News Releases

TORONTO, June 25, 2009 – 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 Capital Markets.

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 oil sands ($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 year.

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.

- 30 -