OTTAWA — Canada’s economy will continue to slow noticeably next year, but all regions will avoid recession, the Bank of Montreal predicts in a new outlook.
And most provinces are doing better than expected in their deficit projections, leaving room for fiscal stimulus if conditions deteriorate, the bank said in its report released Wednesday.
The latest provincial monitor from the bank finds the resource-rich West — particularly Saskatchewan and Alberta — will continue to lead the nation in economic growth, as it has for the better part of the past decade.
Overall, the outlook for the country has slowed considerably in the last few months, the West included. The bank predicts Canada’s economy will grow by 1.8 per cent next year, down from 2.2 per cent this year and 3.2 last year.
The unemployment rate is forecast to average 7.3 per cent next year, two ticks above the current rate.
“It’s slightly below potential, it’s not going to help much on the unemployment rate, but at least it’s positive,” said senior economist Michael Gregory.
“I think we’re going to squeak by (because) recession risks are starting to dwindle a bit in the U.S., and that benefits Canada,” he added.
The 1.8 growth rate projection is almost a full point below the Bank of Canada’s last published estimate, although the central bank is expected to pare down its forecast next month.
Gregory said economists at BMO believe the U.S. is undergoing a “growth recession,” where the economy continues to expand but at a rate below potential. That leaves it vulnerable to an outright contraction in case of a shock — but failing that, the most likely scenario is for continued sluggish growth.
Canada’s economy is also weak enough to fall prey to external shocks — low demand for exports from the U.S., lower global growth, and contagion from Europe’s debt crisis.
In a conference call, Jayson Myers of the Canadian Manufacturers and Exporters said his organization is seeing orders from the U.S. softening.
The export weakness partly explains why the bank sees Ontario’s economy growing by an anemic 1.8 per cent next year, and Quebec at 1.7 per cent. Both provinces have large manufacturing sectors that export autos, parts and aerospace products to the U.S.
Although commodity prices have fallen back from recent highs, they remain sufficiently robust to keep Saskatchewan’s and Alberta’s economies well ahead of the pack with expected growth rates of 2.9 and 2.7 respectively, BMO said.
The Atlantic provinces will record the weakest growth, averaging 1.5 per cent, but BMO economists note that the region did not sink as deeply during the recession and hence the bounce will be smaller.
Newfoundland will experience the biggest slowdown, from six per cent in 2010, to 3.5 per cent this year and an expected 1.6 per cent in 2012 as some energy projects begin to wind down.
One takeaway from the report is that although prospects have dimmed, government finances are in better shape than expected.
Among the eight provinces that have released data for the just completed fiscal year, their combined deficits are $5.5 billion ahead of previous projections. That trend continued in the first quarter of the current fiscal year, despite British Columbia’s expected repayment hit from its withdrawal of the HST tax. Ottawa also is running ahead of expectations.
“These can set the stage for budget outperformance (this fiscal year), create some room for additional fiscal measures, or provide a cushion should this fiscal year prove to be more challenging,” the bank said.