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MONTREAL, June 25, 2009 – The Quebec economy has succumbed to global recessionary forces after holding up relatively well early in the downturn, according to the Provincial Outlook report by BMO Capital Markets Economics.

“Real GDP will likely contract a better-than-average 1.6 per cent this year, before experiencing an average 1.9 per cent recovery in 2010,” according to Robert Kavcic, Economist, BMO Capital Markets.

Manufacturing activity in the province held up well through most of 2008 thanks to strength in aerospace, but by the turn of the year, activity deteriorated sharply as global demand tailed off. Manufacturing shipments fell more than 11 per cent year-over-year in the first four months of 2009, the steepest decline since at least the early 1990s.

Job losses have also begun to mount in the province, not only because of shrinking private-sector payrolls, but also due to a slowdown in public-sector hiring. As such, the unemployment rate has quickly moved higher, and will likely top 9 per cent in 2010. Still, the slackening of Quebec's labour market is modest compared to that in Western Canada and Ontario, the latter of which now has a higher unemployment rate for the first time since at least the early 1970s. Rising unemployment has cooled what had been relatively strong consumer and housing activity in the province, but both retail sales and home prices continue to fare better than the national averages.

One pillar of support that should remain in place is nonresidential construction. The Quebec government has embarked on a five-year, $41.8 billion infrastructure spending program (almost 3 per cent of GDP in fiscal 2009/10) that will continue to drive growth, as will ongoing investments by Hydro-Quebec.

The government is projecting four years of deficits as it temporarily applies the fiscal accelerator in an attempt to counter deteriorating economic conditions. The fiscal 2009/10 deficit is pegged at $3.9 billion or 1.3 per cent of GDP—less than half the size of the deficits seen in the early-1990s.

The government has a five-year fiscal and economic plan that outlines a path to return to surplus by fiscal 2013/14. To achieve this goal, it will limit program spending growth to 3.2 per cent per year starting in fiscal 2010/11, increase the Quebec Sales Tax by 1 percentage point to 8.5 per cent (effective January 2011) and index user fees to inflation.

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

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