Slower, more sustainable growth for Quebec economy in 2019, but dangers lurk beyond

Quebec's economy finds itself at a crossroads as it enters the new year, positioned to continue growing but at a slower rate than it has in recent quarters.

Current private-sector estimates peg Quebec's GDP growth for 2019 around 1.9 per cent, a fair bit lower than the 2.4 per cent growth expected last year and the 2.8 per cent registered in 2017.

The cooling is likely to come mainly from lower domestic demand, especially in residential investment.

After increasing by 5.4 per cent this year, the Quebec government projects a decrease of 1.4 per cent in residential activity, the effect of higher interest rates and Canada's tighter mortgage rules finally being felt in the province.

The government also anticipates housing starts to drop by nine per cent in 2019. If that seems steep, though, it is largely due to huge gains made in the previous two years.

Housing starts should still be well above 40,000 units this year, around 5,000 units more than the average between 2014 and 2016.

'Robust growth'

That's only one of a number of indicators that has analysts relatively optimistic about the short-term prospects of the Quebec economy.

"We don't expect the kind of growth rate that we saw in the last couple of years to continue," said Robert Hogue, a senior economist with the Royal Bank of Canada.

"So we're expecting a little bit of a slowdown, but still I would say fairly robust growth."

In its fall economic update, the Quebec government outlined a number of sectors where the growth outlook remains positive.

Government projections, for example, have wages increasing by 3.2 per cent next year.

At the same time, the economy is expected to create 40,200 new jobs, which would lower the unemployment rate to 5.4 per cent.

The government is bullish, too, on non-residential business investment. In particular, it is counting on nearly six per cent growth in machinery and equipment investment, a key proxy for productivity.

"The Quebec economy is moderating from its recent cyclical peak," said Marc Desormeaux, who monitors Quebec for Scotiabank Economics.

"The province likely won't see the same kind of growth that it did over the last two years. But there are still a lot of positives as the economy returns to its underlying trend growth rate."

In other words, the figures Quebec posted in 2017 and 2018 were spectacular, but not sustainable. This year's growth will be slow and steady.

Global uncertainty

But beyond 2019, the picture gets a little murkier for Quebec, as it does for the global economy as a whole.

Government estimates are for growth to drop to 1.5 per cent in 2020 and 1.3 per cent in 2021.

"We think that accumulated rate hikes and the possibility — and I stress possibility — of a drop in the American fiscal situation bring more uncertainty for 2020. But 2020 is very far away," Quebec's finance minister, Éric Girard, said in early December.

The consensus among large institutional observers is that the global economy has also peaked and lower growth is anticipated in 2019.

And while few are predicting the slowdown will reach recession levels, there are uncertainties that could quickly darken that forecast.

Chief among them is the ongoing trade dispute between China and the United States and continued confusion about Britain's future with the European Union.

"Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are key threats to the global outlook," the International Monetary Fund said in an October research note.

As Quebec's main international export market, a slump in the U.S. economy would eventually be felt closer to home.

An analysis conducted by Quebec's Finance Ministry suggests the province's GDP would drop, on average, 0.45 per cent for every one per cent reduction in U.S. GDP.

There is little Quebec can do to influence the direction of the U.S. economy, but the government is being pressured to take steps to maximize domestic growth prospects.

At the top of that list, for many, is the ongoing labour shortage in the province that is making it difficult for businesses to meet demand.

The problem was highlighted in the December economic statement, but so far nothing has been announced to address it directly. 

Instead, the Coalition Avenir Québec government plans to reduce immigration levels beginning this year, which some worry could aggravate the shortage.

"Perhaps our greatest concern going forward is how Quebec will proceed with respect to immigration," Scotiabank said in a research note last month.

"A reduction in newcomer admissions from current levels was a signature election promise, and would be counterproductive to economic growth or financial sustainability."

Quebec accepted more than 50,000 immigrants last year. The new government is aiming for 40,000 this year, a reduction of between 20 and 30 per cent.

The federal government has also expressed its concerns about what fewer immigrants will mean for the economy.

Premirer François Legault, though, has given no indication he intends to reconsider his plan.

"If the old immigration policy worked, we would have known," Legault said in his inaugural speech to the Quebec legislature. "But that policy didn't prevent the labour shortage ... we have to change things."