Quebec consumers still cautious

“We were disappointed by the GDP growth and employment growth,” says Hélène Bégin, senior economist with Desjardins Group in Lévis, Que. “But, overall, I think the worst is over.”

In the year ahead, economists expect growth of 1.7%-2% for Quebec’s economy, with a rebound in exports playing a key role in the improved performance. A Desjardins report estimates that exports grew by 3.4% in 2013 amid gradually improving conditions in international economies such as the U.S., Europe and Asia. As those economies continue to gain steam, exports are expected to grow by 4.4% in the year ahead.

The picture for the aerospace sector is mixed. Although Montreal-based Bombardier Inc. is expecting rising sales of its new C-Series jets, that series is experiencing production delays. The company also cut 1,700 jobs this past January. However, the forestry industry is well positioned to benefit from a rebound in the U.S. housing market.

Business investment also is expected to trend higher. Swedish telecom company Ericsson AB, for example, has announced plans to spend $1.2 billion on a new information-technology centre in the Montreal area. And construction is set to begin this year on a major new nitrogen fertilizer production plant in the Bécancour region, a joint investment by global fertilizer co-operative Indian Farmers Fertiliser Cooperative Ltd. and Quebec-based agricultural co-operative La Coop fédérée.

As businesses strive to improve their productivity, many have begun investing more heavily in machinery and equipment, says Kristelle Audet, economist with the Conference Board of Canada: “Quebec firms really need to improve their competitiveness and improve their labour productivity, so they will be investing in machinery and equipment.”

National Bank of Canada forecasts almost 6% growth in investment in machinery and equipment in 2014, vs 2.7% in 2013. This increase will be driven in part by new stimulus measures introduced by the Quebec government in October 2013, including new tax credits for small and medium-sized manufacturing firms that invest in certain types of equipment and software.

Not all sectors are demonstrating a willingness to invest. Quebec’s mining industry, for example, experienced a sharp decline and widespread uncertainty in 2013. In addition to grappling with a global mining slowdown, the industry faced changes to the Quebec royalty regime and new mining legislation last year.

“That had some impact on companies’ willingness invest in the province,” says Audet. With changes to the legislation having been finalized and adopted in December, however, Audet anticipates that investment in the mining industry will begin to recover this year.

The retail sectors also are struggling, stifled by ongoing weakness on the consumer side. Economists estimate that retail sales in Quebec grew by a modest 2% in 2013, with households contending with high debt levels and a soft job market, which has kept a lid on growth in salaries and disposable income.

Next: Employment
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Employment

Employment in Quebec grew by a sluggish 1.1% in 2013, according to estimates from Desjardins, with the vast majority of job creation concentrated in two segments: construction and the public sector.

With job gains in those sectors likely to slow this year, it will be critical for other sectors to begin generating jobs, says Stéfane Marion, chief economist and strategist with National Bank: “If you lose the job creation in the public sector and construction, the other sectors must do much better than they’ve done in recent years.”

Economists forecast employment growth in the province of approximately 1.2% in 2014, which does not bode well for spending. Consumers still are feeling the impact of hikes to sales and gasoline taxes in recent years, and many municipalities are facing rising property taxes this year.

“Disposable income growth is likely to be pretty tepid,” says Marion. “In 2014, we should not be relying on the consumer to generate growth in Quebec.”

Weakness at the consumer level took a hefty toll on Quebec’s housing market in 2013, with housing starts plummeting by roughly 25%. The pullback affected all market segments, especially condominiums. The good news, economists say, is that the housing market has little downside left. Housing starts are expected to be roughly unchanged in 2014 from 2013, at around 37,000 new dwelling units, before trending higher in 2015.

Quebec’s government recently took new steps to support the province’s economy. Specifically, a stimulus plan unveiled in October promises $2 billion in support over the next four years.

Although economists suspect that plan will contribute marginally to economic growth, they warn that the government must be cautious about increasing its spending, given the state of the province’s public finances. Quebec has the highest debt/GDP ratio in the country, and expects to record a deficit of $2.5 billion for the 2013-14 fiscal year.

Quebec’s government plans to balance its budget by 2015-16 – a goal that is attainable, economists say, as long as the government remains diligent about controlling its spending.

Quebec

Population: 8,155,334

GDP 2012 ($bil.): 357.9

GDP % change: +3.6

2013-14 deficit ($Bil.): $2.5

Estimated net debt ($bil.): 175.5

Median after-tax income, all families: $44,900

Household disposable income/capita: $26,347

Figures are from latest available reports/estimates

Sources: conference board of Canada;

Government reports

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