Provincial Outlook - December 2021
While the pandemic still poses a significant risk to all provincial economies, the recovery is proceeding generally well. The majority of provinces have sustained strong enough momentum in 2021—in many cases the strongest in decades—to fully reverse the contraction in 2020. We expect positive trends to persist in 2022. High vaccination rates bode well for restrictions continuing to ease across the country, enabling the recovery to further broaden. Households will be keen to rotate some of their spending toward services though they will still have the means to drive up goods consumption too. Businesses will look to invest more, pressed by increasing capacity constraints, labour shortages and the need to address climate change. And governments will continue to play a constructive role by maintaining support where needed and stimulating the recovery of hard-hit sectors.
Omicron the latest worry
The recent discovery of the Omicron variant presents a downside risk to our outlook. There is a great deal of uncertainty surrounding the severity of the variant and the required intervention to stop its spread both at home and abroad. Should additional restrictions be necessary, this would impact the trajectory of provincial output growth in 2022. The level of growth reflected in our updated outlook does not consider additional restrictions.
Growth to be sustained from coast to coast
We project all provincial economies to continue to grow in 2022. However, the pace will be generally slower than it was in 2021 (Saskatchewan will be the lone exception) as the recovery phase matures. In fact, the relative maturity of the recovery will be a significant growth differentiator across provinces. We expect the Maritime Provinces, British Columbia, Quebec and Manitoba to be the furthest ahead when the books close on 2021—reflecting either a relatively smaller economic contraction in 2020 (Prince Edward Island, Nova Scotia, New Brunswick and Manitoba), strong rebound in 2021 (Quebec) or both (British Columbia). These provinces will bump up against capacity limits earlier on in 2022, causing overall momentum to decelerate more rapidly.
Saskatchewan, Alberta and Ontario to lead the way
On the other hand, still with some lost ground to cover, we expect oil-producing provinces and Ontario will remain in catch-up mode into 2022. This will apply resistance against the growth slowdown in these provinces. In the case of Saskatchewan, we project growth to accelerate to 5.6%, topping our 2022 provincial rankings, thanks to a ramp-up in capital investment, improved crop conditions and a material turnaround in the energy sector. These factors will also support growth in Alberta (4.7%, second in our rankings). Ontario (4.4%, third) will get a boost when supply chain issues are resolved.
Consumer-led growth across the country
All provinces will share a number of common trends. All will see consumers continuing to play a central role in driving up activity in 2022 (and beyond). Canadians from coast to coast have accumulated record levels of savings during the pandemic that we expect will be increasingly converted into purchases. We believe there is significant pent-up demand for close-contact services in every province.
Immigration to add a new dimension
The resumption of immigration will be felt virtually everywhere in the country. The reopening of our border is set to unleash a wave of newcomers, as Canada works toward meeting higher targets for new permanent residents (to 401,000 in 2021, 411,000 in 2022 and 421,000 in 2023). We expect provincial population growth to quickly return to pre-pandemic levels, with some provinces (e.g. in Atlantic Canada and British Columbia) possibly exceeding them if recent interprovincial migration trends persist.
Tight labour market will remain a challenge, especially in B.C. and Quebec
The arrival of new workers couldn’t come soon enough for many employers. Provincial labour markets have tightened substantially in the past year. So much so that labour shortages will be among the top challenges to address in 2022 across most of the country. Those issues are currently most severe in British Columbia and Quebec though job vacancy rates are well above historical norms in every province. We expect the war on talent will result in widespread wage increases, further adding pressure on businesses facing escalating input costs.
Supply chain disruptions to stay top of mind in provincial manufacturing hubs
Global supply chain disruptions are a big reason many input (and output) costs are going up. They’ve caused serious headaches to manufacturers—especially those in the motor vehicle and parts industry—who have had to scale back operations due to parts shortages. Other sectors from retail trade to construction also feel the pain. These are complex issues that will take time to resolve. But we expect industrial activity to snap back across the country when they are resolved. We’re penciling it in as a significant plus for growth in Ontario in the latter half of 2022.
Eastern tilt to inflation to flatten in 2022
Higher inflation will prevail in all provinces in the coming year. We expect the eastern tilt—inflation having been strongest east of Manitoba in 2021—to become less pronounced, though, as consumers resume more normal consumption patterns.
Housing to cool across the country, but still hot
Finally, housing trends will look quite similar from coast to coast as exceedingly hot activity cools down amid rising interest rates, broadly deteriorating affordability and a moderation of pandemic-induced market churn. Responding to the dearth of supply issue will keep home builders very busy though we expect housing starts to generally moderate from exceptionally strong levels in 2021.
BRITISH COLUMBIA – Rebounding strongly despite natural disasters
Despite being hit by a series of natural disasters— including, most recently, unprecedented floods that cut off several communities in the interior of the province—British Columbia’s economy staged one of the stronger recoveries in Canada in 2021. We expect much of that momentum will carry into 2022. BC consumers still have a lot of savings fire power to deploy on goods and services purchases. The resumption of immigration will further stimulate consumption and investment. The wider re-opening of the Canadian border will spur the tourism sector. And continuing work on major capital projects will generate substantial economic activity. We project growth to stay solid at 4.2% in 2022, down from an unsustainable 5.6% in 2021.
To be sure, November’s massive floods pose significant near-term challenges for transportation, agriculture, forest products and many other industries. We expect disruptions to the broader provincial economy to ease fairly quickly as repair work restore key transportation corridors—though some communities face a much more difficult recovery. In fact, repair work will add to provincial economic growth, whereas the destruction of property and infrastructure will largely go unaccounted for in GDP numbers.
With jobs lost during the early stages of the pandemic now fully recovered, British Columbia’s labour market enters 2022 in a tight position. Labour shortages are a bigger issue than in any other province—BC has the highest job vacancy rate in the country (7.4% as of September2021). We expect this will remain a central focus of employers. Rising in-migration will help but isn’t likely to provide the entire solution.
Net migration from other provinces (mainly Alberta and Ontario) reached a 25-year high during the pandemic. We expect a sharp rise in immigration in 2022 will boost population growth to pre-pandemic levels, including a material increase in working-age individuals.
Non-residential investment will continue to play a prominent role in BC’s growth story. We expect work on major capital projects—including the Trans Mountain pipeline, Site C hydroelectric project, LNG Canada liquid natural gas terminal and Coastal Gaslink pipeline—will be huge economic catalysts in several regions of the province.
ALBERTA – Solid economic recovery in motion
Amazing what a rebound in global oil and gas markets will do to Alberta’s economy. Stronger demand and higher commodity prices have bolstered the provincial energy sector in 2021. This set a broad economic recovery in motion that we expect will be largely sustained in 2022.
Alberta’s economy has much ground lost to make up for. The pandemic drilled a deep hole—the deepest among the provinces with GDP falling nearly 8%—last year. And this occurred as Alberta had not fully recovered from its 2015-2016 recession. We expect a growth of 4.7% in 2022, after a nation-leading 5.9% in 2021 (tied with Quebec).
The oil and gas industry’s current upcycle has longer to run (though the Omicron variant could cut it short if recent global market volatility is any indication). RBC revised its 2022 forecast for oil prices (WTI) higher since our last Provincial Outlook on the strength of global demand. Improving cash flows will support stronger drilling activity and increasing crude production. New pipeline capacity expansion (including Enbridge’s Line 3 replacement) will further facilitate delivery to market. We expect the sector’s capital expenditures to trend higher though they will remain a fraction of what they were before oil prices crashed in mid-2014.
Investment in Alberta’s renewable energy sector, however, is poised to grow much more rapidly. Construction of Canada’s largest solar farm (Travers Solar) is underway in a part of the province known as Canada’s Sun Belt. Alberta currently has 61 solar projects underway and set to be completed by the mid-2020s. We believe Alberta is well positioned to attract more investments of this type and size in the years ahead.
Solid economic growth in 2022 will also find support outside the energy sector. We see substantial scope for the agricultural sector to spring back from the drought-induced downturn in 2021 (wheat and canola yields plummeted 40% and 30%, respectively). We expect improved labour market conditions, rising consumer confidence, high household savings and stronger immigration to boost consumer spending and residential investment. Alberta is in fact one of only two provinces for which we project housing starts to pick up to 2022.
SASKATCHEWAN—A Brighter year ahead
For Saskatchewan, 2021 proved to be more challenging than anticipated. The fourth wave of the pandemic hit the province particularly hard, and severe drought conditions hammered crop production. We have revised our 2021 growth forecast lower from 3.8% to 3.1%. We expect the provincial economy will make it up in 2022, when we see growth accelerating to a nation-leading 5.6%, provided authorities can keep covid restrictions to a minimum and crop conditions improve. There’s scope for a significant increase in exports. Strong global demand for fertilizers paired with tight supply and high prices will provide potash producers with opportunities to expand production. It’s a similar story for pulse producers, who are facing stronger demand amid droughts in other producing countries (most notably in India and Turkey). The outlook for energy exports is also brighter with higher commodity prices likely to stimulate oil and gas production. And capital spending is poised to ramp up materially with BHP announcing it will go ahead with construction of the $12-billion Jansen Potash Mine—the province’s largest project ever.
The potash investment will be a significant development contributing materially to Saskatchewan’s economy for years to come. Once operational in 2027, the mine will produce 4.4 million tonnes of potash annually, a four-fold increase from the province’s current level of potash production.
The upcoming oil and gas drilling season is off to a stronger start, with close to 70% more drilling rigs operating in November 2021 relative to a year earlier. This activity is supported by producers’ healthier cash flow position arising from the significant run-up in oil and gas prices, and points to a rise in production in 2022.
While crop yields were hammered by severe drought conditions, surging commodity prices have cushioned the blow. The province’s food product exports still held up in 2021, as canola prices (+75% year-to-date) and wheat prices (+62%) surged. These conditions have minimized the impact on farmer’s incomes and in turn, provincial tax receipts. We believe, businesses, households, and governments will generally be in a good position to contribute to economic growth in 2022.
MANITOBA – Soaring commodity prices lend a helping hand
As 2021 draws to a close, most signs point toward Manitoba’s economy being essentially back to where it was before the pandemic. Strong commodity prices have provided substantial support throughout the recovery, as did booming construction investment. To date, the vast majority of jobs lost during the pandemic have been recovered, and employee compensation has grown at a rate above the national average.
Manitoba is in a similar situation to other Prairie Provinces, where soaring commodity prices resulting from tight canola and wheat markets helped cushion the impact of lower crop yields, as export receipts remain well above pre-pandemic levels. The same is true for oil production. The number of physical barrels produced daily in Manitoba has fallen 15% in 2021 (year-to-date), while prices drive the value of energy product exports higher. We expect elevated commodity prices to continue to bolster crop and energy exporters’ cash flows in 2022.
Throughout the pandemic, food product receipts have been largely responsible for growth in Manitoba’s manufacturing sales. In 2022, additional capacity will be added to the province’s pea processing industry, as Manitoba positions itself as a plant-based protein hub. The province’s newest pea processing facility (Roquette Pea Processing manufacturing plant) is set to ramp up production to full capacity in 2022, boosting output in this sector by 50%. The outlook for other manufacturing industries is mixed with supply chains issues still likely to pose a challenge for some time.
In line with the widespread trend across Canada, Manitoba posted record growth in home resales in 2021, up 55% since 2019. We expect activity to cool in the coming year though still remain historically strong. Housing demand will get support from rebounding immigration. In 2021, Manitoba issued 10,000 invitations through its Provincial Nominee Program, which we expect will lead to a rising number of successful candidates. Well qualified newcomers will broadly benefit Manitoba’s economy, filling job vacancies, boosting consumer spending, and generating additional tax revenue for the province.
ONTARIO – Signs of recovery are everywhere
Despite a slower pace of re-opening than in most other provinces, signs of recovery are almost everywhere in Ontario. Ontarians have flocked back to restaurants, gyms and hockey arenas this fall, secured by high vaccination rates and their strong spending power. Yet nagging supply chain disruptions weigh on the provincial economy, holding it back from achieving a full recovery in 2021. Full recovery will be the story for 2022 when those supply chain issues ease and consumers dig deeper into their savings. We project Ontario’s economic growth to clock in at 4.4%, unchanged from 2021 (4.4%) and ranking as the fastest rate east of the Prairies.
Booming residential investment did much of the heavy lifting during the early stages of the recovery. Both home resales and housing construction (including renovations) soared. So did property prices. While we don’t expect record activity to be sustained—the cooling trend is already in motion, in fact—housing will continue to be major economic engine in Ontario. This will be the case not only in the province’s major urban areas but also in smaller communities where an influx of big-city migrants will sustain solid demand.
We expect non-residential investment also to be a part of Ontario’s growth story. The provincial government is boosting spending on public infrastructure by 11% in FY 2021-22. Major projects include transit expansion and new highways. Ontario automakers plan to collectively invest $4 billion in transformative electric vehicle (EV) investments at their facilities. Long-term, Ontario is pushing hard to develop the so-called Ring of Fire, a high-potential mining region in Northern Ontario that contains key minerals used in the production of electric vehicle batteries.
The resumption of motor vehicle production at the GM Oshawa plant is good news for the province’s manufacturing sector, which is otherwise challenged by supply chain bottlenecks. The plant will directly create 1800 new jobs and contribute to stronger manufacturing output in 2022.
Ontario’s world-class tech sector has thrived during the pandemic. Nearly 100,000 new tech workers have been hired, accounting for over half of Canada’s hirings in the sector. And Toronto outperformed other North American tech hubs, including Seattle and Vancouver, with a job growth of 26%. We see significant scope for further expansion of this sector in the coming year.
QUEBEC – Frenetic pace won’t (or can’t) be sustained
Quebec’s economy staged an impressive comeback in 2021. Consumers, businesses and governments got seriously going when restrictions eased, fueling a projected 5.9% growth—tying Alberta for top spot in our rankings. And it’s not over yet. We see further room for expansion in 2022 as provincial households tap into their huge savings to boost their spending, and businesses invest more to address mounting capacity issues. Yet we expect the pace to slow down materially to 3.5%. Labour shortages and other capacity limitations will increasingly bite, and an expected cooling in the housing market will contribute less to the economy.
With slack rapidly disappearing—GDP was back to pre-pandemic levels in the second quarter of 2021, far ahead of Ontario (expected to be at that stage in early 2022)—2022 is poised to be a year of growing strains for Quebec’s economy. Stress is already palpable in the labour market where positions go increasingly unfilled. At last count, a record-high 280,000 jobs were vacant in the province, or 7.3% of the total. Quebec’s unemployment rate (5.6% in October) is among the lowest in the country and rapidly closing in on its pre-pandemic, multi-decade lows. We expect tight labour market conditions to persist amid solid demand and an aging workforce opting to retire in growing numbers. The war on talent will only intensify in Quebec.
And so will the need to invest in machinery, equipment and technology. We expect firms to be under mounting pressure to boost productivity, improve efficiency and bring part of supply chains closer to home. Rapidly rising costs will only add to that pressure.
As interest rates rise in the period ahead, housing affordability strains will become too much for a rising number of home buyers in the province. This will temper activity in a sector that played a central role in the economic recovery since the summer of 2020. We expect residential investment to moderate from record (and clearly unsustainable) levels in 2021. We project 55,000 housing starts in 2022, down from a 34-year high of 71,500 units in 2021.
NEW BRUNSWICK – Into higher gear
We believe New Brunswick is now entering the expansion phase of its economic cycle. Like other Maritime Provinces, all signs point to its achieving full recovery in 2021. That’s mainly thanks to generally low covid case counts (notwithstanding a spike this fall) permitting a quicker easing of restrictions. Strong demand and surging prices for commodities (including lumber and petroleum products) have also helped kick the recovery into a higher gear. Our projected growth of 4.1% would more than reverse the 3.2% decline recorded in 2020, placing the provincial economy ahead of most others relative to pre-pandemic levels. Reaching the expansion phase will be associated with slower growth though. We forecast to pace to ease to 2.6% in 2022, softer than the national average of 4.3%.
While off their all-time peak in May, lumber prices remain well above pre-pandemic levels supported by strong housing starts in the United States and Canada. We expect demand for New Brunswick lumber to stay elevated in the coming year as low housing inventories across the continent continue to stimulate homebuilding activity. The recent US decision to raise tariffs on Canadian softwood imports poses a risk though solid demand and historically high prices should attenuate the impact on producers.
Energy product exports will also keep driving growth in 2022. We expect demand for gasoline to increase as more workers commute to work and summer road trips resume, boding well for the province’s refinery operations.
Demand for housing has boomed through the pandemic, in part driven by an influx of migrants from other provinces. New Brunswick led the Maritimes with the strongest increase in home resales in 2021 (up 28% based on the first 10 months of the year). We expect housing activity to remain hot in 2022 albeit a few degrees cooler than it was in 2021. Positive interprovincial migration flows and the resumption of immigration will provide support.
The outlook for the 2022 tourism season is bright. The provincial tourism sector will receive a boost from cruise ships returning to the port of Saint John (docking is already scheduled for 2022).
NOVA SCOTIA – A rebound fueled by population growth
For Nova Scotia, 2021 was a year of robust growth. Our current 4.0% projection places the province in a group of only five expected to fully reverse the decline in activity in 2020. Rebounding goods and services consumption has driven the recovery so far, alongside record residential investment. We expect momentum to slow to a rate of 2.5% in 2022, as the economy hits capacity constraints. We see stronger population growth, solid residential investment, growing export opportunities and busy manufacturing activity providing scope for the provincial economy to expand.
Nova Scotia has significantly benefited from interprovincial migration during the pandemic. The province welcomed a net 10,000 new residents from other provinces in the four quarters ending Q2 2021—a new record. This has set population growth on an impressively strong track in 2021. There’s scope for even larger gains in 2022 as immigration bounces back from pandemic lows. We believe this will partly help address labour shortages in the province, as well as boost consumer spending and provincial tax revenues.
But a further influx of Canadians from higher-priced markets would maintain upward pressure on housing prices. Many newcomers have been lured by the province’s relatively affordable housing costs, squeezing out local buyers in the process. This has contributed to a historic shrinking of inventories and strong competition between buyers. The average home price has soared 43% during the pandemic, the largest increase among the provinces. We expect exceptionally tight demand-supply conditions in the housing market will keep homebuilders very busy in 2022. We project housing starts to stay near a decades high at 5,200 units, down slightly from 5,600 units in 2021.
The outlook for Nova Scotia’s manufacturers is generally positive. We expect seafood producers will benefit from higher restaurant demand for lobsters in the U.S. and China post-pandemic. An anticipated uptick in road trips will bolster the prospects for tire production in the province. And work on the overhaul of the Canadian Navy’s aging warships and other contracts will keep over 1,000 Nova Scotia workers employed, while generating significant economic benefits.
PRINCE EDWARD ISLAND – Storms gather over solid economic upturn
All signs point to PEI’s economy having already made a full recovery from the 2020 recession. Our projected growth of 3.6% in 2021 would put PEI comfortably above its pre-pandemic output. In 2022, we expect strong residential investment, further recovery in the manufacturing sector and robust consumer spending will drive the expansion at a rate of 2.7%.
PEI’s agri-food sales have rebounded significantly since restaurants re-opened in Canada and the U.S. We expect growing demand for PEI’s lobster and potato products will continue to bolster provincial exports into 2022. PEI potato producers grew one of the largest crops in decades in 2021 and receive strong prices thanks to drought conditions in other provinces. But Canada’s recent decision to suspend fresh PEI potato exports to the United States due to the potato wart disease is casting a dark shadow on the industry. If prolonged, the suspension could materially impact the province’s exports.
The outlook for residential investment remains bright in the year ahead, as elevated in-migration boosts demand. PEI welcomed the highest number of interprovincial migrants and immigrants on record in 2021. We see this continuing in 2022.
Higher shelter and transportation costs have driven PEI’s inflation above that of other provinces. We expect inflationary pressures to persist through much of 2022 (with the annual inflation rate staying above 4%) though ease progressively as supply chain issues are addressed.
So far in 2021, PEI has reported the highest growth of retail sales growth nationally. When tourism returns on a more fulsome scale in 2022, this will drive spending in the province even higher. Overnight stays in PEI hotels were still 47% lower in 2021 than in pre-pandemic summers. In 2022, we expect PEI’s tourism industry will make a strong comeback, as 75 cruise ships are already scheduled to dock at the Port of Charlottetown. PEI is still struggling to fill job vacancies in the tourism sector. As the industry recovers and the sector moves to operate at full capacity, this may exert upward pressure on wages.
NEWFOUNDLAND & LABRADOR – A long road to full recovery
Newfoundland and Labrador will fully recover from the 2020 downturn later than most other provinces, with more challenges ahead. As an oil-producing province, it suffered a double whammy in 2020—an oil price crash and pandemic-induced recession—that drilled a deep hole in its economy (GDP falling 5.4%). Our projected growth rates of 3.0% in 2021 and 2.5% in 2022 would come short of the province climbing all the way back. We’ll need to wait until 2023 for this.
In 2020, Newfoundland’s oil production volumes were the highest in a decade. But in 2021, production has fallen by 7.4%. Output is waning as reserves shrink at Hibernia and White Rose oil fields. And global oil prices have recently seen tremendous volatility caused by the Omicron variant, which could weigh on the value of province’s output if sustained. Terra Nova’s restoration, however, is set to deliver more production towards the end of 2022. This will provide some lift to the province’s total oil production in 2023, more than offsetting declines in other fields.
Higher levels of mineral production, strong retail sales growth, and the return of tourism will bolster Newfoundland’s economy in 2022. Higher iron ore (+11% year-to-date) and nickel (+39%) production will benefit the province’s exports, as price conditions remain elevated for both minerals. Interprovincial migration will support retail spending, bring high-skilled workers into the province, and boost tax revenues.
Stronger price growth throughout the pandemic has translated to a larger revenue base for Newfoundland. It has also driven up nominal GDP, which lowers the province’s net debt-to-GDP ratio. Debt servicing costs are currently low, but as the Bank of Canada moves to adjust rates in 2022, we will see higher interest on debt over the medium term. Newfoundland’s Fall Fiscal Update revised the province’s deficit 28% lower to $595 million thanks to higher revenues (up $186 million) and lower expenses (down $45 million).
Download the full Provincial Outlook report for provincial forecasts.
About the Authors
Robert Hogue is a member of the Macroeconomic and Regional Analysis Group, with RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for the provincial economies. His publications include Housing Trends and Affordability, Provincial Outlook and provincial budget commentaries.
Carrie Freestone is an economist at RBC. She provides labour market analysis, and is a member of the regional analysis group, contributing to the provincial macro outlook.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.