Provincial Outlook - March 2021
While pandemic uncertainty will take a while longer to clear, the economic picture has brightened materially since our last Provincial Outlook report. The recovery across Canada has been stronger than we expected despite the ferociousness of the second wave and three provinces put under lockdown as 2021 rolled in. And with mass vaccination campaigns now getting underway, we believe the pace of recovery will pick up. We have made significant upward revisions to our provincial growth forecast from coast to coast. We now project Quebec to lead the way with a growth rate of 6.5% in 2021, followed by Ontario (6.2%), New Brunswick (6.1%) and British Columbia (5.9%). Newfoundland and Labrador (up 3.4%) still faces several challenges—including the winding down of major capital project construction—and will trail all others.
We expect pent-up demand, high household savings, and government support and stimulus measures to provide substantial thrust to all provincial economies. The respective speed and extent of the phasing out of restrictions will largely determine when the economic engine in each province will rev up. The rebound in commodity markets and prices have boosted the prospects for resource-heavy provinces. This was behind some of the larger revisions we made to our growth forecast—we boosted growth by 1.2 percentage points to 5.7% in Alberta. Capital spending intentions also point to some provinces seeing significantly stronger investment activity this year, including Quebec, New Brunswick and Ontario. While others like Prince Edward Island, Nova Scotia, and Newfoundland and Labrador, will see capex spending fall contributing to lower positions in our growth rankings for 2021.
Our upgraded outlook is unquestionably good news. We now project all provinces but Alberta, and Newfoundland and Labrador will reverse their 2020 GDP loss this year. Still, provincial economies will operate well below where their pre-pandemic trajectories. Labour market bruises will take longer to heal fully—we expect unemployment rates to stay high despite gradually improving. And the resumption of activity in the hospitality sector and other high-touch industries will be a slow and potentially bumpy process—constrained by the likely loss of capacity. In short, things won’t look and feel normal in 2021.
British Columbia: positive outlook for construction and exports
British Columbia started to ease restrictions before many other provinces, which will speed up the recovery of many of its service industries. We expect consumers will show up en force when the time comes. Strong housing demand and declining inventories will drive residential construction higher in the province. We have boosted our housing starts forecast by almost 3,000 units to 37,200 units in 2021. Similar developments across the continent bode well for British Columbia’s wood products industry and exports. Business and public sector plans will see capital expenditures rise by 5.7% this year. The province has major projects underway, including the LNG Canada terminal in Kitimat, Site C hydroelectric dam and Coastal Gas Link pipeline.
Prairies Provinces: rebound in commodity markets is welcome news
An improved outlook for the energy sector will significantly enhance the picture in Alberta. Higher oil prices will pump much needed cash into the economy, which among other things will help revitalize drilling activity in the province. The strong recovery in the housing market has been a remarkable story. We believe it will set the stage for a material rebound in residential construction this year. While the provincial economy is headed in a positive direction, the road ahead will be long. We expect full recovery from last year’s horrendous recession to be complete only in 2022—later than all other provinces except Newfoundland and Labrador.
Higher grain and other commodity prices will particularly benefit both Saskatchewan and Manitoba in 2021. Last year, Saskatchewan’s agri-food exports surged on growing global demand, reversing an earlier export decline caused by China’s ban on canola imports from Canada. We expect further gains this year, weather conditions permitting. Stronger global grain prices bode well for Saskatchewan’s potash production and exports. Experts expect farmers around the world to use part of their larger crop revenue to broaden fertilizer use. The improving prospects for the energy sector is also positive for Saskatchewan. We expect increases in both drilling and production this year.
Food-product manufacturing capacity expanded significantly in Manitoba thanks to a new world-class pea protein processing facility. Food production will follow a steep upward trajectory this year as the new plant ramps up. As it does, demand for provincial pulses and exports also will grow. Manitoba’s manufacturing sector will benefit from strong economic recoveries on both sides of the Canada-US border. New contracts awarded to Winnipeg electric bus manufacturer bode well for the province’s motor vehicle industry.
Full speed ahead in Central Canada
Canada’s most populous provinces have faced the most stringent restrictions nationally since the late-stages of 2020. Yet, we expect economic activity to quickly rebound as governments ease restrictions and service-sector businesses re-open. Significant pent-up demand and record-high household savings will get consumers to spend big. The housing market frenzy will drive up residential construction substantially. A surge in building permits signal housing starts are on track to reach the highest levels in decades in both provinces. As mass vaccination campaigns finally get off the ground, businesses are beginning to feel more confident. Capital investment intentions increased materially this year, up 10.8% in Quebec and 9.1% in Ontario. In Quebec, the public sector will account for more than two-thirds of the increase, as construction of public transit infrastructure kicks into higher gear. In Ontario, we’re encouraged to see a noticeable increase in manufacturing sector, which will complement continued spending on public transit.
Atlantic Provinces: The tide turns
Higher energy product prices will be positive for Newfoundland and Labrador but won’t be sufficient to fully turnaround the provincial economy. The province is one of only two that will fall short of 2019 output levels this year. Capital investment fell off a cliff in 2020 and 2021 doesn’t look brighter with a further decline of 0.4% anticipated due to the winding down of major projects. Newfoundland will continue to be plagued by costs associated with Muskrat Falls, and the uncertainty surrounding the feasibility of West White Rose. What’s more, the provincial government will be called on to make tough choices to address its precarious fiscal position.
On the other hand, we expect New Brunswick, Prince Edward Island and Nova Scotia to fully reverse last year’s drop in GDP. Nova Scotia has made great progress so far, having recovered 94% of jobs lost during the pandemic. Capital investment will drive growth in New Brunswick. Businesses and public sector companies plan to boost their capital spending by 10.1% this year. And we see some scope for tourism to lift Prince Edward Island’s economy—supplementing strong contribution from the province’s food product sector. We believe it increasingly feasible to reach mass immunization against COVID-19 by mid-year, which could enable the loosening of travel restrictions within Canada. Freer travel would benefit all Atlantic economies.
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.
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