Quebec’s economy rebounded more swiftly from the recession than the economies of most other provinces, but economists expect a more modest level of growth this year as Quebec’s government begins tackling its fiscal deficit by boosting taxes.

In 2010, the province benefited from a recovery in both consumer spending and business investment, combined with fiscal stimulus. The employment market has recovered all of the jobs that were lost during the recession and has since exceeded its pre-recessionary peak by a wide margin.

“Quebec’s economy got back on its feet faster than rest of Canada’s and the U.S.’s,” says Hélène Bégin, a senior economist with Lévis-based Desjardins Financial Security in Montreal. “All of the elements of the domestic economy — consumer, government and [business] investment — were positive last year.”

Economists expect to see final 2010 real gross domestic product growth in Quebec of between 2.5% and 3%. But this year, GDP is expected to decline to 2.1% or 2.2% as stimulus tapers off and the government focuses on fiscal restraint.

“We’re going to see overall economic growth moderate in 2011 and 2012 compared with what we saw in 2010,” says Marie-Christine Bernard, associate director, provincial economic trends, with the Conference Board of Canada. “That has a lot to do with the heavier tax burden for households.”

Indeed, as part of the Quebec government’s efforts to reduce its fiscal deficit, its 2010-11 budget included increases to sales taxes, fuel taxes and tuition fees, as well as the introduction of a new annual health-care fee that will rise progressively to $200 per person by 2012.

Economists consider the increase to the Quebec sales tax the most significant part of the fiscal restraint plan. The QST rose by one percentage point on Jan. 1, to 8.5%; and it will rise by an additional percentage point in 2012. This year’s increase alone is expected to generate $1.5 billion in additional government revenue.

“That will take away from purchasing power,” says Bernard, “so we’re going to see very weak consumption spending.”

In effect, reduced consumer spending will remove support that has been critical to Quebec’s economic recovery, says Carlos Leitao, chief economist and strategist with Montreal-based Laurentian Bank Securities Inc.A combination of low interest rates and a quick rebound in employment levels contributed to strength at the household level in 2010, he explains, which bolstered the retail and housing sectors.

But this year’s fiscal restraint measures will weigh heavily on these sectors, he adds: “It does affect disposable income. It is going to contribute to somewhat slower economic growth than what would otherwise be the case.”

Despite the dampening effect that the tax hikes could have on Quebec’s economy, however, economists largely support the move as being necessary for the province to return to a balanced budget.

“It does put Quebec on a realistic track to eliminate its fiscal deficit on target for 2014,” says Leitao. “In this global environment of increasing uncertainty and increasing questions about the sustainability of public debt, making sure that we stay below the radar and that we eliminate the fiscal deficit is definitely a good thing.”

Quebec is under pressure to eliminate its deficit as quickly as possible, partly because it has a higher debt-to-GDP ratio than any other province or territory, Bégin says: “It’s a concern. We have to be very serious about eliminating the deficit quicker than the other provinces.”

With the bulk of the fiscal restraint measures set to impact households in Quebec, economists expect businesses to pick up some of the slack. Business spending already had begun to climb in 2010, and economists expect this trend to continue this year.

“We are seeing a recovery in equipment and machinery investment right now,” says Bégin. “It’s a sign that companies are aware that they have to modernize.”

Economists are also optimistic that export activity will begin to accelerate in 2011, which could help offset weaker domestic consumption. Although exports were considered to be the weakest aspect of Quebec’s economy in 2010, economists have witnessed growing global demand for some of the province’s key exports.

For example, aerospace — one of Quebec’s most important export sectors — so far has lagged the recovery. But new orders have stopped decreasing and have stabilized; in fact, they could begin climbing once again this year.

“We feel that the aerospace industry will start getting back on its feet in 2011,” says Bernard, “so that should help the trade sector in Quebec.”

Natural resources are also enjoying rising demand and higher prices, which could strengthen Quebec’s export activity. Bernard is particularly bullish on the prospects for mining, including aluminum: “Quebec has a lot of potential in the mining industry. There has been a fair bit of investment in the past two years, and that should continue in 2011.”

Construction is also set to drive growth this year — at least, on the non-residential side. Even though spending on government stimulus-funded infrastructure projects will taper off this year, a few major construction projects underway in Quebec continue to fuel activity in the sector.

Among these are major redevelopment projects for both of Montreal’s university health networks: a $2.25-billion redevelopment of three McGill University Health Centre campuses; and the creation of a new “super-hospital” that will relocate the Centre Hospitalier de l’Université de Montréal’s three hospitals into a single facility.

“Non-residential construction will continue to do well,” says Bégin. “There are some big projects that have just started or will start soon.”

Residential construction in Quebec is expected to slow this year, amid modest population growth and rising mortgage rates. The Conference Board of Canada expects housing starts to average 40,000 in 2011, down from roughly 50,000 in 2010.

“We’ll probably see the housing market moderate,” says Bernard. “Housing starts have been very elevated, so we think there will be a correction.”

The pace of growth in Quebec’s job market is also expected to slow this year. Economists with Desjardins expect 60,000 new jobs to be created in 2011, down from an average of 75,000 in 2010. They predict that the unemployment rate will fall to 7.3% by yearend from 7.6% as of Dec. 31, 2010.

Says the most recent economic and financial outlook report from Desjardins: “We should see gains over the next few quarters, but the slower economy and unfavourable demographic pressure will curb job creation.” IE