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BMO Bank of Montreal

December 07, 2011 09:30 ET

BMO Economics: Capital Spending to Contribute to Steady Growth in Quebec

- Transport, aerospace to boost exports in 2012

- Real GDP growth of 1.8 per cent in 2011; 1.7 per cent in 2012 (Canada's at 2.3 per cent in 2011; 2.0 per cent in 2012)

MONTREAL, QUEBEC--(Marketwire - Dec. 7, 2011) - Quebec's real GDP is expected to grow 1.8 per cent this year before softening to 1.7 per cent in 2012, according to the Provincial Monitor report released today by BMO Economics.

"Fiscal restraint has taken root in Quebec, as the Province remains fully in budget-balancing mode," said Robert Kavcic, Economist, BMO Capital Markets. "As well, the tax burden will continue to rise in 2012 in part due to another one percentage-point QST increase and an increase in the health contribution tax."

This rising tax burden will cut into disposable income and consumer spending. "Retail sales in the province were up a decent 2.5 per cent year-over-year in Q3, but should cool early next year," stated Mr. Kavcic. "Offsetting this somewhat will be a still-solid level of capital spending. Ongoing Hydro Quebec investments continue to support growth, while the Plan Nord will see the Province inject $2.1 billion into infrastructure, and Alcoa announced it will spend $2.1 billion to upgrade its Quebec smelters."

Sluggish pace of U.S. growth will be an ongoing headwind for manufacturing, though the sector is still seeing solid growth. "Manufacturing sales were 6.9 per cent above year-ago levels in the third quarter, led by transportation equipment, and recent aerospace orders should provide a boost to exports in 2012," said Mr. Kavcic. "That said, manufacturing employment continues to fall, down 7.7 per cent year-over-year to the lowest level on record in October, before a modest pickup in November. Services and construction have picked up some of the slack."

"Despite the overall slowing of the provincial economy, businesses continue to invest in new product development, production, and in upgrading their operations by purchasing machinery and equipment," said Victor Pellegrino, Vice-President, Commercial Banking, Metropolitan Montreal, BMO Bank of Montreal. "Overall, there is a cautious optimism in the business community as they are making strategic decisions that will better position them for growth going forward, particularly in terms of productivity and overall competitiveness."

Quebec's midyear fiscal update pegged the fiscal 2011-2012 deficit estimate at $2.9 billion, essentially unchanged from the Budget forecast. Quebec continues to project a return to a surplus position in fiscal 2013-2014.

The full Provincial Monitor can be downloaded at bmocm.com/economics.

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