Quebec’s economy seen to be resilient

Economists’ general consensus for Quebec’s economy is: “Modest recession equals modest recovery.” That’s because the province has managed to stay resilient throughout the recession, with expectations of moderate growth in the year ahead despite a decline in manufacturing shipments and a strained export industry.

Real gross domestic product growth resumed in Quebec this past summer, and the consensus forecast for the province in 2010 is 2.2% growth. And as the recovery gathers steam, it should lead to much faster real GDP growth of 3.7% in 2011, says Robert Hogue, senior economist with Royal Bank of Canada in Toronto.

It is estimated that the current recession in Quebec has lasted between seven to eight months, according to Toronto-Dominion Bank’s recent provincial economic forecast. During those months, Quebec’s quarterly real GDP will have posted “a peak-to-trough decline of roughly 2.5%,” the report states. “This is less than even the annual percentage drops in real GDP experienced in [the recessions of] 1982 (-3.6%) and in 1991 (-2.7%).”

With a relatively short recession, Quebec has managed to fare much better this time around than in the early 1990s’ recession, which lasted almost two years.

However, the province had felt the effects of the economic crunch much later than most other provinces in the recent recession. Many economists point to the early fiscal stimulus plan that the provincial government implemented in 2007 as one of the factors responsible for offsetting the recession.

“Quebec managed to do relatively better during the recession than other parts of the country,” says Hogue, “and we think this mostly has to do with the fiscal stimulus that had begun earlier than in other provinces. In the end, it provided a bit of a cushion for Quebec.”

It was the crumbling infrastructure in Quebec — including the collapse of a highway overpass that resulted in the death of five people — that forced the provincial government to jump-start an aggressive infrastructure program. The province initially budgeted $37.7 billion for 2007-12, but boosted its plan to $41.8 billion for 2008-13 in January 2009. The government estimates that, including federal and municipal monies, the current 2008-13 plan totals $50.6 billion.

Along with the infrastructure plan, the province is also counting on its manufacturing sector — specifically, the aerospace industry, which continued to perform strongly throughout 2009.

However, with a recent drop in aircraft orders, that sector is finally starting to feel the aftershocks. Whereas most of the other provinces’ key industries have already weathered the worst of the storm — such as the automobile sector in Ontario and oilsands production in Alberta — the aerospace industry in Quebec is now just starting to see the bruises from the recession, Hogue says: “There were still a lot of orders in the pipeline for the industry to work through when the recession first hit. Now, unfortunately, the recession has caught up with many of the big airlines from around the world, resulting in cutbacks within that sector.”

“Aerospace manufacturers have seen a number of orders delayed or even cancelled,” adds Hélène Bégin, senior economist with Lévis, Que.-based Desjardins Financial Security in Montreal. “The orders are still very low, and last month we saw many of Bombardier [Inc.]’s major clients cancelling orders.”

With the aerospace industry making up a hefty chunk of Quebec’s manufacturing sector, economists aren’t expecting the manufacturing recovery to happen until 2011. Last month, Montreal-based Bombardier announced an additional 715 layoffs in Quebec. The layoffs began at that time and will be spread over the first two quarters of the fiscal year.

Although unemployment remains a concern for the province, there is some cause for optimism, as the unemployment rate has been forecast to drop below the national average for the first time since at least 1976, when most reports started tracking that data. Quebec’s unemployment rate, which was as high as 9.1% last year, has been forecast at 8% for 2010 vs a national average of 8.1%.

“We started to see a decline in the unemployment rate at the end of the summer,” Hogue says, “and it continued to drop more than we expected.”

Bégin believes that Quebec’s unemployment rate will remain stable throughout 2010, mainly because the drop in the size of the labour force has been offset by discouragement among job seekers.

@page_break@“The improved economic outlook should encourage these people to start looking for jobs again,” she adds, “which could push the unemployment rate back up.”

This past autumn, the provincial labour market saw the addition of 21,400 workers — the result, primarily, of an increase in full-time employment. Overall, fewer than 50,000 jobs have been lost since November 2008.

“These jobs are mostly being created in services sectors, such as construction and the real estate market,” says Bégin, “and are helping to improve the unemployment situation throughout Quebec.”

With the boost in infrastructure spending, as well as the improvement within the housing sector, Quebec’s construction industry is starting to see some bounce-back. Homebuilding and renovation activity in the province were able to sidestep the recession early on and now have less ground to make up, while the solidity of consumers’ financial situations has allowed the real estate market to make a quick comeback.

“Housing starts should increase to 46,000 units in 2010,” Bégin says, “and then to 48,000 in 2011.”

Although there are many economic factors working in Quebec’s favour, there’s still one long-term challenge ahead: balancing the province’s budget by 2013-14. This initiative will demand substantial efforts, says Bégin, and could hamper the growing economy’s momentum.

Desjardins’ recent economic and financial outlook report points out that, at first, the increase in program spending needs to be reined in to 3.2% vs the 4.6% average of the past five years.

In addition, total provincial government spending will have to be cut by $3.9 billion and the government would have to increase revenue to balance its budget. Already, the government has identified the need for stronger efforts to combat tax evasion and avoidance. It also will index many user fees for government services, and increase the Quebec sales tax, says Bégin, which will rise to 8.5% from 7.5% as of Jan. 1, 2011.

Although these measures should add up to roughly $2.4 billion, another $5 billion will be needed to get Quebec’s budget balanced in time. Additional sources of revenue have yet to be identified, but, Bégin says, the province could increase the QST further, raise personal income taxes and increase electricity rates.