PROVINCIAL ECONOMIC UPDATE

Last October, TD Economics released its Regional Economic Outlook, entitled The Great Canadian Divide. In that report, we projected that economic growth in the commodity-oriented Western markets would be significantly stronger than in most other regions in 2005 and 2006, notably those in the manufacturing-based Ontario and Quebec. Since then, regional economic developments have largely unfolded as expected, with the West entering 2006 like a lion and central and eastern Canada like a lamb.

This Provincial Economic Update includes revised growth forecasts for 2006. In addition, we have added the outlook for 2007 (see tables on page 3). In a nutshell, not only were the adjustments made to our earlier 2006 forecasts little changed, but the West-East divide in terms of economic expansion and job creation is expected to remain intact next year.

That being said, there is good reason to believe that the gap in regional growth performances will start to close in 2007, as the special forces that have given the west the edge diminish to some extent. First, the sky-high Canadian dollar is projected to pull back to the 81-83 U.S. cent range next year, providing some needed relief to the manufacturing-heavy economies of central Canada. And, second, the recent rally in world commodity prices, which has helped the west but hindered the east, is expected to cool this year and next. Crude oil prices are forecast to slip to US$50 per barrel and to remain in the US$45-50 range in 2007. While the level of crude oil and other commodity prices is likely to remain relatively high by historical standards, the reversal will no doubt curtail some of the current enthusiasm in the resource sector.

One factor that is likely to work in the opposite direction and, hence, delay any major narrowing in the regional gap in 2007 is the outlook for a sharp slowdown in the U.S. economy. We expect the U.S. will deliver real GDP growth of only 2-2.5 per cent in the second half of 2006 and first half of 2007, which is a far cry from its recent trend rate of about 3.5-4 per cent. Weaker U.S. demand over the forecast period will weigh on all provincial economies, but none more so than in central Canada.

Among the provinces, look for Alberta to grow at a robust 4 per cent per year in the 2006-07 period. In spite of the likelihood of some slackening in oilpatch conditions later this year and into 2007, there is significant forward momentum currently built up in the province’s economy. The economic expansion in British Columbia will remain strong in 2007 – above the 3 per cent mark – as continued strength in construction and services activity more than offsets a slowdown in forestry. Elsewhere in the Western region, continued expansion in the energy and mining industries, and some improvement in the crop sector, is likely to keep real GDP growth in Saskatchewan above the national average, while the diversified economy of Manitoba is expected to advance at the same beat as Canada as a whole.

Meanwhile, prospects for weaker U.S. demand later this year and ongoing softness in manufacturing are likely to keep economic growth in the slow lane (i.e., 2-2.5 per cent) in Quebec, Ontario and New Brunswick in 2006-07. Similarly, the on-going reduction in energy production in Nova Scotia and a lack of major construction projects in Prince-Edward-Island will keep these economies expanding at a slower pace than the national average for a fourth and fifth consecutive years in 2006 and 2007, respectively. In contrast, Newfoundland & Labrador should lead the country in terms of real GDP growth in 2006, thanks mainly to the start-up of production at the White Rose oilfield, and remain at the upper end of the leaderboard in 2007.

Lastly, inflation is where we observed fewer disparities across regions. For example, the red-hot labour market and sharply rising wages in the West has failed to create major upward pressures on consumer prices. This year and next, inflation is expected to ease across the country, weighed down by a decline in energy prices and the expected introduction of the GST cut from 7 to 6 per cent in the upcoming Federal Budget.