Quebec Economy: A Broad Based, Moderate Expansion In 2018 Q1

The public and investors are aware that the Quebec economy gained traction in recent years. Real GDP growth in 2017 advanced at its strongest pace (3.0%) since 2000, propelled by household spending and business investment.

However, the economic accounts recently released by l’Institut de la Statistique du Québec show some moderation in economic growth in the province during the first quarter of 2018. Real GDP grew at its slowest pace in six quarters; yet a still respectable annualized rate of 1.8% q/q. This moderation is mainly attributable to slower growth in household expenditures. After increasing at its fastest pace in the current business cycle in late 2017 (4.9% q/q annualized), household expenditures in goods and services rose by a modest 1.4% q/q annualized in 2018 Q1. Household spending in all of the 13 basic and discretionary categories registered a slower pace of growth, except food.

In our view, for some reason consumers took a breather to begin the year despite further improvement in labour market conditions. Household disposable income (3.9% q/q annualized) continued to increase at a faster clip than household spending in nominal terms. Thus, the saving rate climbed to a two-decade high of 7.3%, almost 2 percentage points higher than a year ago. Households in Quebec will benefit from a very comfortable cushion in case an unexpected negative shock occurs. In comparison, households in Ontario have a thin 2.0% saving rate.

Also, residential investment remained stable in 2018 Q1, following double-digit growth during the second half of 2017. Unsurprisingly, the sub-component of residential investment that fell the most was ownership transfer costs (-7.8% q/q ann.) as higher interest rates and OSFI’s new restrictive mortgage regulations slowed resale housing activity. Renovation spending pulled back to a lesser extent (-1.1% q/q ann.). Home-building activity, the third sub-component of residential investment, rose for a sixth consecutive quarter in 2018 Q1 (+3.6% q/q ann.). Measures such as the housing starts-to-population ratio and the absorption rate do not show signs of overbuilding. This being said, housing starts stood above 50K annualized in 2018 Q2 and clearly above household formation according to new statistics released by CMHC earlier this week.

Another encouraging development is the increasing contribution of business investment to GDP growth overtime. As the Quebec business cycle matures, companies build up new production capacity. Business investment in M&E and buildings both rose at a pace of 5% q/q annualized in 2018 Q1, extending the uptrend firmly in place since 2016. Similar to business investment, government spending (3% q/q ann. in 2018 Q1) is also on an upward trend since 2016 as the provincial government is able to allocate budgetary surpluses to spending programs after efforts made in 2014-15 to eliminate the structural deficit.

Overall, these encouraging trends in government spending and business investment make the economic expansion increasingly broad based. This being said, the situation is not perfect. The Quebec’s international trade balance has been deteriorating, even before the White House announced tariffs on steel and aluminum at the end of May. This deterioration continued in 2018 Q1 with the main drag being international exports of goods (-4.7% q/q ann.).

However, the weakness was highly concentrated in Quebec’s top export: aluminum products. In volume terms, international exports of aerospace, pharmaceutical, chemical and iron products are growing at a double-digit pace year-to-date. Also, international exports of services jumped 8.4% q/q annualized during 2018 Q1, playing an increasing role in Quebec’s export sector although they represent only one-fifth of total international exports.

Finally, interprovincial exports rose moderately (+4.4% q/q annualized), reflecting the robust economic expansion taking place in the economies of Quebec’s main Canadian trading partners, Ontario and Alberta.

Bottom Line: The Quebec economy got off to a respectable start in 2018 even though it has been growing at a slower pace than in 2017. The 1.8% q/q annualized growth performance in 2018 Q1 stands a notch below our current real GDP annual growth forecast of 2.2% for the entire 2018 and the 2.1% forecast used in the 2018 Quebec budget published last March. Moreover, employment, manufacturing shipments and retail sales numbers released so far for 2018 Q2 are not supportive of an imminent acceleration in economic momentum. With global trade tensions increasing and a smaller pool of labor force available, the risks to Quebec’s real GDP forecast of 2.2% for 2018 are thus slightly tilted to the downside.