RBC releases quarterly provincial outlook

(July 5, 2005) The Canadian dollar’s drag on international trade will likely diminish in the coming year and real GDP growth will likely pick up by 2006 as Canada’s strong domestic economy provides a boost and offsets struggling trade sectors.

Authors of the RBC quarterly Provincial Outlook say real growth is expected to reach 2.7% by the end of 2005 and 3.2% in 2006.

Newfoundland has one of the most interesting growth stories — economists still expect the province to be a growth leader in 2006, but not everyone in the province is expected to benefit. British Columbia and Alberta are vying for the top spot in the list of the country’s growth leaders in 2005. Manufacturing in Ontario, Quebec and Manitoba are all expected to benefit from a faster than expected depreciation in the Canadian dollar, while GDP is expected to grow at a rate lower than the national average in Nova Scotia and Prince Edward Island — both provinces are net importers running trade deficits.

According to the report, Canada’ domestic economy has been running at full speed, mitigating the drop in net exports. With BC as a possible exception, the authors say overall they expect inflation in Canada to remain relatively benign.

On the west coast, the economy “appears to be experiencing good times at last.” Although unemployment is at its lowest level since January 1981, the authors say risks like upward wage and price pressures are starting to emerge in what might become an overheated economy in the run up to the Vancouver Olympics in 2010. The province is already becoming an expensive place to live — labour supply shortfalls are significant and housing affordability in the province is “far and away the worst in the country.”

Alberta meanwhile continues to be a growth leader. The boom-time province is obviously benefiting from higher energy prices with unemployment standing at 3.5%, the lowest level since 1981, average weekly earnings are up 5% compared to a year ago, consumer spending is on a tear, new motor vehicle sales are up 12% and there are no signs of slowing housing or consumer markets. Despite all this activity, inflation in the province remains low.

In Saskatchewan, housing markets are beginning to show weakness. After housing starts grew 12% in 2004, new home construction activity dropped off sharply, forcing economists to revise their forecast for the province. Depressed grain prices continue to affect the outlook for agriculture, but favourable investment conditions in commodity markets and good crop conditions are both helping to keep the province among the top growth leaders in the country.

Despite growing at a significantly weaker than expected rate of 2.3% last year, Manitoba and it’s “remarkably resilient manufacturing sector” is maintaining one of the lowest unemployment rates in the country and average weekly earnings are growing above the national average. On the other hand, the province is experiencing relatively flat employment trends and no growth in the overall labour force, despite strong migration into the province.

Ontario and Quebec are both expected to grow more slowly than the national average despite significant federal and provincial fiscal stimulus, but the authors say this is bound to enhance growth in both provinces going forward. New Brunswick meanwhile, the third most manufacturing-reliant province after Ontario and Quebec, “will be hard pressed to grow above the national average in 2005 and 2006.” More jobs should be created this year so long as commodity prices remain high, as international exports from the province are worth about 73% of real GDP.

Finally, economic growth in Newfoundland is directly tied to mega-projects like the White Rose offshore oil project and the Voisey’s Bay nickel mine. After growing nearly 17% in 2002 and another 6.8% in 2003, the provincial economy shrank 0.7% in 2004 as the companies wrapped up project construction. Since then job growth and housing starts have tailed off. When both projects go into production, nickel and oil output are expected to give a huge boost to provincial GDP growth, but employment will drop to a smaller core of operators and the value of the production will accrue to the project owners. Although Newfoundland is expected to top the list in 2006, economists say they expect 6.1% GDP growth for the province, the year will likely show slower employment growth and income growth and a slowdown in the province’s housing market.

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com