The election of a majority Liberal government in Quebec and the decisive defeat of the separatist Parti Québécois signal a turn to greater economic stability and enhanced credibility on the fiscal front in the province, observers say.
“Suffice it to say that the sovereignty issue was all but put to bed last night,” BMO Nesbitt Burns chief economist Douglas Porter said in a note Tuesday.
“From an economic perspective, a majority government (and silencing of referendum talk) returns some political stability back to Quebec, which is a clear positive for the flagging economy,” he said, pointing out that the Canadian dollar is modestly stronger Tuesday morning at $1.092 (U.S.).
“Certainly from a foreign investor perspective, they are more comfortable with the idea of the separation issue fading into the background,” said David Watt, chief economist with HSBC Canada.
“We still need foreign investment having a strong confidence in Canada.”
The federalist Liberals’ promise to relaunch the Plan Nord to bolster the mining, energy and forestry sectors bodes well for getting more foreign direct investment in metals and minerals in northern Quebec, said Mr. Watt.
Over the past few days, 10-year spreads in the bond market were narrowing slightly compared with Ontario as the Liberals gained strength in the polls, said Mr. Porter: “This result should only further temper concerns in the bond market, though sights will now turn to a Liberal budget.”
Yield spreads on Quebec bonds have tightened up by two basis points just since the election results were in, said Joey Mack, director of retail trading at GMP Securities. (A basis point is one-hundreth of a percentage point)
Look for Quebec bonds to put in a strong performance, especially in light of the upcoming Ontario election, he said.
“You’ve got four years of stability,” Mr. Mack said about Quebec. But he added that a key driver of market sentiment will be the first Liberal government budget and how determined it is about putting the province’s fiscal house in order.
Mr. Porter said to expect the Liberal government of Philippe Couillard to target a budget surplus by 2015-16, mostly through a freeze on spending.
One of the major challenges facing the new government is the $2.5-billion budget deficit and province’s mounting debt, which is projected to reach $198.4-billion – 54.3 per cent of the province’s GDP – by 2018-19.
The Liberals have pledged to create 250,000 jobs during the next five years, while cutting $1.3-billion in spending. Half of any eventual surplus will be directed to income tax cuts and half to paying down Quebec’s long-term debt.
The “election of a strong majority government increases certainty surrounding government policy since budgets and other key legislation can be passed without support from opposition parties,” Toronto-Dominion Bank economic analyst Sonny Scarfone said in a note Tuesday.
TD Economics is forecasting Quebec real GDP growth to increase moderately to 1.9 per cent in 2014 and 2.3 per cent in 2015, bolstered by a rebounding U.S. economy.
But the bank did not revise its outlook based on the election result in light of the “significant economic and fiscal challenges” the incoming government faces.
“That said, to the extent that business and investor confidence in the province improves, the risks surrounding our call appear to have tilted to the upside,” said Mr. Scarfone.
Yves-Thomas Dorval, head of the influential employers’ group Conseil du patronat du Québec, said a majority government sends out a positive signal that can help boost economic growth, as long as the new regime acts quickly on key strategic decisions, especially with regards to public finances and wealth creation.
“Quebeckers currently face issues that will have a major impact on their future and the quality of their lives in the future,” said Mr. Dorval, singling out Quebec’s status as a wealth-creation laggard, a public debt that continues to rise, the economy’s slow decline, an aging population and crumbling infrastructure.
With files from The Canadian Press