Last year was disappointing for residents of Quebec, and economists predict that the province is facing at least one more year of sluggish growth before some of the province’s key sectors finally begin to improve. The province is feeling the effects of its widespread exposure to the struggling U.S. economy, along with a slew of fiscal austerity measures that are squeezing consumers who are already lacking in confidence.
The economy grew in the range of 1.5% to 1.8% in 2011, economists estimate, and they expect around the same level of growth this year. “Overall, the economy should not perform any better in 2012 compared with 2011,” says Marie-Christine Bernard, associate director of provincial economic trends with the Conference Board of Canada in Ottawa. “We’re forecasting very weak growth.”
However, forecasters also expect better days ahead. Looking ahead to 2013, economists are generally more optimistic about the province’s growth prospects. With the U.S. economy expected to be in better shape and domestic consumer spending likely to pick up, Lévis-based Desjardins Financial Security anticipates that real gross domestic product growth will accelerate to 2.3%. “In 2013 we expect things to get back to normal,” says Hélène Bégin, senior economist with Desjardins.
There will be more pain before that happens, however. The labour market has proven to be a particularly weak component of the economy in the past few months. Quebec’s unemployment rate shot up to 8.7% at the end of 2011, after the province lost about 70,000 jobs in the last quarter of the year. This was the worst quarterly decline in employment since the 1980s, according to Carlos Leitao, chief economist with Montreal-based Laurentian Bank Securities Inc.: “Unemployment rose very quickly in the last two months of the year.”
The job losses came in a variety of sectors, such as construction, health care and retail, leaving economists without any specific industry to blame for the sudden and abrupt contraction. “We don’t see a real explanation for that,” says Bégin. “We hope it’s going to get better at the beginning of this year.”
She expects the unemployment rate in Quebec to retreat down to an average of about 8% in 2012. Other economists agree that the worst of the job losses are likely over. “There should be some modest job creation [this year],” says Bernard. “There could be some hiccups here and there in certain months, but overall, the bleeding should not continue at the same pace.”
Much of the weakness in the economy is coming from the heavyweight manufacturing and export sectors, which are grappling with flagging global demand for commodities and other goods. The weak fundamentals of the U.S., in particular — a market that accounts for three-quarters of Quebec’s international exports — continue to cast a dark cloud over the outlook for exports.
Economists are hopeful that the aerospace sector, which represents more than 10% of Quebec’s exports, will begin to rebound this year amid encouraging signs that orders are on the rise. But it may not be until late this year or next that this translates into more activity in the sector.
“It will really depend on how the global situation will go, with Europe going into recession and some countries in really bad shape,” says Bégin. “I don’t think that’s going to be really good for the aerospace sector.”
There’s little enthusiasm for other types of exports as well. Commodities such as aluminum, wood, and pulp and paper, which make up about 20% of Quebec’s international exports, are expected to continue facing soft demand until the global economy improves.
Weakness in domestic consumer spending has been another factor contributing to the slowdown in Quebec. The fragile state of the labour market is not putting consumers in the mood for spending. To make matters worse, consumers are bearing the brunt of the impact of the government’s fiscal austerity measures.
Quebec’s sales tax rose to 9.5% on Jan. 1, up from 8.5% last year and 7.5% in 2010, and the gasoline tax will rise by 1¢ per litre this year for the third consecutive year. Health-care contributions will also increase once again this year.
In total, these hikes to taxes and fees are worth more than $2.5 billion per year, and will take a 1% bite out of consumer spending in both 2011 and 2012, according to Desjardins. “We are in the middle of the worst impact,” says Bégin. She estimates that spending on goods and services will grow by a modest 1.5% in 2011 and 2012, before returning to a healthier level of about 2.5% in 2013.
A bright spot in the economy is business investment. Economists are encouraged by the amount of private-sector activity they’ve seen in the past year, and given the strong state of corporate balance sheets, they’re optimistic that this will continue. “Private investment has been doing quite well in Quebec,” says Bernard.
The mining sector, in particular, has attracted a considerable amount of investment, and is expected to show growth this year. “There’s been a lot of enthusiasm and a lot of talk around the [Quebec government’s] ‘Plan Nord,’ and rightly so — the mining potential in Northern Quebec is very significant,” says Leitao. “Mining will be doing better this year than last.”
And non-residential construction projects are also helping to stimulate economic activity. As long as business confidence remains intact, economists say, private investment will be an important source of support for Quebec’s economy this year.
But confidence is largely dependent on external factors. In the event of a worsening of the eurozone crisis or other negative developments in global markets, there’s a good chance confidence could take a nosedive. “It seems that the worst is over for business confidence,” Bégin says. “But it always depends on the global markets situation.”
Meanwhile, economists are optimistic that the Quebec government is on track to meet its deficit reduction targets. The government expects to record a deficit of $3.8 billion this year and $1.5 billion next year, with a goal of returning to a balanced budget in 2013-2014.
“In the current international environment, where public finances are scrutinized so closely, I think it’s absolutely important that those targets are met,” says Leitao, “and I think they will be.” IE