Man­u­fac­tur­ing and con­struc­tion have been strong eco­nomic driv­ers for Que­bec, the growth of which is ex­pected to slow slightly this year

Investment Executive - - FRONT PAGE - BY DONALEE MOUL­TON

Man­u­fac­tur­ing and con­struc­tion have been driv­ers, but growth may slow this year.

la belle prov­ince was a bright eco­nomic light in Canada last year — and there’s no in­di­ca­tion the lus­tre will fade any­time soon.

“Que­bec has been a very pleas­ant sur­prise in 2017,” says Robert Hogue, se­nior econ­o­mist with Royal Bank of Canada (RBC) in Toronto. “We an­tic­i­pate the strong­est growth in 15 years [will be re­ported when num­bers are fi­nal].”

RBC es­ti­mates that Que­bec’s econ­omy ex­pe­ri­enced real gross do­mes­tic prod­uct (GDP) growth of 2.8% in 2017. Growth is ex­pected to slow slightly to 1.8% this year.

Toronto-based Bank of Mon­treal’s cap­i­tal markets divi­sion pre­dicts Que­bec will have real GDP growth of 2.1% this year, down from 2.9% growth in 2017 and al­most on par with the 2.2% growth rate pro­jected for the coun­try as a whole in 2018.

In De­cem­ber, Que­bec’s un­em­ploy­ment rate fell be­low 5% — “some­thing I never thought I’d see in my life­time,” says Hogue. This low rate ef­fec­tively means Que­bec now is at “full” em­ploy­ment, a mile­stone that has both ad­van­tages and dis­ad­van­tages.

“For a per­son al­ready in Que­bec and look­ing for work, the sce­nario is great,” says Stephen Spence, econ­o­mist with the Con­fer­ence Board of Canada’s pro­vin­cial out­look group in Ot­tawa. “[How­ever,] low un­em­ploy­ment also means find­ing work­ers is be­com­ing harder for busi­nesses. This will be­come a more se­ri­ous and fre­quent prob­lem.”

If the un­em­ploy­ment rate re­mains low, as an­tic­i­pated, busi­nesses could be de­terred from open­ing of­fices or ex­pand­ing into the prov­ince.

Man­u­fac­tur­ing and con­struc­tion have been strong eco­nomic driv­ers for Que­bec. Ac­cord­ing to a re­cent pro­vin­cial eco­nomic fore­cast from Toronto-Do­min­ion Bank (TD), man­u­fac­tur­ing gains have been wide­spread across in­dus­tries — and new-home con­struc­tion in 2017 is likely to hit a five-year high.

Greater Mon­treal has been par­tic­u­larly strong in these in­dus­tries. The re­gion’s good­spro­duc­ing in­dus­try is ex­pected to post growth in 2017 for the first time since 2012, and hous­ing con­struc­tion should post growth of 3.1% in 2017 be­fore mod­er­at­ing to 2.1% in 2018, ac­cord­ing to the Con­fer­ence Board.

There may be a hic­cup in hous­ing starts, how­ever. Stiffer rules for mort­gage lend­ing, cou­pled with an­tic­i­pated in­creases in in­ter­est rates, could dampen the mar­ket for new homes.

“We ex­pect both home re­sale and con­struc­tion ac­tiv­ity to ease in 2018,” states a re­cent re­port from RBC. “This is, in fact, one of the main fac­tors con­tribut­ing to slower eco­nomic growth in our fore­cast for the com­ing year in Que­bec.”

Man­u­fac­tur­ing is ex­pected to post growth of 4.7% in 2017, largely on the back of Mon­tre­al­based Bom­bardier Inc., says Spence.

In Oc­to­ber, Air­bus SE an­nounced it would ac­quire a ma­jor­ity stake in Bom­bardier’s C Se­ries Air­craft LP. Through that part­ner­ship, the com­pa­nies ex­pect to man­u­fac­ture more than 6,000 air­craft over the next 20 years.

The part­ner­ship’s head­quar­ters and pri­mary as­sem­bly line will re­main in Que­bec, while Air­bus will un­der­take ad­di­tional C Se­ries pro­duc­tion at its man­u­fac­tur­ing site in Alabama.

This U.S. pres­ence may serve as a com­pelling coun­ter­ar­gu­ment to Chicago-based Boe­ing Co.’s com­plaint that Bom­bardier re­ceived il­le­gal gov­ern­ment sub­si­dies. In the wake of that com­plaint, the U.S. Depart­ment of Com­merce levied a 220% coun­ter­vail­ing duty on Bom­bardier’s sale of com­mer­cial jets to one U.S. air­line.

Ma­jor projects also will con­trib­ute to the Que­bec econ­omy over the next sev­eral years. The light rail project in Mon­treal alone is ex­pected to cost $6 bil­lion — money that will be spent over the next three years on the 67-kilo­me­tre rail line.

Que­bec’s Lib­eral gov­ern­ment has re­ceived high praise for its fis­cal re­straint and bud­get tight­en­ing over the past sev­eral years. Late last year, Fi­nance Min­is­ter Car­los Leitão an­nounced that as a re­sult of “sound man­age­ment of pub­lic fi­nances,” the prov­ince had a bud­get sur­plus of $2.4 bil­lion. Half of that sur­plus will be used to lower in­come taxes for res­i­dents.

The gov­ern­ment also an­nounced that it will spend $367 mil­lion to step up de­ploy­ment of high-per­for­mance dig­i­tal in­fra­struc­ture in all re­gions of the prov­ince. This move will pro­vide more than 90% of Que­be­cers with ul­tra-high-speed In­ter­net within five years.

The eco­nomic strength shown in 2017 and the solid, if less ro­bust eco­nomic per­for­mance ex­pected for 2018 has boosted op­ti­mism.

“The momentum is there,” says Hogue. “Con­fi­dence is back, and con­fi­dence does won­ders for the econ­omy.”

Con­fi­dence, how­ever, can be a fickle emo­tion, Hogue warns: “It wouldn’t take much to dampen that mood.”

How­ever, Hogue leans to­ward the pos­i­tive side. “[Que­bec’s econ­omy] is not a house of cards,” he says. “It is quite solid.”

Two other chal­lenges also must be ad­dressed. The North Amer­i­can Free Trade Agree­ment is be­ing rene­go­ti­ated, and if the U.S. pulls out or pulls back sig­nif­i­cantly, Que­bec will feel the im­pact.

For ex­am­ple, Amer­i­can ne­go­tia­tors ex­pressed in­tent to elim­i­nate the sys­tem that con­trols prices and quan­tity in the dairy in­dus­try, which will have a di­rect eco­nomic ef­fect on Que­bec.

As well, Canada’s gen­eral de­mo­graphic trend to­ward an ag­ing pop­u­la­tion will present a chal­lenge for Que­bec, par­tic­u­larly be­cause the prov­ince has not been suc­cess­ful in at­tract­ing im­mi­grants.

“[Que­bec] at­tracts only about 18% of im­mi­grants to the coun­try,” Spence notes, “but has 23% of the pop­u­la­tion na­tion­ally.”

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