Big budgets, population growth will delay economic downturn: Desjardins

Infrastructure spending climbing, with Ont., B.C., Alta. and Sask. slated to spend more in 2024 than in 2023

Alicja Siekierska
Tue, April 25, 2023

Strong population and employment growth and fiscal stimulus will delay an economic downturn in Canada until later this year, a new Desjardins report says. (THE CANADIAN PRESS/Nathan Denette)

Strong population and employment growth and fiscal stimulus will delay an economic downturn in Canada until later this year, a new Desjardins report says, with Ontario and B.C. feeling the pain of higher interest rates more than other provinces.

Desjardins principal economists Marc Desormeaux and Hélène Bégin updated their provincial outlook on Tuesday, pushing their recession call to later in 2023 amid stronger growth rates in many Canadian provinces. While they expect inflation will continue "to dominate the economic outlook for Canada's provinces," the previously expected economic slowdown will be delayed.

"We expect all regions to increasingly feel the dampening impacts of easing but still-elevated price pressures and still‑high interest rates as 2023 progresses, particularly in construction activity and interest-sensitive industries," the economists wrote in their report.

"But early 2023 surges in employment and population, plus stimulative infrastructure spending and affordability relief measures laid out in this year's budgets, will delay the downturn until later this year."

The economists say that government support has increased since their last quarterly provincial outlook. Infrastructure spending is on the rise, with provinces such as Ontario, B.C., Alberta and Saskatchewan slated to spend more in 2024 than in 2023. While affordability measures have been scaled back, the Desjardins report notes that "the latest fiscal blueprints did introduce new measures that could very well stimulate consumer spending (and possibly inflation)."

While the report focuses only on provincial budget spending, federal spending is also on the rise. Prime Minister Justin Trudeau's government unveiled a spend-heavy budget in March despite calls for fiscal restraint. The 2023 federal budget features larger deficits and elevated spending, with net new spending up by $46 billion over six years, and no timeline for a return to a balanced budget.

Surprisingly strong employment rates are also helping provinces fend off an economic slowdown.

"With some exceptions, provincial employment has also started the year stronger than we anticipated," the report said.

"While we think this trend will reverse as the full effects of interest rate increases make their way through the economy, it nonetheless improves the (first-quarter) growth handoff in many jurisdictions."

Population growth has also helped provinces through economic uncertainty, with the Prairie provinces and Atlantic Canada experiencing the strongest gains, helping fill high numbers of job vacancies.

Ontario, B.C. to see biggest slowdown

But the pending economic downturn will not play out equally across the country. The economists say housing-exposed provinces like Ontario and B.C. will see the biggest economic slowdowns this year, while commodity-producing provinces – Alberta, Saskatchewan and Newfoundland and Labrador – will have the best economic prospects. The report says Quebec will also see a downturn, as global economic headwinds weaken exports and investments in the province in 2023 and the labour market softens.

"We still expect the late-2023 recession to impact Ontario disproportionately. Sharply higher interest rates, stretched affordability, high household debt levels and moribund housing market activity have significantly impacted the economy," the report said.

"More challenging conditions in the financial services sector could also contribute to the slowdown ahead."

Alberta, on the other hand, "appears to be firing on all cylinders," the report says.

"Provincial crude output should also continue to rise—albeit at a diminished pace. Yet completion of the Trans Mountain pipeline expansion later this year may support further increases down the road (and reduce the gap between Alberta and U.S. oil prices)," the report said.

"And while household debt is higher in Alberta than in most of the country, the housing market is still much more affordable than in other parts of the country. That continues to spur net interprovincial migration to Alberta — particularly from higher-priced Ontario — amid surging international immigration and net non-permanent resident admissions."

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.