made up of aerospace and aluminum products, the province’s main export products.
Real manufacturing GDP Real GDP at basic prices $ billion (2002)
$ billion (2002) 54 52 50 48 46 44 42 40 38 97
98
99
00
01
02
03
04
05
06
07
08
09
100 98 96 94 92 90 88 86 84 82 80 78 Ontario (R) 76 74 Quebec (L) 72 70 68 10 11 12
National Bank, data from Statistics Canada
Lacklustre exports had an impact on manufacturing output, which stagnated in 2011 after a modest gain in 2010. Even though Ontario’s manufacturing sector suffered much more severely as a result of the recession, its recovery has been faster. 5 Summer 2012
Provincial Economic Outlook Recent statistics on the Quebec labour market from the Labour Force Survey (LFS) have been staggering. For the last quarter of 2011, the LFS reported a decline in employment that usually corresponds to a deep recession. However, no other indicator corroborated this statistic, particularly payroll employment, according to the Survey of Employment, Payrolls and Hours (SEPH) or workers’ compensation according to provincial economic accounts. What is more, according to the LFS, all the jobs lost at the end of 2011 have been recovered as of April 2012! Payroll employment, according to LFS and SEPH 3460
Number of jobs, in thousands
3440
April and May 2012
3420
SEPH*
3400 3380 3360 3340
Unusual divergence
3320
LFS
3300 3280 3260 2007
2008
2009
2010
2011
2012
*Jobs according to payrolls, excluding agriculture, fishing and trapping, private household services, religious organizations and military personnel National Bank, data from Statistics Canada
This unusual LFS employment profile conditions our forecast. Because of the drop in fourth quarter 2011 and the fact that no jobs were recovered in the first quarter of 2012, the average level of employment should experience only minimal growth this year. However, from December 2011 to December 2012, this still represents a net creation of 84,000 jobs, a very respectable figure. That being said, the level of jobs in May 2012 was not very different from the level reported 12 months previously, except that full‐time jobs replaced part‐time ones. This suggests moderate growth, i.e., less than 2%, in consumer spending in 2012. Another factor supporting this prognosis is the relative financial vulnerability of Quebec households. From its 2009 high, the rate of personal bankruptcies and proposals has been decreasing more slowly than in the rest of Canada, particularly Ontario. Personal bankruptcies and proposals Per 10,000 inhabitants age 20 and over, 12-month moving average 75 Number 70 65
Quebec
60 55 50
Ontario
45 40 35 30 25 20 15 10 88
90
92
94
96
98
00
02
04
06
08
10
12
National Bank, data from Office of the Superintendent of Bankruptcy Canada and Statistics Canada
The home resale market is in balance, suggesting that housing starts will gradually fall to a level justified by population growth.
6 Summer 2012
Provincial Economic Outlook Public administrations will reduce domestic demand in 2012 and 2013. According to the last budget, growth in the provincial government’s expenditures will be less than 2% for the period covering this fiscal year and the next. Government infrastructure investment peaked in the first quarter of 2011, and has been decreasing ever since. In 2012, the drop will nonetheless be slower than in a number of other provinces, because the government has to continue to make massive investments, especially in the road infrastructure. However, business investment spending should repeat its 2011 performance with a growth rate exceeding 7%. The province is experiencing a mining boom. Investment in the sector is growing vigorously, and mining production could well increase 50% between 2011 and 2013, and even double in the specific case of metal ore extraction. Québec: Investments, mining sector 2012: Intentions 4.5
$ billion
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
National Bank, data from Statistics Canada
Even so, growth in final domestic demand is likely to be limited to 1.5% in 2012 and 2013. International trade, which took away from economic growth each year of the decade from 2002 to 2011, could contribute to it instead in 2012 and 2013, based on anticipated export growth, specifically in aerospace products and metal ores. Moreover, smaller growth in the domestic economy should translate into smaller growth in imports. Slower growth in domestic demand is therefore responsible for the modest economic expansion forecast in 2012 and 2013, namely 1.4% in 2012 and 1.7% in 2013.
Ontario: Expansion, but at a moderate pace Ontario experienced 1.8% economic growth in 2011, following a 3.0% jump in 2010. This slowdown reflects the one in domestic demand, which grew 2.8% in 2011 versus 4.8% in 2010. Consumer spending advanced at the moderate rate of 2.1%. Government capital spending peaked in the last quarter of 2010, and then dropped more than 6% in 2011. Government current expenditure increased only 0.7%. Domestic demand nonetheless turned in a respectable performance thanks to strong growth in business investment spending, which stood at close to 20% in the machinery and equipment segment. In real terms, the total trade deficit (interprovincial and international balances combined) remained stable in 2011 after reducing economic growth in 2010. In fact, while international 7 Summer 2012
Provincial Economic Outlook exports of automotive products undeniably increased in 2011, it seems that in volume terms, other international merchandise exports fell overall. That being said, automotive sector output contracted in 2011 because of supply chain disruptions following the natural disaster in Japan. The manufacturing sector nonetheless made gains, mainly on account of strong advances in the machinery, primary metal and fabricated metal product sectors. Mining extraction jumped by almost 20%, although it is still far below its pre‐recession level. Residential and non‐residential construction did well in 2011, but the construction industry on the whole had a lacklustre year because of reduced activity in engineering work. However, 2011 will remain the year that the Ontario economy returned to expansion territory after making up the ground lost since the last recession. Real GDP Quarterly 105 104 103 102 101 100 99 98 97 96 95 94
Index 2007 Q4 = 100
Ontario
2007
2008
Québec
2009
Canada
2010
2011
2012
Sources: Statistics Canada, Institut de la statistique du Québec and Ontario Ministry of Finance.
Employment grew at the same rate as the economy in 2011, namely 1.8%. Not surprisingly, gains will be more modest in 2012, especially since the federal government has announced significant cuts in the civil service. Following the economic recession in the United States, the value of international exports of automotive products plunged by 45% between 2007 and 2009. In 2011, almost half the ground lost was regained. With Americans now buying new vehicles at a rate of 14 million units per year, compared to 16 million before the recession, it is clear that the industry will not return to its former glory so quickly. Nevertheless, in the first four months of 2012, the value of automotive products was up 14.7% over the same period in 2011, and accounted for two‐thirds of the 7.5% growth in the value of the province’s total international exports. In real terms, automotive products will spearhead Ontario’s international exports in 2012. On the other hand, domestic demand should rise by 2.1% in 2012, and 1.4% in 2013. The more modest employment growth anticipated in 2012 will naturally affect consumer spending. It should also be noted that the personal savings rate closed out 2011 at only 2.0%, compared to 3.0% in Quebec and 3.1% for Canada as a whole. In its last budget, the provincial government announced pay restrictions totalling $6 billion over three years. In the first quarter of 2012, Ontario was among the provinces with the lowest payroll growth, namely 1.5% on a year‐over‐ year basis. In its last budget, the government acknowledged that the status quo would have led to an expanding structural deficit, and measures were announced to keep it on the downward 8 Summer 2012
Provincial Economic Outlook trajectory called for in the 2011 budget. Growth in program expenditure is limited to 1% this fiscal year and next. In real terms, government current expenditure should remain at the same level in 2012 and 2013 as it was in 2011. In addition, the reduction in government capital spending will intensify in 2012. Until this point in 2012, collective housing starts in the Greater Toronto Area have risen sharply compared to 2011, a trend that cannot be sustained. Faced with slower growth in condo resale prices, combined with a larger number of condo properties for rent, investors can be expected to reduce their pre‐construction purchases, which in turn will prompt developers to delay projects. Mainly for this reason, residential construction is expected to decrease in Ontario in 2013. GTA: Collective Housing Starts 40
38.7
000
35
30.9
30 25
21.9
25.8
24.2
23
21.7
28.5
25.8 23 18.5
20
17.8
19.2
15 10 5 0 00
01
02
03
04
05
06
07
08
09
10
11
12*
* 5 months, annualized
Fortunately, business spending for machinery and equipment will continue to grow over the forecast horizon, which is worth mentioning after growth rates of 15% in 2010 and close to 20% in 2011. This spending is stimulated by the strength of the loonie, the renewal of manufacturing equipment, particularly in the automobile industry, and a mining boom that is just as robust as in any other part of the country. All in all, domestic demand will nonetheless be the main factor keeping Ontario’s economic growth at the same level in 2012 as in 2011, namely 1.8%, with a modest rise of 1.7% in 2013. This will be the case even if international trade contributes more than in 2011 to the province’s economic growth over the forecast horizon. National Bank, data from CMHC
Atlantic Provinces Crude oil extraction accounts for close to 20% of the real GDP of Newfoundland and Labrador. In 2012, activity is expected to decline by more than 15%, because of interruptions for maintenance of offshore facilities. This is enough to significantly reduce GDP growth, but it will not significantly affect other vital indicators, such as employment. In 2011, despite a 3% reduction in crude oil extraction during the year, the economy grew by an estimated 3.1%, stimulated by 20% growth in the construction industry and 13% growth in metal ore extraction. The expected slowing of economic growth to 0.7% in 2012 hides the fact that 9 Summer 2012
Provincial Economic Outlook activity, apart from crude oil extraction, will rise 4.6%. Construction industry should peak in 2012, and be an important factor in the anticipated 2.0% increase in employment in this province. Newfoundland and Labrador is already in second place behind Alberta for the proportion of construction in total employment. Investment will intensify in major projects like Vale’s hydrometallurgical nickel processing facility in Long Harbour and iron mine development, not to mention the maintenance of the offshore oil sites. In this context, the construction industry will hardly feel the expected reduction in residential construction, a result of cooling in the resale market. Construction employment as a % of total employment 10.8 10.4 10.0 9.6 9.2 8.8 8.4 8.0 7.6 7.2 6.8 6.4 6.0 5.6 5.2 4.8 4.4 95
%
Alberta
Newfoundland and Labrador
Rest of Canada
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
2012: First 5 months National Bank, data from Statistics Canada
While the drop in crude oil production will have little impact on economic indicators, the same is not true when it comes to the royalties received by the provincial government. In addition, the government will see its revenues decrease by $536 million (6.8% of fiscal 2011‐12 receipts) in 2012‐13 following the end of offset payments under the Atlantic Accord. Even though program expenditure is expected to grow at less than the rate of inflation, this loss of fiscal receipts translates into expectations of a budget deficit for this fiscal year and the next. In 2013, economic growth should be 1.0%, a return to normal in crude oil production being counterbalanced by the fact that construction will decline compared to its 2012 peak, which will weigh on employment growth. In 2011, Prince Edward Island posted economic growth estimated at 1.2%. Even though agriculture and fishery were vectors of employment growth, production decreased in these sectors because of bad weather conditions. Production also decreased in transportation equipment manufacturing and manufacturing of various products. The provincial government recorded a budget deficit equivalent to 5.3% of its receipts in 2011‐ 2012. A three‐year plan was put in place to restore a balanced budget in 2014‐2015. The plan calls for low growth in program expenditure and, starting April 2013, a broadening of the tax base for the provincial sales tax by harmonizing it with the GST. Public infrastructure spending is also expected to decline in 2012. Therefore, the public sector will weigh on PEI’s economic growth in 2012 and 2013, which should be limited to 1.4% and 1.5%, respectively, even factoring in a recovery in agriculture and fishery. Tourism will continue to suffer as a result of the strong Canadian dollar, and new residential construction should slow down, after reaching a 23‐year high in 2011. It should be remembered that the province’s demographic growth in 2011, namely 1.7%, was the highest in the country, as immigration services succeeded in attracting a large number of immigrants, mainly from China. However, the influx of immigrants is likely to return to 10 Summer 2012
Provincial Economic Outlook normal now that the immigration applications submitted under the old Provincial Nominee Program have been processed. Prince Edward Island: Housing starts Number 1200
1000 800 600 400 200
13
11
09
05
07
03
01
99
97
95
93
91
89
87
0
CMHC data, National Bank 2012 and 2013 forecasts
The province’s manufacturing sector is dominated by frozen food production, while information technologies, biosciences, aerospace products, railway equipment, machinery and paper manufacturing are also present. The value of manufacturing sales jumped in the first quarter, suggesting that these sectors should perform well in 2012. Nova Scotia posted economic growth estimated at 0.6% in 2011. It probably would have been 1.5% if not for the 14.2% reduction in natural gas extraction, the drop in infrastructure construction and the production slowdown in several manufacturing industries. The labour market was weak from October 2010 to October 2011, and, as a result, the average level of employment in 2011 did not increase over 2010. Nova Scotia: Natural gas extraction Annual production 6
Billions m3
May-December January-April
5 4 3 2 1 0 00
01
02
03
04
05
06
07
08
09
10
11
12
Source: Canada – Nova Scotia Offshore Petroleum Board
The decline in natural gas extraction continued into early 2012, a situation that will persist until the commissioning this summer of the Deep Panuke offshore site. Afterwards, this activity will contribute to growth in real GDP. In addition, Shell Canada has launched a six‐year, $970‐million exploration project, with the first seismic surveys expected to begin in 2013. This is the first major exploration project in a decade. However, good news from the resource sector has been mitigated by the stagnation of tire production, which in 2011 accounted for 23% of the province’s international exports, in response to lower demand on European markets, and plant closures in the forest products sector. Furthermore, transportation equipment manufacturers’ sales were down at the beginning of 2012. 11 Summer 2012
Provincial Economic Outlook In order to table a balanced budget as of fiscal 2013‐2014, the provincial government will make substantial cuts, starting this year, in program expenditure growth. For a second consecutive year, government investment spending will decrease in 2012, although more moderately than in the other provinces. Housing starts should also slow, since 2011 marked the highest level of rental housing starts since 1991, mainly in Halifax, which does not seem sustainable. That being said, the shipbuilding industry, already busy maintaining the existing frigates, will have an embarrassment of riches starting next year after the awarding of a major contract to build navy combat vessels. All in all, the outlook for economic growth in Nova Scotia, at 1.8% in 2012 and 1.9% in 2013, is not far off the national average. New Brunswick: A job-loss recovery Employment 101.0
Index October 2008 = 100
Nova Scotia
100.5 100.0 99.5 99.0 98.5 98.0 97.5 97.0
New Brunswick
96.5 96.0
Shaded area: Recession in Canada
95.5 2008
2009
2010
2011
2012
National Bank, data from Statistics Canada Paradoxically, employment in New Brunswick, which held up well during the recession, fell during the recovery, such that at the moment these lines were written, it was 1.5% below its October 2009 high. What is more, the losses have been pretty much across the board, with nine out of 16 sectors posting decreases in jobs during the period, as the unemployment rate rose from 8.2% to 9.4%. In addition, the job losses in 2011 were concentrated in full‐time positions. In 2011, the economy is estimated to have grown 0.2%. The construction industry took the biggest chunk out of economic growth, declining for the third year in a row. In 2011, a reduction was recorded in both residential and non‐residential construction. New Brunswick is the province with the biggest drop in housing starts, at about 15.8%, and the level of activity fell to its lowest point since 2002. The end of work at the Point‐Lepreau nuclear generating station resulted in a significant decline in engineering activity. The 8.8% drop in primary metals and metal products explains the drop in manufacturing output. Agriculture also had a negative impact on growth in 2011. According to the Canadian Real Estate Association (CREA), New Brunswick is the province with the most lacklustre home resale market since the start of the year. Furthermore, New Brunswick is the only province where sales of existing dwellings have decreased each year since 2008. This suggests a connection with the performance of employment. In any event, home construction is likely to experience a further decrease in 2012. Non‐residential construction will also pull back, since both private and public investment will be weaker. In addition, the government wants to wipe out its budget deficit by fiscal 2014‐2015, and for this reason will be letting the size of the public service shrink while implementing a salary freeze and limiting promotions. Nevertheless,
12 Summer 2012
Provincial Economic Outlook the province’s economic horizon is not completely clouded. According to the Fraser Institute, New Brunswick is the best jurisdiction in the world for operating in the mining sector. A number of metal mines will go into production during the next few years. The new Sussex potash mine should open next year. In total, mining output is expected to rise 40% in 2013. As the residential market firms up in the United States, a wood products plant is likely to reopen. The economy should in any case grow by 1.5% in 2012 and 2.0% in 2013.
Western Provinces Manitoba experienced economic growth estimated at 1.3% in 2011. The 21% reduction in GDP from crops, which were devastated by heavy rains and flooding, took 0.7 of a percentage point off real GDP growth. In total, decreases in metal ore extraction, meat products, printed material and primary metal manufacturing as well as the end of work on major engineering projects reduced real GDP growth by just as much. Manitoba: Population growth Thousands of people
21 18 15 12 9
Interprovincial net migration International net migration Natural increase Total
6 3 0 -3 -6 -9 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: Statistics Canada
The scene promises to be different in 2012. Up to now, agriculture has been enjoying much better weather conditions. With new mines going into production, metal ore extraction should record double‐digit growth, while oil and gas extraction should increase by close to 10%. However, these two activities combined represent less than 2% of the province’s real GDP. More decisive is the manufacturing sector’s performance, which accounts for 11% of the economy. Highly diversified, this sector should grow strongly. In particular, increased worldwide demand for commercial aircraft will relegate uncertainty over the federal government’s purchase of military aircraft to second place. Stimulated by the Manitoba Provincial Nominee Program, the influx of international immigrants greatly exceeded the net outflow of residents to other provinces, thereby ensuring vigorous population growth and stimulating demand for housing. In this regard, the level of housing starts in 2011 was at its highest point since 1987, with more growth expected in 2012, since the resale market is currently the tightest in Canada. The construction industry could also get a boost from non‐residential business investment and gain strength compared to 2011.
13 Summer 2012
Provincial Economic Outlook Diversification of merchandise exports Herfindhal index*, nominal exports excluding re-exports 0.605
Index (extreme concentration = 1, perfect diversification = 0.15625)
0.555 0.505
2007 2011
0.455 0.405 0.355 0.305 0.255 0.205 0.155 NS
MB
BC
QC
ON
SK
PE
NF
NB
AB
*Sum of the squares of the shares of the eight main export categories in total exports. National Bank, data from Statistics Canada Manitoba ranks second in the country for the diversity of its international merchandise exports, a characteristic that guarantees it relatively stable economic growth. The only cloud on the horizon is the increased tax burden and the rationalizing of government spending introduced in the last budget, in order to meet the timetable for eliminating the provincial budget deficit, set for fiscal 2014‐2015. Economic growth should nonetheless clock in at 2.5% in 2012 and 2.4% in 2013.
Saskatchewan: Population growing since 2007 Population growth Number of people 18000 15000 12000 9000 6000 3000 0 -3000 -6000 -9000 -12000
Interprovincial net migration International net migration Natural increase Total
0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 months ended June 30
Source: Statistics Canada
In 2011, Saskatchewan likely had 5.0% economic growth. The partial recovery of agriculture, which accounts for 11% of the economy, added one percentage point to growth, while the 14% jump in potash production added four‐tenths. The mining, oil and gas sectors also contributed via exploration activities and engineering work. Stimulated by the performance of these goods‐ producing industries, wholesale trade, transportation and warehousing added another percentage point to economic growth. Furthermore, the province’s population has been increasing since 2007, with a large boost from international immigration and the end of net migration to other provinces. Population growth stimulates retail trade and the financial and residential industries. Employment may have risen by only 0.3% in 2011, but this statistic hides 1.1% growth in full‐time employment. At the beginning of 2012, potash producers significantly cut production in order to counter falling prices. As a result, the value of international potash exports in the first quarter was 25% less than the level for the corresponding period in 2011. For 2012 as a whole, production could be lower than its 2011 level, which will shave a little off the province’s economic growth but should be more than offset by increased oil production. Housing starts should rise in 2012, given the more than 20% growth in existing home sales to this point in 2012 compared to 2011, and the vacancy rate of only 0.6% for rental housing recorded in Regina toward the end of 2011. Employment and
14 Summer 2012
Provincial Economic Outlook retail sales were up substantially at the beginning of 2012, while in the first quarter, the province recorded the strongest year‐over‐year growth in payroll in the country. Wages and salaries First quarter of 2012, year-over-year growth 9% 8%
7.8% 7.7% 6.6%
7% 6%
National average: 3.2%
5% 4%
3.4%
3.1%
3%
2.5% 2.1%
2%
1.6% 1.3%
1.0%
1% 0% SK
AB
NL
BC
MA
QC
PE
ON
NB
NS
Source: Statistics Canada
In 2013, on account of expanded extraction capacity, potash production could increase by one quarter. While unlikely to be as impressive, metal ore extraction is expected to post strong growth. The mining industry alone will contribute one percentage point to economic growth in 2013. Economic growth should stand at 2.9% in 2012 and 2.7% in 2013, a remarkable performance in the wake of growth rates of 4.0% and 5.0%, respectively, in the previous two years. In 2011, Alberta may well have taken the prize for economic growth, estimated at 5.1%. Growth was 4.7% in the energy sector, which accounts for 22% of the economy, 33% in engineering work related to oil and gas extraction, 31% in machinery manufacturing and 9.3% in wholesale trade. These four sectors combined represented half of Alberta’s economic growth in 2011. Alberta: 2011 Real GDP above 2008 level Real GDP at basic prices $ billion chained (2002)
190 180 170 160 150 140 130 120 97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Employment increased sharply, by 3.5% (4.4% for full‐time employment). Given that the province has the highest average earnings in the country, it is not surprising that it has posted by far the strongest growth in retail sales since the beginning of the year. Source: Statistics Canada
15 Summer 2012
Provincial Economic Outlook Retail sales First quarter of 2012, year-over-year growth 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
9.7%
6.9%
National average: 4.3%
5.9%
5.4% 3.3%
AB
PE
SK
BC
ON
3.1% 2.7%
NS
2.7% 2.5% 2.3%
NL
NB
QC
MA
Source: Statistics Canada
It is true that producers sell oil at a large discount compared to the WTI benchmark price. Furthermore, world price of oil has declined lately, and some investment projects might be postponed. However, the continuation of projects already started should continue to sustain the activity in the construction industry, offsetting the impact of reduced government infrastructure spending. Also, housing starts should rise in 2012, as the resale market recently tightened again. In any case, construction will continue to produce large spinoffs for the manufacturing sector, notably in machinery manufacturing and metal products. Extraction of mineral fuels will increase at the same time, as projects make their way from construction to commissioning. The spinoffs will be just as significant for wholesale trade and for transportation. All this activity will continue to fuel the strongest employment growth in the country over the forecast period. Alberta continues to post the highest employment rate in Canada. Starting in 2012, it should also post the lowest unemployment rate. Developments in employment will foster population growth and related service industries. With 3.0% economic growth expected in both 2012 and 2013, Alberta will continue to drive economic growth in Canada. Alberta: Still the country’s highest employment rate Employment as % of working-age population
72%
Alberta
70% 68%
Saskatchewan
66% Manitoba
64% 62% 60%
Rest of Canada
58% 56% 90
92
94
96
98
00
02
04
06
08
10
12
For 2011, British Columbia’s economic growth is estimated at 2.9%. On account of shale gas operations, natural gas extraction ran contrary to the situation in the rest of Canada, with a 19% upsurge. Oil and gas‐related engineering work experienced similar growth. Support activities for mining, oil and gas extraction jumped 24% as a result of the expansion of exploration activities. Strong export demand, mainly from China, stimulated forestry and forest operations, which grew by 11%, as well as wood product manufacturing. Machinery manufacturing was the other main factor in the 3.1% increase in manufacturing output. Source: Statistics Canada
16 Summer 2012
Provincial Economic Outlook British Columbia: Natural gas extraction 44
Billions of cubic feet
40 36 32 28 24 20 16 12 8
85
87
89
91
93
95
97
99
01
03
05
07
09
11
National Bank, data from Statistics Canada
In early 2012, the province experienced strong employment growth according to the Labour Force Survey, particularly in the manufacturing sector, but this is not corroborated by the Survey of Employment, Payrolls and Hours or wages and salaries growth. Caution is therefore necessary in this regard. After two months in 2012, natural gas extraction was up 10% on a year‐over‐year basis. This is expected to be representative of the increase in activity over the entire year. With the development of new deposits, production should increase next year and in the medium term. With the beginning of construction on a power transmission line that could serve a mining territory that is not yet being exploited, mining companies are keeping an eye on the province. According to a Natural Resources Canada survey, mining exploration expenditures will jump 43% in 2012, and the amount is likely to be higher than in Quebec. Expenditures should increase again in 2013. Mining: Exploration and deposit appraisal expenditures * 1200
Millions dollars
1000 2008 2009 2010 2011 2012
800 600 400 200 0 NF
NS-NB
QC
ONT
MA
SK
AB
BC
Y-NWN
* Expenditures on engineering, economic and production feasibility studies, environment costs, land access costs and filed work.
National Bank, data from Natural Resources Canada.
A gold mine is supposed to go into production in the second half of 2012, and a gold and copper mine in the last quarter of 2013. These start‐ups will mean that extraction of metal ores will increase in 2013 for the first time in four years. On the other hand, the manufacturing sector will feel the effects of the slow economic recovery in the United States, including in residential construction. However, it will be stimulated in 2013 by the shipbuilding contract awarded by the federal government. Unlike most of the other provinces, home resales have fallen since the beginning of the year, concentrated exclusively in Greater Vancouver. At the same time, the number of collective 17 Summer 2012
Provincial Economic Outlook housing starts in Greater Vancouver has decreased as well. Our hypothesis is that the recent level is representative of the trend for the rest of the year, which suggests a slight decrease in housing starts in B.C. in 2012. Number of existing homes sold First five months of 2012, annualized, compared to 2011 28% 24.6% 24% 20.9% 20% 16%
13.1%
12%
9.1%
8%
National average: 4.0%
7.9% 5.4%
4%
3.7%
1.8%
0% -0.9%
-4%
-5.1%
-8% PE
SK
AB
NL
NS
QC
ON
MA
NB
BC
National Bank, data from Canadian real estate association
As in most regions of the country, government investment spending will decline significantly in 2012, but should be offset by growth in business investment. The abolition of the harmonized sales tax, slated for April 1, 2013, will decrease the rate of inflation in B.C. as of that date. The government says that this decision will reduce its receipts by $700 million (or 1.6% of total receipts) in fiscal 2013‐2014. Nonetheless, it expects that fiscal 2013‐2014 will be the year that the budget deficit is wiped out. In short, the resource sector and business investment will drive the economy over the forecast period; the economy should grow by 2.2% in 2012 and 2.5% in 2013.
18 Summer 2012
Provincial Economic Outlook
Main economic indicators – Provinces 2007
2008
2009
2010
2011e
2012f
2013f
Real GDP (% growth) Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Canada
9.2 1.8 1.6 1.1 2.1 2.0 2.7 3.6 1.7 3.0 2.2
-0.4 0.7 2.7 0.6 1.3 -0.6 3.8 4.6 0.9 0.7 0.7
-9.0 0.2 0.0 -0.4 -0.7 -3.2 -0.3 -3.8 -4.5 -2.1 -2.8
6.1 2.6 1.9 3.1 2.5 3.0 2.4 4.0 3.3 3.0 3.2
3.1 1.2 0.6 0.2 1.7 1.8 1.3 5.0 5.1 3.0 2.5
0.7 1.4 1.8 1.5 1.4 1.8 2.5 2.9 3.0 2.2 1.9
1.0 1.5 1.9 2.0 1.7 1.7 2.4 2.7 3.0 2.5 2.0
Employment (% growth) Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Canada
0.7 0.8 1.6 1.9 2.4 1.8 1.7 2.4 3.8 3.5 2.4
1.0 1.2 0.9 0.6 1.2 1.5 1.7 1.7 3.1 2.0 1.7
-2.9 -1.4 -0.1 0.1 -0.8 -2.4 0.0 1.3 -1.3 -2.1 -1.6
3.5 3.1 0.2 -0.9 1.8 1.6 1.9 0.9 -0.4 1.8 1.4
2.8 1.8 0.0 -1.1 1.0 1.8 0.7 0.3 3.5 0.8 1.5
2.0 0.6 1.0 0.8 0.5 0.7 1.0 1.3 2.9 1.9 1.1
0.2 1.0 0.6 1.0 1.0 1.2 1.2 0.8 2.1 1.5 1.3
Unemployment rate (%) Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Canada
13.5 10.3 8.0 7.6 7.2 6.4 4.5 4.2 3.5 4.3 6.0
13.3 10.7 7.6 8.5 7.3 6.5 4.2 4.1 3.6 4.6 6.1
15.6 12.0 9.1 8.7 8.5 9.0 5.3 4.8 6.6 7.7 8.3
14.3 11.3 9.3 9.3 7.9 8.6 5.4 5.2 6.5 7.6 8.0
12.7 11.3 8.9 9.5 7.8 7.8 5.4 5.0 5.4 7.5 7.5
12.5 11.5 8.5 9.3 7.8 7.9 5.4 5.1 5.0 7.0 7.4
12.2 11.0 8.0 8.6 7.5 8.0 5.1 5.3 4.8 6.8 7.2
Housing starts (000) Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Canada
2.6 0.8 4.8 4.2 48.6 68.1 5.7 6.0 48.3 39.2 228.3
3.3 0.7 4.0 4.3 47.9 75.1 5.5 6.8 29.2 34.3 211.1
3.1 0.9 3.4 3.5 43.4 50.4 4.2 3.9 20.3 16.1 149.1
3.6 0.8 4.3 4.1 51.4 60.4 5.9 5.9 27.1 26.5 189.9
3.5 0.9 4.6 3.5 48.4 67.8 6.1 7.0 25.7 26.4 194.0
3.3 0.7 3.7 2.4 45.1 75.0 6.7 7.8 31.0 25.2 200.9
2.9 0.7 3.8 2.3 40.0 62.0 5.9 6.9 29.0 24.0 177.5
Consumer Price Index (% growth) Newfoundland & Labrador 1.4 Prince Edward Island 1.8 Nova Scotia 1.9 New Brunswick 1.9 Quebec 1.6 Ontario 1.8 Manitoba 2.1 Saskatchewan 2.9 Alberta 4.9 British Columbia 1.7 Canada 2.1
2.9 3.4 3.0 1.7 2.1 2.3 2.2 3.2 3.2 2.1 2.4
0.3 -0.1 -0.1 0.3 0.6 0.4 0.6 1.1 -0.1 0.0 0.3
2.8 2.1 2.7 2.5 1.7 2.8 1.2 1.7 1.2 1.7 2.1
3.2 2.9 3.5 3.3 2.9 2.9 2.7 2.6 2.4 2.2 2.8
1.9 1.7 2.0 1.7 2.1 1.8 1.4 1.4 1.7 1.4 1.8
2.1 2.0 2.2 2.0 2.1 2.0 2.1 2.0 2.1 1.4 2.0
e: Estimates for real GDP at market prices
f: forecast National Bank, Economy and Strategy Group
19 Summer 2012
Provincial Economic Outlook
Provincial Budgets Summary 2012‐2013
Revenue ($ 000 000) Total own-source revenue % of total revenue Federal transfers % of total revenue Expenditure
N.L. 7,210.5 6,483.8 89.9% 726.7 10.1%
P.E.I. 1,510.1 907.3 60.1% 602.8 39.9%
N.S. 9,270.3 5,517.1 59.5% 3,267.3 35.2%
N.B. 8,013.1 4,919.6 61.4% 2,728.4 34.0%
Qué. 69,395.0 50,336.0 72.5% 15,797.0 22.8%
Ont. 112,240.0 86,722.0 77.3% 21,776.0 19.4%
Man. 13,851.0 9,962.0 71.9% 3,889.0 28.1%
Sask. 11,290.9 9,225.5 81.7% 1,586.9 14.1%
Alta. 40,263.0 30,821.0 76.5% 4,915.0 12.2%
B.C. 43,101.0 33,757.0 78.3% 7,257.0 16.8%
7,468.9
1,585.0
9,561.3
8,196.0
70,879.0
126,393.0
14,424.0
11,195.9
41,149.0
43,869.0
(911.0) 895.0
(1,000.0)
(1,500.0) -0.5%
(15,153.0) -2.5%
Reserve- stabilization funds Adjustments Surplus/Deficit(-) % of GDP Return to balance budget Debt charges/ Revenue Debt charges/ GDP Net Debt /GDP-public act. 2011
79.8 (258.4) -0.9% 2014-15*
(74.9) -1.5% 2014-15
(211.2) -0.6% 2013-14
(182.9) -0.6% 2014-15
2013-14
11.5% 7.3% 9.5% 8.4% 11.9% 2.9% 2.2% 2.4% 2.3% 2.6% 29.1% 34.3% 35.3% 32.2% 49.8% * N.L.: Deficits expected for the current fiscal year and next.
(47.5) 113.0
2017-18 9.4% 1.7% 35.0%
(460.0) -0.8% 2014-15
(200.0) 47.5 0.1%
(886.0) -0.3% 2013-14
6.2% 3.5% 1.3% 1.6% 0.6% 0.2% 24.4% 5.8% -7.0% Source: ISQ and Provincial budgets
20 Summer 2012
(968.0) -0.5% 2013-14 5.8% 1.2% 15.1%
Provincial Economic Outlook
Disclaimer This presentation may contain certain forward‐looking statements. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not place undue reliance on National Bank Financial Group’s forward‐looking statements.
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Economic and Strategy Team: Sun Life Building 1155 Metcalfe Street Montreal, Quebec, Canada H3B 4S9
The present document is based on data published up to June 15, 2012. 21 Summer 2012
