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June 30, 2009

Rebound in commodities will aid West: BMO

TORONTO

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 with 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 oilsands ($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.

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 spending growth.

DCN News Services

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