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MONTREAL, QUEBEC--(Marketwire - Oct. 12, 2011) - Cooling of economic growth in Quebec will be offset by a still-solid level of capital spending, according to the Provincial Monitor report released today by BMO Capital Markets Economics.

"Ongoing Hydro Quebec investments continue to support growth, while the Plan Nord will see the Province inject $2.1 billion into infrastructure, opening a path to resource development in the northern reaches of the province," said Robert Kavcic, Economist, BMO Capital Markets. "This will offset the ramping up of fiscal restraint and the impact of sluggish U.S. demand on exports and manufacturing."

Mr. Kavcic forecasts that Quebec's economy will grow 2.1 per cent this year, and remain at a below-average pace through 2012. "Fiscal stimulus has turned to restraint in Quebec, as the Province is now fully in budget-balancing mode. The restraint is being felt on multiple fronts, including a slowdown in program spending growth to 2.5 per cent per year over the 5-year forecast horizon, which is a contraction in real per-capita terms. Meantime, the tax burden is rising as well, with a further one percentage point QST increase in January combined with other measures."

The manufacturing sector is currently seeing a solid recovery, although sluggish U.S. growth will represent a challenge. "Manufacturing sales were 4.3 per cent above year-ago levels through July, led by metals, machinery and electronics. Aerospace has also been a strong contributor," stated Mr. Kavcic. "While job growth in the sector has yet to stage any kind of comeback, services and construction have picked up the slack, and Quebec's 7.3 per cent jobless rate in September was down from above 8 per cent a year ago."

"The Canadian dollar, while down from its recent heights, is still robust enough to provide an opportunity for Quebec businesses to invest in their operations by purchasing machinery and equipment," said Victor Pellegrino, Vice-President, Commercial Banking, Metropolitan Montreal, BMO Bank of Montreal. In so doing, businesses will be able to boost productivity and enhance their competitiveness."

Mr. Kavcic noted that the rising tax burden will cut into disposable income and consumer spending. "Retail sales in the province accelerated to more than 7 per cent year-over-year before the first QST hike was implemented, but growth has since moderated."

In this spring's Budget, the Province projected a $3.8 billion deficit for fiscal 2011-2012 (1.2 per cent of GDP), following a $4.2 billion shortfall in fiscal 2010-2011 (1.3 per cent). After a $1.5 billion deficit in fiscal 2012-2013, a return to balance was projected for fiscal 2013-2014, but this latter outcome left un-detailed slightly more than $1.0 billion in deficit-reduction measures. The Province also reached an agreement with the Federal government on the QST, and will receive $2.2 billion in compensation for its past move to harmonize. The Province, however, will have to make some changes like no longer applying the QST on top of the GST.

The full Provincial Monitor report can be downloaded at www.bmocm.com/economics.