2010 is shaping up to be a great year, from RBC

New beginnings

Turning the page on 2009 will be done with great relief almost everywhere in Canada. The past year has been, by far, the toughest since the early 1990s recession and, in some cases, the early 1980s recession. Hardship was evident from coast to coast, even in parts of the country, such as Alberta, that were previously considered almost bullet-proof.

Perhaps more importantly, however, will be the full force of fiscal and monetary stimulus kicking in. Nearly all governments at the federal, provincial and municipal levels have initiated substantial infrastructure spending programs and these will be in high gear during the year ahead.

In most cases, although not all, 2010 will be the peak of stimulus spending.

The easing of monetary policy is already having a visible impact – most notably in housing resale markets across the country – and should continue to do so despite our expectation that the Bank of Canada will gradually take its feet off the gas pedal starting mid-year. Extremely low mortgage rates have been key to the spectacular rebound in housing resale activity in every province since early 2009.

The precipitous decline in activity that started late in 2008 plunged a number of provinces – including Ontario, Alberta and British Columbia – into a deep slump through the better part of the year, which reverberated loudly in regional job markets.

The ranks of the unemployed swelled and unemployment rates surged broadly, reaching the highest levels since the 1990s in Ontario and Alberta.

While many challenges will remain, 2010 promises a widespread turnaround in economic performance, albeit a modest one at first. A more sanguine global context will sharply contrast with the meltdown on the world stage that took place in 2008 and early 2009. With the financial crisis behind us and the U.S. economy on the mend, factors “external” to the provincial economies are expected to contribute positively to growth again.

In turn, this housing resurgence should be seen as evidence that consumers are feeling more upbeat even in areas of the country such as British Columbia, Ontario and Alberta where the recession caused substantial damage.

The price tag for the fiscal stimulus is enormous – huge budget deficits.

Collectively, the provinces are projecting shortfalls totaling $38.2 billion in the 2009-10 fiscal year and at least $30.2 billion in 2010-11 (with two provinces not providing estimates), both records in terms of value. However, relative to GDP, the deficits will be modestly milder than the peaks recorded in the early 1990s.

While running up huge budget shortfalls might cause some discomfort, the alternative was even less attractive given the severity of the economic downturn. Nonetheless, returning to balance during the medium-term will be a challenge involving difficult choices.
Partly offsetting any negative impact in the medium-term will be the benefits of implementing the Harmonized Sales Tax (HST) on July 1, 2010.

Although the HST will result in certain currently exempt products and services being taxed, moving to a value-added tax structure will make the tax system more economically efficient and will improve the competitiveness of Ontario businesses by lowering the cost of doing business in the province.

Wish you & Your Family Happy Holidays !
Jimmy