Quebec’s economy mired in instability

Says Robert Hogue, senior economist with Royal Bank of Canada in Toronto: “The Quebec economy in 2012 was one of disappointment; we thought it would have a bit more traction. However, the pace of housing construction in the U.S. will be a positive factor for Quebec exports – particularly in the forestry sector.”

Nevertheless, Stéphane Marion, chief economist and strategist with National Bank of Canada in Montreal, warns that because the health of Quebec’s exports are so crucially tied to prosperity south of the border, Quebec is likely to continue to walk an economic tightrope in 2013.

“If there’s one lesson we have learned from the global credit crisis,” Marion says, “[it’s that] even when you think you might not be impacted, you very well could be. The reality is that because of the interrelationships, it is hard to view yourself as an isolated island.”

Strong U.S. economic growth in 2013 also would be a boon to Quebec’s government coffers, economists say. The province really does not have the choice, they say, about eliminating its deficit, due to its significant debt burden. At more than 50% of GDP, Quebec’s debt is much higher relative to that of other provinces, such as Ontario or British Columbia.

Nicolas Marceau, Quebec’s finance minister, has said the province will balance its books largely on the back of limited growth in long-term program spending (that growth will be limited to 1.8% in 2013-14), and through higher taxes on incomes of more than $100,000 a year.

The economic plan laid out by the provincial government this past autumn is “doable,” says Carlos Leitao, chief economist and strategist with Montreal-based Laurentian Bank of Canada.

That said, he adds, the greater economic hurdle for the province to overcome will be over the medium term, not the short term: “They can reach zero, no problem, and stay there for a couple of years. But beyond that, there needs to be bigger reforms – particularly in health-care and education spending.”

Although 2013 will be the first year in which Quebec will see the full weight of the consumption tax increases of the past few years, it appears the province will look to boost levels of private investment to help drag the province out of the economic wilderness.

For example, this past autumn’s provincial budget put measures in place to promote private investment with a 10-year tax holiday on new projects of $200 million and more.

“It is an interesting idea, and was surprisingly refreshing,” Leitao says. “The only thing we would’ve liked would be to see that threshold come down a bit, so that small and medium-sized enterprises [SMEs] could take advantage of that.”

Marion says there is more that can be done, from a policy perspective, to give SMEs in Quebec an added leg up. Although the province has a very competitive corporate tax rate for large corporations, the corresponding rate for SMEs is 8% – the highest in the country.

@page_break@ “The policy is a bit counterintuitive,” Marion says. “Quebec is highly dependent on SMEs for job creation.”

In fact, Marion points out, about 51% of all jobs in the private sector in Quebec are in businesses with less than 100 employees (vs about 43% in Ontario).

Moreover, it wouldn’t be unreasonable to see a rise in the percentage of people hired by SMEs in Quebec, given the pressure to curtail spending – and, thus, reduce jobs – in the public sector.

The employment situation in the province remains volatile. Although employment rose by 0.7% in 2012, says Robert Kavcic, economist with BMO Capital Markets Corp. in Toronto, the positive job numbers are, in part, because of a rough 2011 for Quebec’s labour force.

Quebec also will have to deal with the challenges related to demographic pressures as it explores possible solutions on how to deal with its aging workforce.

Despite the recent positive gains in job creation, says Hélène Bégin, senior economist with Desjardins Group in Montreal, consumer spending in the province is flatlining. As a result, she expects housing construction to slow down significantly in 2013.

“The housing market is starting to slow,” says Bégin, “which is good news because we had some fears over too many constructions in the condo market. Still, with consumers on a break and with the housing slowdown, [Quebec] will be missing a main driver of the economy.”

The surge of home ownership rates in Quebec, and for the rest of Canada, is likely in the past, given the tightening of the once “permissive” rules for first-time homebuyers that was announced last year, Marion says. His forecast doesn’t project any spikes in Quebec consumer debt relative to disposable income for 2013.

Given this changing economic landscape, Marie-Christine Bernard, associate director, provincial economic trends, with the Conference Board of Canada, says she believes Quebec’s long-term outlook isn’t all doom and gloom – particularly as the province works on attracting more private investment.

Bernard also foresees long-term growth potential for Quebec as it develops its hydroelectric capacity. As well, there is a lot of interest in wind power and in the bellwether minerals and aluminum sectors.

In addition, she sees some potential in Quebec’s aerospace industry, a historical mainstay. In fact, she says, this industry could begin to take off again after experiencing a downward spiral because of the recession.IE

 

Population: 8,054,756

GDP 2011 ($bil.): 322.7

GDP % change: +1.9

2012-13 deficit ($Bil.): $1.5

Estimated net debt ($bil.): 184.4

Median after-tax income, all families: $43,200

household disposable income/capita: $25,646

Figures are from latest available reports/estimates

Sources: Statistics Canada; Government reports

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