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TORONTO, July 3, 2008 – The disparity in Canadian regional economic performance continues unabated, with surging commodity prices supporting growth in the West, and the strong Canadian dollar and slowing U.S. economy depressing manufacturing-heavy Central Canada, according to the new Provincial Monitor report from BMO Capital Markets Economics.

“While most provinces will lose momentum this year, record oil prices and the U.S. downturn will hit Central Canada particularly hard, keeping this regional disparity intact,” said Michael Gregory, Senior Economist, BMO Capital Markets.

The resource-rich provinces were the clear-cut GDP growth leaders again in 2007. Newfoundland & Labrador led the country with a 9.1 per cent surge, thanks to strong offshore oil output and a rebound in production at the Voisey's Bay nickel mine following strike activity in 2006.

Western Canada also rode commodity prices to another year of above-average real GDP growth, with the four provinces west of Ontario averaging 3.1 per cent, helped by a favourable mix of energy and mining output and exploration and construction activity. Meantime, economic growth in Central Canada and the Maritimes was below the national rate in 2007 as rising fuel costs, a strong Canadian dollar and slowing U.S. economy dragged on manufacturing.

This regional disparity continues, though more the result of a pronounced slowdown in Central Canada than accelerating growth in the West. The bulk of the weakness is in manufacturing and export-heavy Ontario and Quebec, where GDP growth will likely dip below 1 per cent for the first time since the 1990s. On average, western provinces are expected to grow 1.6 percentage points faster than in the East, up from 1.2 percentage points last year (excluding volatile Newfoundland & Labrador). This gap should narrow in 2009 when the U.S. economy – and Central Canada – recovers.

One trend that has started to reverse is the flow of migrants. Net interprovincial migration to Alberta hit a record 58,200 people in 2006, with many leaving Atlantic Canada in search of high-paying jobs. However, late-2007 saw a sharp reversal in this pattern, with Alberta recording its biggest quarterly outflow since 1988 and Atlantic Canada experiencing in-migration and accelerating population growth. With a number of construction projects on tap, Atlantic Canada could be at risk of facing its own skilled labour shortage, making for some interesting competition for workers between the West and East.

Canadian housing market activity has cooled sharply so far in 2008, confirming that the multi-year housing boom has indeed fizzled, particularly in the formerly white-hot West. National existing home sales were down 13 per cent year-over-year through May. The breadth of the declines is eye-catching, with 9 of 10 provinces seeing sales below year-ago levels through May – Newfoundland & Labrador is the exception – and 19 of 20 major markets down in May. The most pronounced declines have been in Alberta and B.C., with Saskatchewan also starting to lose momentum.

While sales are falling, new listings continue to rise, led by a whopping 58 per cent jump in Regina – the country's latest hot-spot. But with sales in the city down an almost equally whopping 28 per cent year-over-year, Saskatchewan's white-hot housing market is quickly balancing out, and downward price pressures like the ones we've seen in Alberta in the past year are likely to take hold in the coming months. Prices in Calgary and Edmonton are now down 2.4 per cent and 4.8 per cent year-over-year respectively, joining layoff-ridden Windsor as the only three cities with prices in the red.

Canada's western-led housing boom looks to be over, and the days of 40 per cent-plus price appreciation in Alberta are behind us and soon to be behind us in Saskatchewan as well. However, thanks to still-solid job growth, strong underlying economic fundamentals and more conservative lending (i.e.: no explosion in subprime mortgages), a balancing period is likely rather than a U.S.-style collapse.

The regional disparity is also evident on the fiscal front. Overall, the Canadian provinces continue to see black ink, with all but PEI expecting balanced budgets or surpluses for both the 2007/2008 and 2008/2009 fiscal years. The combined provincial surplus is pegged at just under $3 billion this year – excluding $750 million allowances in B.C. and Ontario – down from nearly $9 billion last year, largely due to smaller figures in B.C. and Alberta.

Provincial Growth Forecasts

British Columbia:
Economic growth in B.C. will slow to 2.2 per cent this year after 3.1 per cent growth in 2007, as headwinds in forestry work against a sturdy consumer and booming resource sector. A rebound is expected in 2009 as the U.S. economy recovers.

Alberta:
While Alberta was unseated as the growth leader last year, and should slow to 2.6 per cent this year, the province remains one of the engines driving Canada's economy, and above-average growth is expected through 2009.

Saskatchewan:
Saskatchewan's momentum should continue this year, with real GDP growth likely accelerating to 3 per cent, before losing some steam in 2009. Saskatchewan boasts Canada's hottest economy, with nominal GDP ballooning 11.4 per cent last year, and the province leading in retail sales growth and housing market performance.

Manitoba:
Manitoba posted another year of solid 3.3 per cent real GDP growth in 2007, as construction activity and a sturdy manufacturing sector buoyed the province's economy. While the strong Canadian dollar and U.S. slowdown are weighing on growth this year, the diversity of the manufacturing sector, mining activity and aggressive capital spending will all help moderate the slowdown in Manitoba to 2.1 per cent.

Ontario:
The Ontario economy is struggling against the backdrop of a strong Canadian dollar, high energy costs, and a U.S. downturn. While real GDP growth was a moderate 2.1 per cent in 2007, the sputtering manufacturing sector will likely drag down growth to 0.2 per cent this year before rebounding in 2009.

Quebec:
The Quebec economy grew at a healthy 2.4 per cent clip in 2007, boosted by strong domestic activity. However, momentum is fading this year as the surging loonie and U.S. housing recession chip away at manufacturing, with real GDP growth likely to slow to 0.6 per cent before rebounding in 2009.

New Brunswick:
New Brunswick posted below-average 1.6 per cent real GDP growth in 2007, as the negative impacts of the surging Canadian dollar and slowing U.S. economy offset an upbeat mining sector. The story should remain the same this year, with growth slowing to 1.2 per cent as U.S. export demand softens further.

Prince Edward Island:
Economic growth in PEI should slow to 1 per cent this year as consumer activity gives back some of its strength and the U.S. downturn continues.

Nova Scotia:
As in much of Atlantic Canada, Nova Scotia's economy is being supported by robust construction spending while facing stiff manufacturing headwinds,. As a result, growth likely slipped modestly to 1.4 per cent this year, but should rebound in 2009.

Newfoundland & Labrador:
Newfoundland & Labrador led the country in economic growth in 2007, with real GDP rising a torrid 9.1 per cent amid a rebound in offshore drilling and mining activity. This year, that boost will wear off and pull growth down to a below-average 0.9 per cent, but the underlying trends still look good.

The complete report can be found at www.bmocm.com/economics.

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