The Quebec economy grew at a slower pace of 1.8% annualized in the first quarter of 2018, its slowest in 6 quarters, due to slower household expenditure growth. Household savings increased to a high of 7.3% while business investment and government spending continued trending upward, making the expansion more broad-based. However, Quebec's international trade balance deteriorated before US tariffs and the weakness was concentrated in aluminum exports, though other exports grew double-digit. Overall the economy started 2018 respectably but at a slower pace than 2017 and momentum may not accelerate given global trade tensions and a tight labor market.

1.
The Quebec Economy: A Broad based, Moderate Expansion in 2018Q1
Public and investors are aware that the Quebec economy gained traction in recent years. Real GDP growth in 2017
advanced at its strongest pace (3.0%) since 2000, propelled by household spending and business investment.
However, the economic accounts recently released by l’Institut de la Statistique du Québec show some moderation in
economic growth in the Province during the first quarter of 2018. Real GDP grew at its slowest pace in 6 quarters; yet
a still respectable annualized rate of 1.8% q/q (see chart below). This moderation is mainly attributable to slower
growth in household expenditures. After increasing at its fastest pace in the current business cycle in late 2017 (4.9%
q/q annualized), household expenditures in goods and services rose by a modest 1.4% q/q annualized in 2018Q1.
Household spending in all of the 13 basic and discretionary categories registered a slower pace of growth, except
food. In our view, for some reason consumers took a breather to begin the year despite further improvement in labour
market conditions. Household disposable income (3.9% q/q annualized) continued to increase at a faster clip than
household spending in nominal terms. Thus, the saving rate climbed to a 2-decade high of 7.3%, almost 2
percentage points higher than a year ago. Households in Quebec will benefit from a very comfortable cushion in case
an unexpected negative shock occurs. In comparison, households in Ontario have a thin 2.0% saving rate.
Also, residential investment remained stable in 2018Q1, following double-digit growth during the second half of 2017.
Unsurprisingly, the subcomponent of residential investment that fell the most was ownership transfer costs (-7.8% q/q
ann.) as higher interest rates and OSFI’s new restrictive mortgage regulations slowed resale housing activity.
Renovation spending pulled back to a lesser extent (-1.1% q/q ann.). Homebuilding activity, the third subcomponent
of residential investment, rose for a sixth consecutive quarter in 2018Q1 (+3.6% q/q ann.). Measures such as the
housing starts-to-population ratio and the absorption rate do not show signs of overbuilding. This being said, housing
starts stood above 50K annualized in 2018Q2 and clearly above household formation according to new statistics
released by CMHC earlier this week (see chart below).
Another encouraging development is the increasing contribution of business investment to GDP growth overtime. As
the Quebec business cycle matures, companies build up new production capacity. Business investment in M&E and
buildings both rose at a pace of 5% q/q annualized in 2018Q1, extending the uptrend firmly in place since 2016.
Similar to business investment, government spending (3% q/q ann. in 2018Q1) is also on an upward trend since
2016 as the provincial government is able to allocate budgetary surpluses to spending programs after efforts made in
2014-15 to eliminate the structural deficit.
Overall, these encouraging trends in government spending and business investment make the economic expansion
increasingly broad based. This being said, the situation is not perfect. The Quebec’s international trade balance has
been deteriorating, even before the White House announced tariffs on steel and aluminum at the end of May. This
deterioration continued in 2018Q1 with the main drag being international exports of goods (-4.7% q/q ann.).However,
the weakness was highly concentrated in Quebec’s top export: aluminum products. In volume terms, international
exports of aerospace, pharmaceutical, chemical and iron products are growing at a double-digit pace year-to-date.
Also, international exports of services jumped 8.4% q/q annualized during 2018Q1, playing an increasing role in
Quebec’s export sector although they represent only one-fifth of total international exports. Finally, interprovincial

2. Economic Research and Strategy
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of Laurentian Bank Securities (LBS), a wholly owned subsidiary of the Laurentian Bank of Canada. The author has taken all usual and reasonable precautions to determine that the information contained in this document
has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze it are based on accepted practices and principles. However, the market forces underlying investment value
are subject to evolve suddenly and dramatically. Consequently, neither the author nor LBS can make any warranty as to the accuracy or completeness of information, analysis or views contained in this document or their
usefulness or suitability in any particular circumstance. You should not make any investment or undertake any portfolio assessment or other transaction on the basis of this document, but should first consult your
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without in each case the prior express written consent of Laurentian Bank Securities.
Source: Institut de la Statistique du Quebec/Haver Analytics
Quebec Real GDP
(q/q % change saar)
Quebec Real GDP
(yoy % change)
5
4
3
2
1
0
-1
5
4
3
2
1
0
-1
12 13 14 15 16 17
exports rose moderately (+4.4% q/q annualized), reflecting the robust economic expansion taking place in the
economies of Quebec’s main Canadian trading partners, Ontario and Alberta.
Bottom Line: The Quebec economy got off to a respectable start in 2018 even though it has been growing at a
slower pace than in 2017. The 1.8% q/q annualized growth performance in 2018Q1 stands a notch below our current
real GDP annual growth forecast of 2.2% for the entire 2018 and the 2.1% forecast used in the 2018 Quebec budget
published last March. Moreover, employment, manufacturing shipments and retail sales numbers released so far for
2018Q2 are not supportive of an imminent acceleration in economic momentum. With global trade tensions
increasing and a smaller pool of labor force available, the risks to our Quebec’s real GDP forecast of 2.2% for 2018
are thus slightly tilted to the downside.
Sébastien Lavoie | Chief Economist
514 350-2931 | lavoies@vmbl.ca
Source: Canada Mortgage and Housing Corporation/Haver Analytics
Housing Starts: Rest of the Province
(units, seas. adj. at annual rate)
Housing Starts: Montreal
(units, seas. adj. at annual rate)
60
50
40
30
20
10
0
60
50
40
30
20
10
0
13 14 15 16 17 18