Posthaste: Canada’s provinces face ‘deteriorating’ outlook, says Fitch Ratings

Canada's provinces will face headwinds in the coming year. Photo by Getty Images

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The resilience of Canada’s economy to Donald Trump’s trade war has surprised forecasters, including the Bank of Canada, but we’re not out of the woods yet.

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The outlook for Canada’s provinces in 2026 remains “deteriorating,” said Fitch Ratings this month, after first lowering its outlook from neutral in its midyear report.

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“Economic and fiscal challenges continue to tilt slightly negative for provinces, despite resilience thus far,” said Douglas Offerman, Fitch senior director.

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Though less severe than the worst-case scenarios first imagined earlier this year, the impact of trade tensions on the economy and fiscal performance has been “meaningful,” said the rating agency.

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Other headwinds such as slowing population growth and rising public service costs are expected to continue in the new year, though lower borrowing rates will help with these challenges, it said.

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The new push by Federal and provincial governments toward infrastructure and natural resource development is promising, said Fitch, but unlikely to boost provincial economies right away. Finding new trade partners will also take time.

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Meanwhile, hefty tariffs on the steel, aluminum, auto and forestry sectors and Asian tariffs on agricultural products are hitting the “regional economic pillars” of Ontario, Quebec, British Columbia and Saskatchewan.

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Alberta is grappling with lower energy prices and Saskatchewan, with higher healthcare and fire response costs.

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All the provinces except British Columbia forecast real GDP growth below 2024 levels this year and next, said Fitch.

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Central Canada, the region most impacted by the trade war, is expected to show the weakest growth, with BMO Capital Markets predicting just 1 per cent rise in GDP in 2026 for Manitoba, Ontario and Quebec.

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Southern Ontario is also experiencing a housing correction, which BMO expects will continue in the new year.

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Trade and economic headwinds have pushed up spending not only for the federal government, but also for the provinces, said Shelly Kaushik, senior economist for BMO Capital Markets.

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The combined deficit for the provinces is set to hit 1.4 per cent of GDP this fiscal year, “meaningfully deeper than 0.1 per cent share in FY24/25,” she said.

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When added to the federal deficit, it climbs to an estimated 3.8 per cent of GDP, the highest since the Great Recession, she said.

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Fitch will be watching in coming months for developments that could further weaken the provinces’ outlook, including:

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