Sunday, October 21, 2007

REB's Forecast and Provincial Outlook


October 2007

Regional variations on the Canadian economic


Canada's economy is so far marching to the beat of its own drummer, but there are sharp regional variations on this economic advantage. As a result, we

have lowered our growth forecasts for the Ontario and Quebec economies and have become more bullish on near-term prospects in parts of western Canada.

First are the sharp regional differences in terms of dependencies on manufacturing and primary sector activities. The benefits from the positive swing in Canada's overall terms of trade are concentrated on the resource provinces. In contrast, high commodity input prices and the surging loonie are accentuating Ontario's and Quebec's greater downside sensitivity to the U.S. economy.

Second, Canadian job markets remain stronger than in the United States, but the effects are spread unevenly. Alberta, New Brunswick and British Columbia have the strongest job gains, which are translating into above-average consumer spending spin-offs for these provinces.

Third are the significant regional variations in housing market performance. On net, mortgage credit conditions have eased substantially in Canada despite modestly higher mortgage rates in recent months and a deterioration in the tiny sub-prime segment. Mortgage securitization is relatively unaffected in Canada because 85% of it is guaranteed by the federal government. The reason for the net easing in mortgage credit conditions is due to the arrival of long-amortization mortgage products, which now dominate mortgage purchase applications in the insured segment and comprise about one-quarter of total mortgage purchase applications in Canada. The effect of going for longer amortization is significant enough to extend Canada's housing cycle by about a couple of years by transferring future activity to the present. The highest take-up rates on longamortization products are in British Columbia and Alberta.

Fourth, Canadian fiscal policy is far better off than much of the rest of the world in terms of relatively low net debt levels compared to the size of the economy and federal surpluses. Surpluses or balanced budgets across the provinces add to this picture, but surpluses can mask underlying problems.

There is little doubt in our minds that Ontario's fiscal policy is exacerbating its competitiveness woes by transferring future growth to the present through a rapid rise in program spending and is partly financing this via the world's second highest business tax burden on new investments. The federal government's accelerated equipment write-offs are a partial offset.

Fifth, we expect a capital spending surge in Canada commencing by decade's end. The biggest effects will be felt in Alberta, Saskatchewan, Newfoundland and New Brunswick. Proportionately smaller influences will be felt in Ontario, Quebec and Nova Scotia. British Columbia lacks megaprojects to fill the void after the Vancouver 2010 Olympic and Paralympic Winter Games and, barring major hydroelectricity investments, Manitoba will also miss out along with Prince Edward Island. From RBC Economics

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