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Canadian Economy Moves from Stimulus to Restraint, Says BMO Economics

Conditions favour growth in Western Canada, with Saskatchewan leading the country in 2011
Newfoundland & Labrador to remain strong
Central Canada to benefit from U.S. stimulus
Budget balancing underway in Ontario, Quebec, Atlantic Canada

TORONTO, January 12, 2011 – The Canadian economy has geared down from its post-recession sprint, with real GDP growth expected to clock in at 2.7 per cent in 2011, according to the Provincial Monitor report issued today by the BMO Capital Markets Economics Department.

“Looming fiscal restraint by the Provinces, firm commodity prices and a strong Canadian dollar are predominant factors shaping our forecast,” said Michael Gregory, Economist, BMO Capital Markets. “All of these factors appear to favour growth in Western Canada over Central and Atlantic Canada, and while we're a long way from the commodity-boom days of 2007, the regional growth divide should assert itself in the coming year.”

Growth is expected to top 3 per cent in Western Canada, led by 4 per cent growth in Saskatchewan as the agriculture sector bounces back from a flood-ravaged 2010. Meantime, Central Canada should soften to growth of 2.6 per cent in Ontario and 2.5 per cent in Quebec, while Atlantic Canada is expected to meander along at around a 2 per cent pace, with the exception of Newfoundland & Labrador, which will see the stimulus taps keep flowing.

The coming year will see stimulus spending reigned in across most of the country as capital spending programs, which were ramped up during the recession, begin to wind down. Additionally, the budget-balancing work will likely begin in earnest this budget season, and the restraint required to accomplish the task will be much larger in Central and Atlantic Canada, which face deeper fiscal holes.

“At about 3 per cent of GDP, Ontario's fiscal hole is the deepest in Canada, while other Provinces like Quebec and Nova Scotia have already begun the budget-balancing task through a series of tax hikes,” noted Mr. Gregory. “Meantime, Western Canada is in relatively healthy shape on this front, as shallower fiscal holes (if any) should be comfortably filled by stronger growth prospects and firming commodity revenues, at least outside of the natural gas space.”

Commodity-sector investment will also support growth out West. Resurgent oil prices have improved the economics in the energy sector, and activity in Alberta is gathering momentum. While the Province expects stable conventional crude production in the coming years, raw bitumen production is expected to grow about 10 per cent per year in the next two years, to more than 2 million barrels per day. Meantime, while Saskatchewan's agriculture sector is expected to rebound, continued growth in potash output will also provide support. Improving relative job prospects and relatively low jobless rates are again starting to drive East-to-West migration flows, which were positive for the three western-most provinces in the latest year.

Finally, with the dollar expected to hover around parity, trade is unlikely to add much to growth. “The manufacturing-heavy provinces in Central and Atlantic Canada will feel the biggest impact,” said Mr. Gregory. “Ontario saw a record real trade deficit (as a share of GDP) open up in 2010. Still, it's not all bad on this front as U.S. fiscal stimulus (notably lower payroll taxes and accelerated capital spending deductions) should support consumer spending in the coming year, and provide some help for Central Canadian exports in the face of the strong loonie.”

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

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Media Contacts:

Peter Scott, Toronto, PeterE.Scott@bmo.com, (416) 867-3996

Ronald Monet, Montreal, ronald.monet@bmo.com, (514) 877-1873

Laurie Grant, Vancouver, laurie.grant@bmo.com, (604) 665-7596