RBC June 2009-Provincial Forecast

Many provincial economies “took it on the chin” late last year and early this year, resulting in 2009 growth being widely revised down. However, recent developments have lent support to our view that growth will return by the second half of this year and be maintained through 2010. The latest available data point to a moderating pace of both job losses and declines in real GDP in Canada, seen as evidence that the worst of the recession is likely behind us.

Improved commodity markets are anticipated to reignite capital expenditures by businesses in Canada. This will be supplemented by relatively aggressive public sector spending on infrastructure. The most recent budget season almost universally brought significant measures to stimulate provincial economies, primarily in the form of increased spending on public infrastructures but also, in some cases, tax cuts and other fiscal incentives – Alberta being the lone exception, preferring to hold the line on spending.

The price to pay for this public spending binge is the return of government budget deficits. Collectively, provinces are projecting to run deficits totaling almost $29 billion this fiscal year, including a recent adjustment in Ontario to account for higher-than-expected financial assistance to troubled automakers.
Only Saskatchewan and Manitoba, the two best economic performers, will remain in the black. Even Alberta is projecting its first budget shortfall in 15 years.

Nonetheless, three provinces are still expected to grow this year — Saskatchewan, Manitoba and Nova Scotia — but barely so. These provinces continue to benefit from growth drivers (mainly capital spending) with sufficient force to overwhelm weaker elements. All other provinces are projected to contract.

Alberta — Capital investment, consumers sitting out 2009

Alberta’s economy is in the midst of a severe slump that is taking a toll on its job market, which not so long ago was showing all the signs of overheating. Mounting layoffs in the province have caused a surge in new employment insurance claimants since last fall – their numbers recently jumped 145% above year-ago levels, the sharpest increase among provinces.

The plunge in energy prices during the latter half of last year, elevated construction costs and the credit crunch have thrown several capital projects off course since last summer and spending plans have been scaled back considerably. In the all-important oilsands sector, more than one-half of the $130 billion in proposed projects was on hold at the end of April.

Further hampering performance will be a sharp drop in consumer spending. Alberta consumers have clearly hunkered down in the face of the recent downturn in the energy sector and deteriorating job market. Retail sales plummeted by more than 10% year-over-year in the first quarter with new motor vehicles hit the hardest, down 29% by units sold. We expect consumer spending to start improving gradually through the latter part of the year but will remain a drag for the year overall. Real GDP is forecast to decline by 2.5%, the province’s most severe contraction since 1982.

Read the full report at http://www.rbc.com/economics/market/pdf/provfcst.pdf