Recovery bumpy but still advancing in all provinces

Despite the third wave of the pandemic causing greater-than-expected disruptions this spring, the economic recovery remains on track from coast-to-coast. We expect half of the provinces this year to fully make up the ground lost last year, and three others coming quite close. Massive vaccination campaigns have been hugely successful—Canadians now boast some of the highest vaccination rates in the world—allowing provincial governments to ease restrictions and let high-touch industries reopen more fully this summer. Alberta, Saskatchewan, New Brunswick, P.E.I., and Newfoundland have in fact lifted all restrictions, though Alberta just announced it will reintroduce some of them, including wearing masks in certain indoor settings. Quebec, British Columbia, Manitoba and Ontario are in the midst of implementing proof of vaccination systems (including passports) that ultimately should make high-touch activities safer and more resilient as the fourth wave takes hold. Nonetheless, the delta variant poses a definite risk to provincial economies, though we believe vaccination should minimize the impact relative to previous waves.

With restrictions easing, we expect Canadians from across the country to spend more after adding massively to their savings since the start of the pandemic—reflecting both fewer available spending avenues and historic income transfers from governments. Sales at retail stores (including online) have jumped way up above 2019 levels, with PEI and BC—which eased restrictions earlier on—posting the strongest growth. We’ll see Canadians increasingly broaden their spending toward services in the next phase of the recovery. Our own cardholder data indicates that spending at hospitality and tourism merchants grew by close to 20% year-over-year in Quebec and Ontario in July, after residents of these provinces emerged from Canada’s most stringent lockdowns. And many of them traveled east! The number of overnight stays in PEI by residents of Ontario and Quebec more than quadrupled this summer relative to 2020. We expect high savings and new spending options will generate increased economic activity nationwide in the period ahead, so long as fourth-wave disruptions are contained.

While Canadians flock back to restaurants, bars and gyms, in many provinces tight labour market conditions are forcing some of these businesses to operate at reduced capacity. B.C., Quebec and P.E.I. are contending with record-high job vacancy rates. Employers in the hospitality, retail and health care sectors, in particular, are struggling to find workers. Labour shortages pose a greater challenge in those provinces (though we believe some of the lost output can be made up by increased productivity and automation).

A widespread return-to-class bodes well for educational services-sector GDP, specifically in the Maritimes where the sector accounts for a comparatively larger share of output. The return of many students to on-campus learning at Canadian universities across the country will boost provincial in-migration, bringing with them additional spending power and spurring higher demand for rental apartments.

Not only did the third wave prove more damaging to provincial economies than we previously anticipated, it now looks like supply chain disruptions will restrain growth in the near term. Accordingly, we have lowered our growth forecast for all but one province (Alberta) this year. We now expect Alberta (+5.9%), B.C. (+5.8%), and Quebec (+5.7%) to lead the pack, with B.C., Nova Scotia, and PEI the furthest along in their recovery (comparing 2021 projected output to pre-pandemic levels). Newfoundland and Labrador (+3.0%) still trails other provinces in our rankings due to slowing capital investment and oil production. Our revised growth forecast for Canada (5.1%) is more than 1.2 percentage point weaker than what we projected in the June Provincial Outlook. We’ve delayed some of this growth until 2022—we’ve bumped up next year’s growth from 4.0% to 4.3%.

British Columbia: Onwards and upwards

Having re-opened comparatively faster than other provinces, British Columbia has one of the highest year-to-date increases in our own cardholder spending measure. Clearly, many British Columbians are eager to put their high savings to work. Rampant job vacancies, however, will hinder the ability of accommodation and food service businesses to fully take advantage of these opportunities. After reaching sky-high activity levels, the housing market has cooled since spring. Yet buyers aren’t getting much respite as prices continue to rise amid a dearth of homes for sale. The good news is builders are working flat out to bring more supply to market. We project housing starts to reach a record high of 46,400 units this year. The building boom in the province and across the continent is a boon the BC wood product industry though widespread forest fires this summer have posed significant challenges in some regions. We have revised our growth forecast for British Columbia slightly lower to 5.8% this year—still more than enough to reverse last year’s 3.8% contraction.

Prairies: Will droughts interrupt robust recovery?

With the Prairie Provinces having fully re-opened in July and August, and Manitoba soon introducing a vaccine passport system, we expect the recovery to proceed at a brisk pace. Consumer spending is up meaningfully (cardholder spending is up ~5% from year-ago levels), and close to 90% of jobs lost during the pandemic have been recovered in the Prairies. Still, horrendous drought conditions are seriously impacting the region’s agriculture sector. This factor played a prominent role in us lowering our growth forecast for Saskatchewan to 3.8% this year (from 5.7% previously). We expect Saskatchewan’s 2021 crop production to drop materially.

Manitoba is experiencing robust growth in food-product manufacturing, after a new pea-processing facility came online this year. Stronger food product exports will more than offset an expected decline in wheat production. The province’s electric bus manufacturer continues to sign contracts with municipalities in the U.S., which bodes well for future manufacturing exports. We project a 4.8% growth in 2021, just enough to reverse a 4.8% contraction in 2020.

Our forecast remains largely unchanged for Alberta at 5.9%. The province’s energy sector is benefiting from stronger global oil markets and prices, and capital spending is expected to grow by 5% this year. Our own measure of cardholder spending is up 4% year-to-date, with the province exhibiting notable strength in accommodation and food services in recent months. In this province, housing starts have exhibited the strongest growth in the country, rising 14% in the second-quarter (relative to Q1). Alberta is still on track to fully recover in 2022.

Central Canada: Recovery ramps up

Provincial governments began to ease restrictions at the end of May in Quebec and mid-July in Ontario. By late-July, all Quebec regions reached the lowest alert level—the so-called “green zone”—and Ontario entered Stage 3 reopening. Both provinces will rely on vaccine passports to contain the social and economic costs of the fourth wave. Consumers welcomed the lessening of restrictions. Our own cardholder data indicates spending in July grew by 16% in Quebec and 17% in Ontario relative to pre-pandemic levels. Going forward, we expect consumers to continue to drive the recovery.

The red hot housing market has cooled in both Quebec and Ontario. Home resales have come down from all-time highs this winter—though remain still historically solid. A lack of supply has been a major restraining factor. However, this is being addressed by home builders. They’ve cranked up housing starts to decades-high levels. We project 2021 starts to jump 38% to 73,800 units in Quebec and 25% to 100,900 units in Ontario.

In Ontario, the global microchip shortage poses a significant challenge to the province’s auto industry. Motor vehicle and parts production and exports continue to trend lower, with recent announcements of temporary plant shutdowns across North America offering little scope for a quick turnaround. Persistent supply chain disruptions are one of the main factors causing us to revise our forecasts lower in both Ontario and Quebec this year. We expect Ontario’s economy to grow by 5.0% (down from 6.3% previously) and Quebec’s economy by 5.7% (down from 6.6%).

Atlantic Provinces: Moving steadily ahead

We project Newfoundland and Labrador to be the last provincial economy to fully recover with growth rates of 3.0% in 2021 and 2.5% in 2022. The recovery is held back by a few factors, with declining oil production playing a prominent role. In fact, production is falling at every major oil field off the province’s coast this year. Capital spending is also on the way down in the province as major projects either have wound down in recent years or are nearing completion—such as the Muskrat Falls hydroelectric project. Planned major capital spending is nearly 32% below 2019 levels, a decline of 0.4% year-over-year. On the plus side, the Terra Nova offshore oil project will be refurbished and restarted next year after being shut down two years ago. This will partly mitigate declines in oil production and capital spending.

We expect Prince Edward Island (up 3.6%), Nova Scotia (up 4.3%), and New Brunswick (up 4.2%) to fully recover this year. Residents of PEI and New Brunswick have been living mask-free since July, with restaurants and high touch industries operating at full capacity. Nova Scotians may soon join them in mid-September. Alongside higher consumer spending, robust export activity has driven the recovery and will continue to add wind to the sails of these provinces. In Prince Edward Island, alongside rebounding tourism activity, potato growing conditions are favourable. Lobster producers in both Prince Edward Island and Nova Scotia are benefitting from U.S. restaurants re-opening and surging demand for seafood from China. New Brunswick’s refined oil product exports have rebounded. High forest product exports drove much of the surge in the province’s exports this spring though we expect this to moderate through the remainder of this year.

Climate change taking growing economic toll

The Prairies have always suffered from droughts. But this year’s conditions are exceptional, with dry conditions expected to cover more of Saskatchewan than even the brutal drought of 1961. Wildfires in Western Canada, and severe storms in eastern North America have also hit this year. The economic costs of climate change are escalating: the average cost of floods and storms rose by 60% in the last five years relative to a decade earlier. Drought may hit more frequently, too: analysis for Canada suggests a warming climate could lead to drier conditions across the southern Prairies over the coming decades. We can do little to create rains in the driest years, but addressing climate change and adapting to its impact should be high on to-do lists of businesses, communities and policymakers to avoid many more years of hampered production and tighter budgets.

Climate change taking growing economic toll

The Prairies have always suffered from droughts. But this year’s conditions are exceptional, with dry conditions expected to cover more of Saskatchewan than even the brutal drought of 1961. Wildfires in Western Canada, and severe storms in eastern North America have also hit this year. The economic costs of climate change are escalating: the average cost of floods and storms rose by 60% in the last five years relative to a decade earlier. Drought may hit more frequently, too: analysis for Canada suggests a warming climate will lead to drier conditions across the southern Prairies over the coming decades. We can do little to create rains in the driest years, but addressing climate change and adapting to its impact should be high on to-do lists of businesses, communities and policymakers to avoid many more years of hampered production and tighter budgets.

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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.

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