Stronger than expected momentum, and the U.S. tax deal reached at the end of last year, is generating brighter economic prospects for Canada’s provinces, according to a new report from CIBC World Markets Inc.

“For provinces highly correlated to the United States, namely Ontario and Québec, the 2011 outlook has improved markedly since our last provincial forecast was issued in September,” the firm said Tuesday in a research report.

“For Canada and its provinces, a reinvigorated U.S. economy is welcome news. While Canada has gradually diversified into other markets, the US is by far the largest export market for all 10 Canadian provinces,” CIBC says, adding that, its forecast for U.S. real GDP growth this year has been bumped up by 0.8% relative to its September’s forecast, and the Canadian real GDP growth forecast was lifted 0.5% to 2.4% too.

“And the timing couldn’t be better. Finance ministers will embrace more buoyant consensus forecasts as they draft their 2011 budgets. More growth means more revenue, creating welcome fiscal relief for a number of
jurisdictions grappling with budget deficits,” CIBC says.

However, the economy faces a number of longer-term hurdles, CIBC cautions, including “currency-related
headaches, consumer sector deleveraging and fiscal belt tightening. And notwithstanding America’s short-term improvement, risks of a US deceleration loom, putting renewed pressure on some provinces in 2012.”

There are other risks for the year ahead too, CIBC notes. “As many as seven provincial elections could recast social and economic priorities in some jurisdictions, with prospective changes in the fiscal policy stance having implications for future provincial growth,” it says. “And in the Prairies, the profile of real GDP will continue to be impacted by weather conditions in the agricultural sector.”

“For smaller provinces like Nova Scotia and New Brunswick, fiscal restraint, the absence of large-scale private sector investment projects and less favourable demographics contribute to relatively subdued growth,” CIBC adds.

Even in the bigger provinces, while prospects may have improved, growth is still likely to be below average, CIBC suggests. “That leaves Canada’s resource-rich provinces to drive growth.”

“For 2011, there may be special factors at play, including the potential rebound in Saskatchewan crop production, but economic outperformance for provinces like Alberta, Saskatchewan, Newfoundland & Labrador and British Columbia can be expected to extend into 2012,” it projects. “Call it a case of déjà vu; as a consistent expansion takes hold and resource development deepens, Canada’s commodity rich provinces are squarely back in the driver’s seat.”

IE