Blue Book: 2021 Atlantic Provinces Outlook

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Prince Edward Island. Click here to play video.

Robert Kavcic | March 31, 2021 | Economic Insights

Robert Kavcic | March 31, 2021 | Economic Insights

BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Economist, provided an overview of the macroeconomic indicators across Canada, while I discussed the provincial economic trends.

In all four provinces east of Quebec, economic growth is expected to lag the national recovery, but a closer look reveals different factors driving the projections.

New Brunswick’s expected growth of 3.6%, for example, comes on the heels of a contraction in 2020 that was much milder than most other regions. Meanwhile, service-sector employment has rebounded past its pre-COVID-19 levels.

In Nova Scotia, modest COVID-19 mitigation measures have dampened economic activity, particularly in the tourism industry, and the outlook for the 2021 travel season is in limbo due to a slow vaccine rollout.

After leading the country in economic growth in 2019, Prince Edward Island’s economy suffered a serious blow in 2020. So while its 3.7% projected growth trails Canada as a while, it still represents a strong rebound. Like Nova Scotia, the slow vaccine rollout presents a challenge to summer tourism.

Newfoundland & Labrador’s expected growth of 4.3% represents that best projection among the Eastern provinces. A strong rebound in oil prices should boost its near-term prospects, and the unemployment rate has returned to a normal level.

Overall, real estate is booming in Atlantic Canada, and the region’s fiscal has largely improved in recent years. While longer-term demographic pressures remain, the region is currently benefitting from inward migration from the rest of the country.

Read the entire Blue Book here.

Transcript

Robert Kavcic:

All right, thanks. I'll pick it up there. What I'm going to do is I'm going to go through a few other topics here on things like the labor market, the housing market, the fiscal policy, some things that are very topical at the moment, and I'm going to do so with an eye specifically on Atlantic Canada. I realize that these are big topics to knock off in 10 or 15 minutes. If there are further issues after we move through this, happy to take any more detailed questions after we wrap up.

First of all, if you take a look at our regional growth forecast, what's unique this time around is that most of Canada, or pretty much all of Canada is more or less in this shock together. Typically, when we look at "normal year" what's happening in the Canadian economy, we usually say that the headline growth numbers really mask what's happening at the regional level, and that's a little bit different today because we're all more or less in this pandemic together. So, the growth numbers do look different.

Some of the provinces with the bigger urban centers, like the Ontarios, the Quebecs, or the provinces that were exposed to oil early on, you can see in 2020, had much tougher shocks. The flip side is that coming out over the downturn into 2021 and into '22, those provinces look like they're going to rebound quite a bit more strongly, but by and large, you can see everybody was down last year, everybody is rebounding very sharply this year.

Where Atlantic Canada falls on the spectrum here is that because of the nature of the economy there and of the geography there, and more of a smaller, more closed in region of Canada, that ended up going through the pandemic with better healthcare outcomes than a number of other regions. You can see the decline in 2020 was quite a bit softer than the larger provinces.

The flip side of that is, as we look out this year and into 2022, you're going to see growth running about two percentage points below what some of the bigger provinces are going to look like coming out of this, but on net, I would say, when you look at the full path through the pandemic, Atlantic Canada has actually come through this relatively well, partly because of better health outcomes, and partly because we just haven't had to see the same kind of aggressive restrictions and lockdown measures that we have in other parts of the country.

What that has meant for the labor market is that the jobless rate gap between Atlantic Canada and the rest of Canada has actually closed quite a bit. Atlantic Canada typically runs with a jobless rate that is a few percentage points higher than the national average because the downturn was quite a bit more subdued in that part of the country, we actually have seen the jobless rate move more or less in line with Canada on average. Historically, that's typically not something you see. From an employment perspective, if you look at the national picture overall, we're still about 850,000 jobs or so below pre-COVID levels. I think that's about 4.5% at the moment.

On average, you can look across the four Atlantic provinces, and I think we're down about 1.5% or so from pre-COVID. Yes, there's still a pretty significant employment hole to fill in the region, but relative to the rest of Canada, again, this just hammers home the point that we have moved through the pandemic with a relatively better economic outcome.

On the labor market, one thing that I want to touch on here, and it's important before we go into the housing market story, is what's happening at the industry level. This chart here effectively shows you where the job declines and the rebounds have been by wage level. If you move from low to high on this chart, you're effectively moving up the wage scale, and if you move left to right, you're moving towards a better employment outcome. The takeaway here is that if you look down in the bottom left hand of the chart, you can see industries that are still down 15% to 30%, in terms of employment from pre-COVID levels.

Those are things like accommodation and food, restaurants, information culture. If you look where those industries land on the wage scale, they are among the lowest-paying industries in Canada. The key here is that as you move up into the right on this chart, you move into higher and higher-paying industries, but you also move in industries that have recovered much more quickly. If you look at sectors like finance, professional services, those are among the highest paying industries in Canada, they have not only recovered the job declines seen through COVID, but they've actually pushed pretty significantly above levels that we saw last February.

In fact, if you take the five or six highest paying industries in Canada, we've all now fully recovered, and then some of the job declines we've seen through the pandemic. One of the questions that this helps explain, and this is-- If Doug's most common question right now is on inflation, mine is on housing, why the housing market is so strong across this country. Well, one of the reasons is, and if we break this down between the demand and the supply side, on the demand side, the reality is that the employment recovery has been extremely swift in the higher-paying industries in Canada.

Where the deepest hole in the labor market still remains, is in much lower-paying industries that typically, you don't see a lot of homebuyers, and there's a lot of part-time employment, a lot of youth employment in industries like accommodation and food, and things like that. So, not typically where homebuyers reside. The demand curve for housing has rebounded, actually, very quickly. If you layer on to that record low mortgage rates, we're looking at five year fixed rates around 1.5%, 1.6% at this point, and your mileage will vary a little bit on that. That's helped foster this very strong rebound in housing as well.

The other thing is, there's been a very dramatic shift in housing preferences during the pandemic. Rather than this kind of movement towards the core of the big cities, once the lockdowns were put in place and we've adopted this ability to work from home, we've had this big move out of the core of the major cities towards suburban markets, towards single detached homes. Honestly, the single hottest housing market in this country right now is about hour and a half to two hours outside of Toronto. I use that as an example because it's the most dramatic one, where prices have leveled up 30%, 40%, and some cases, almost 50%.

As you spread out through the rest of the country, the same story more or less holds. If you look at price gains in markets like Monckton or Halifax, we're looking at average prices up about 22% year-over-year or so, which is historically, obviously, very, very strong for these markets, which in the past have been relatively soft. The demand side has been very strong, but on the supply side, we're kind of compounding the strength because mobility is down around the country.

People aren't really moving a lot right now. Those that are in larger properties or rural properties are in big single detached homes are hanging on to them dearly, at the moment, until these lockdowns get restricted, or get removed, rather. We're not seeing the kind of turnover that would help these strong market conditions. Over the last decade or so, the vast majority of new supply has been in the condo market across the major centers in Canada, not in the single detached market where a lot of this demand is falling.

You really have this perfect storm for home prices to accelerate. It's getting to the point now where, is it becoming a little bit concerning? I would say in some of the smaller markets like Atlantic Canada, it's not as big a deal because affordability is quite favorable there, and the valuations there are relatively favorable, but in some of the major centers in Canada, I think it's getting to the point where maybe we're going to have to start asking a few questions about this going forward.

On the fiscal policy front, if we look across the provinces in Canada, a lot has been made on the federal deficit running about $380 billion. It's historically high as a share of GDP. When you look across the provincial landscape, what we're seeing now is actually a relatively decent position in Atlantic Canada. This chart here just kind of, it's a quick way to stack up how the fiscal situation looks across the country. As you go up the vertical axis, you're looking at a bigger budget deficit. As you go out across the horizontal axis, you're looking at a larger debt burden. Ideally, where you want to be on this chart is down in the bottom left corner.

That is typically where your AAA credits would lie. British Columbia being the last of the group. Then as you go up into the right, you get into a worse and worse position. Newfoundland and Labrador, obviously, is probably the most challenged fiscal position in Canada at the moment, because of the oil price shock and because of just tougher, longer-term economic prospects. Look at the other three provinces in Atlantic Canada. One of the stories that has been underreported or lost pre-COVID was how much positive fiscal progress provinces like Nova Scotia, New Brunswick, and Prince Edward Island were making before the pandemic.

We were running surpluses in these provinces. We were bringing the net debt burden down as a share of GDP. In fact, the whole group now is looking at net debt, as a share of each individual economy, that's smaller than in Quebec, smaller than in Ontario. The fiscal situation here is relatively, I would say, in decent shape considering. The other thing to point out here is that the federal government has really absorbed the vast majority of the fiscal requirements through the pandemic. The provinces, yes, are running much bigger deficits, but to Ottawa's credit, they stepped in and funded the vast majority of the COVID related spending programs that we've seen through the pandemic.

Obviously, I'm not going to go through them all, but the sub and the wage subsidy and the various measures have run at about $275 billion or so worth of direct spending. That's an incredible amount of stimulus and support. By design, I think the purpose of these measures was for the federal government to provide liquidity, and provide solvency, to households and businesses so that when policymakers come out and say, "Okay, we've seen enough vaccine distribution, go ahead and reopen your businesses, and go ahead and go back to your more normal activity," that there are actually businesses still there to go and turn the lights back on.

That's how fiscal policy has more or less been designed to this point. The bad news is that we're left with this $385 billion hole that eventually we're going to have to fill back in. As we look out to this upcoming fiscal year, we probably are going to see a big decline in the size of that deficit, just as some of these programs roll off, and as the economy recovers quite a bit stronger, and quite a bit faster than, I would say, most policymakers were expecting in the fall or in last year's fiscal plan. There are a few factors here that I would say, as bad as this chart looks, help tempo the story in favor of Canada a little bit.

I would say one, is that we have to keep in mind that pre-COVID, Canada was in a relatively strong fiscal position. Yes, we have deteriorated a lot, we've arguably deteriorated and provided more stimulus than most other developed countries, but we came into this in a very good position. We are more or less all in this together. If you look at where debt service costs are today, as big as the run up in borrowing has been, and as big as this deficit is, we're still only seeing the federal government pay about seven or eight cents on the dollar of revenue to fund these borrowing costs.

It helps that the Bank of Canada, unlike in the past, has been able to step in and absorb a lot of this issuance. Go back to the 1990s, for example, where we had a real fiscal crisis in Canada, and Ottawa was spending about 35 cents on every dollar revenue at one point to service the debt. It puts us in this position where from a fiscal perspective, maybe it's not quite as bad of a crisis as this chart itself would suggest, but going forward, there is going to obviously, have to be some consolidation down the road, and nobody's going to suggest that we can run deficits that are 8%, 10%, 12%, at this point, 17% of GDP going on indefinitely from here.

Just to summarize a little bit, with respect to Atlantic Canada, some of the things that we've kind of covered here, I would say, on the strong side of the ledger for the region, one has just been the favorable COVID outcome. I would suspect that as the economy opens up, it's going to be a relatively favorable position in terms of business losses and things like that, because we have actually navigated through this relatively well.

The real estate market in Atlantic Canada, the strength we're seeing is a new phenomenon. We're used to it in markets like Toronto and Vancouver. In Atlantic Canada, this is very new, and this is probably a positive story, it's going to drive more construction activity going forward. We are seeing inward migration from the rest of Canada. Typically, in the past, we would see Atlantic Canada losing migrants to a market like Alberta, where the job market is just quite a bit stronger, and wages are quite a bit higher.

Now, we're actually seeing that picture having turned around, and we're seeing inward flows into Atlantic Canada, partly because the relative economic strength has shifted out of Alberta, but partly because Atlantic Canada is just an affordable place to live. To be honest, I'm seeing advertisements, here in Toronto, trying to lure me into Nova Scotia to work from that part of the country remotely.

I have to run it by my boss first, but that's the kind of thing we're seeing here, and anecdotally, we are seeing cases where that might be happening, or at least at minimum, Canadians from other parts of the country are picking up second properties in Atlantic Canada because they just are so cheap relative to the rest of the country. As I mentioned, the fiscal position has improved pre-COVID. It leaves us with an environment where we might not have to clamp down quite as hard as some of the others, as we emerge from this.

That said, I think longer-term, the biggest issue in the region is, and it continues to be, is the demographic [inaudible 00:29:18]. From a short-term perspective, yes, we are seeing some inflows into the region, from other parts of Canada. That has also been, in the past, supplemented by very strong international immigration flows. It's led to small construction or building booms in markets like PEI, for example, that were chronically underbuilt. Right now, obviously, with the pandemic still here, we've seen those population flows slow down quite a bit.

I think that's one question, is how quickly those flows can come back, and I know Ottawa is still bullish on immigration targets, but we have to actually see that on the ground before it starts to work. Longer-term, it is still an older population that will keep potential economic growth running a little bit slower than the rest of Canada. I think one thing that's not on the board here is the tourism sector. That's a scenario where we do see a lot of economic activity drive through Atlantic Canada through that industry. 2020 was obviously an extreme challenge.

I think it might be a little bit premature to say that that industry is going to come all the way back this year, but I would say, as we look out to 2022, I think there's going to be quite a bit of pent up demand for travel and tourism that should land pretty solidly on Atlantic Canada. I will leave it at that, and I think we'll turn it over. Obviously, we can come back to some questions at the end, if there are any out there.

Robert Kavcic

Director and Senior Economist

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing economic, fiscal and real estate trends in Canada. Robert regularly contribut…(..)

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In all four provinces east of Quebec, economic growth is expected to lag the national recovery, but a closer look reveals different factors driving the projections.

Read the entire Blue Book here.

This is part 2 of a 7-part series on

Blue Book: 2021 Atlantic Provinces Outlook

PART 1