Growth Outlook Slashed as Interest Rate Hikes Bite
- In its fall update, the Quebec government acknowledged the dampening effect of interest hikes on economic growth is manifesting through multiple economic channels. Housing construction has already fallen sharply, and longstanding resilience in consumer demand is starting to flag. In the labour market, activity is moderating as demand for goods and services weakens.
- Quebec maintained its GDP forecast of 0.6 per cent for 2023, consistent with the spring budget. However, weaker expenditures and a more pronounced labour market downturn mean that the growth forecast for real GDP in 2024 has been halved since the spring budget and now stands at just 0.7 per cent. The government attributes the downgraded growth outlook for 2024 to persistent inflation and higher interest rates worldwide.
- Our own economic outlook for Quebec is weaker than that of the government. We anticipate growth of just 0.1 per cent in 2023 and again in 2024. Weaker consumption and investment forecasts underly our more pessimistic outlook.
- The government acknowledges deteriorating credit conditions are draining confidence among consumers and businesses. The government expects household consumption growth to slow from 2.8 per cent this year to just 0.8 per cent in 2024. We anticipate a more pronounced slowdown, with household consumption growth expected to fall to 0.4 per cent in 2024.
- This year, Quebec’s population growth will reach its highest level since 1959. This marked expansion is underpinned by the arrival of 62,000 immigrants and roughly 150,000 non-permanent residents. Yet despite the uptick in 2023, Quebec’s population growth is lower than the national average and most other provinces. In the coming years, weaker planned immigration relative to the rest of Canada will weigh on population growth in Quebec, sustaining tightness in the labour market and constraining growth in consumption and investment demand.
Province Unwinds Contingency Reserves, Leaving Little Room to Face an Economic Downturn
- Despite a weaker economic climate than in the spring, Quebec’s updated fiscal plan shows only a minor downgrade in revenues. In all, the province expects own-source revenues to be about $500 million lower in fiscal year 23–24 than previously estimated, but the long-term outlook for revenues is actually higher than in the budget—to the tune of an average of $500 million per year over the next four years.
- The weaker own-source revenue outlook this year is mostly because of a downgrade to personal income tax revenues, while the higher outlook in the subsequent years is because of a much higher estimate for corporate income tax revenues. The outlook for QST revenues are similar to the budget.
- The fall update now expects program expenditures to be roughly $1.9 billion higher per year over the next five years. Many of these costs are allocated to higher spending on housing initiatives ($1.1 billion total over the next three years) and climate related initiatives ($800 million over the next three years). Debt charges are expected to be around $500 million higher over the next three years.
- The updated fiscal plan also comes with much lower levels of contingencies, and less contribution to the Generations Fund than in the budget.
- In all, Quebec’s fall fiscal update highlights a path towards surplus of $4 million in fiscal year 27–28, which is in-line with what it estimated in the budget, but that planned surplus comes with a total of $400 million less in payments to its Generations Fund and $4.5 billion less in contingencies over the next five years.
Policy Announcements Try to Tune All the Sour Notes
- The government announced nearly $4.3 billion in targeted new measures over the next five years covering housing, climate transition, business investment, training, and homelessness. The new spending, however, will be spread unevenly.
- Reflective of the general pressures on the economy, housing will be the largest new policy expenditure. Made possible through a new joint federal-Quebec government agreement, more than $1.8 billion will be directed toward accelerating the building of 8,000 social and affordable units. Most of the expenditure will occur in 2025–26 and taper off through the forecast period. Details on how and where the funding will flow will be announced later.
- Action on climate change is chiefly related to helping communities and the forestry sector recover from massive fire season in the summer 2023 (about $400 million over five years). An additional $300 million will be directed at mitigating the risks associated with future forest fires. The government is also topping up its emergency assistance program for public transit by an additional $265 million this fiscal year.
- Because of the risk of limiting growth in productivity and living standards, lagging business investment has been a challenge across the country. Quebec will be renewing, extending, and simplifying its C3i tax assistance program to support the acquisition of manufacturing and processing equipment, computer hardware and management software. Assistance will be greatest for investments in depressed economic zones and lowest for those in the Montreal and Quebec City regions.
- Labour vacancies are a particular concern in Quebec, and $261 million training assistance will be directed at the skilled trades in the construction sector and in health care over the next two years. Efforts will focus on adding diploma program capacity and accelerating training.
Tight Labour Markets Add Challenges
- With limited room to maneuver the Quebec government has focused on housing, homelessness and supporting training, specifically in construction and health care, to address labour shortages. But the difficulty with the province’s labour shortages goes beyond skills and training to the lack of available workers. Quebec’s unemployment rate is among the lowest in the country and our forecast for the province is for unemployment to peak at just 5.2 per cent next year despite a very weak economic outlook.
- High inflation and labour shortages have been leading to labour strife across Canada and Quebec is no exception. Some 600,000 public servants in the province have taken strike action to push for more than the 10.3 per cent salary increase over five years that is planned for in the economic update. This poses upward risk to the government’s planned expenditures.
- While the weaker economic outlook has not affected the government’s plan to balance the books by 2027–28, it’s doing so by contributing less to the Generations Fund and accounting for much reduced contingencies for risk. Our own economic estimates are weaker than those of the Quebec government, and because most contingencies are removed with the fall update, the risks for the province’s finances, both in terms of revenue growth and the path to balance, now skew to the downside.