While the current recession has had a significant and widespread impact on the economies of all Canadian provinces, sights are now set on a coming economic recovery, according to the new report from BMO Capital Markets Economics.

“Thanks to a rebound in commodity prices, widespread fiscal stimulus and some of the lowest interest rates in a generation, all provinces are poised to participate in the recovery,” said Douglas Porter, deputy chief economist, BMO Capital Markets.

Western Canada has been hard hit this downturn, as last year’s plunge in commodity prices and tighter credit conditions slashed investment activity in the energy sector. While annual real GDP in B.C. and Alberta is likely to contract for a second consecutive year, the rebound in commodities should breathe some life back into Western Canada in 2010.

Production costs have fallen sharply amid slackening labour markets and lower input prices, and oil prices have now moved back above break-even levels for the oilsands (US$60-US$65). As a result, Western Canada is likely to experience an above-average rebound in 2010 with growth averaging slightly above 2%.

Central Canada continues to grapple with declines in manufacturing. Ontario’s auto sector came to a near standstill to start the year amid restructuring efforts, and employment in the assembly and parts sectors has fallen to the lowest level since the early-70s, BMO notes. Meantime, Quebec’s more favourable manufacturing-sector mix has helped the province better weather the recession, BMO says.

Looking ahead to 2010, the region will likely see a recovery that is in line with the national average, though a rebound in auto production should give a slight tilt to Ontario. “Still, the long-term restructuring challenges in the region remain, and should lead to continued underperformance in the medium-term,” BMO says.

Atlantic Canada has held up well during this recession thanks to renewed population growth, fiscal stimulus and sturdy non-residential investment activity. “As 2010 rolls in, the region will likely see a near-average recovery as public- and private-sector investment activity combats ongoing manufacturing weakness,” BMO says.

Overall, Canadian provincial revenues are projected to fall 1.5%, with double-digit declines seen in the commodity provinces. BMO says commodity revenues are forecast to fall 40% year-over-year on the back of lower prices and production volumes, cutting their share of total provincial revenue to about 5% from nearly 9% in fiscal 2008/09. Meantime, spending is slated to rise a solid 5.4%, led by double-digit growth in Ontario and Newfoundland & Labrador. Only two provinces, Alberta and Saskatchewan, penciled in lower spending this fiscal year.

Total provincial infrastructure spending will be about $40 billion this fiscal year, or nearly 3% of GDP, up about 25% from the prior year. Ontario will invest the most as part of its two-year, $27.5 billion program, while Newfoundland & Labrador is the most aggressive relative to GDP. Alberta is the only province that will see infrastructure spending fall, but it continues to invest heavily, a legacy of the commodity boom. “These strong and widespread levels of infrastructure investment will help to reinforce the coming economic recovery,” BMO says.

At the same time, the trend in provincial tax rates remains down, with Ontario and New Brunswick serving up fundamental changes to their tax systems. Ontario proposed harmonization of the provincial sales tax with the federal goods and services tax in mid-2010, while also cutting the general corporate tax rate to 10% by 2013 from 14% last year. New Brunswick concluded its tax-system review with a simplified two bracket/two rate system (to be fully phased in by 2012), overall personal tax reductions through fiscal 2012/13 and a general corporate tax rate cut to 8% by 2012 from 13% last year.

Deficits and robust infrastructure investment have ramped up provincial borrowing requirements this fiscal year, BMO says. Total borrowing is projected to be $68.3 billion, up from $55.6 billion in fiscal 2008/09, broken down about equally between refinancing and new borrowing. Through late-June, almost half of this requirement had been funded.

IE