Reassessing Exposure to Quebec's Economy Amid Downgraded GDP Forecasts

Quebec's economy has entered a period of recalibration, marked by sharply revised GDP forecasts and a strategic pivot toward infrastructure and equity investments. As U.S. tariffs and global trade tensions weigh on exports, the province's real GDP contracted by 0.6% in the second quarter of 2025, marking the steepest decline since the 2009 financial crisisQuébec’s real GDP at market prices down 0.6% in the second quarter of 2025^[1]. This downturn, coupled with a projected $13.6 billion deficit for 2025–26Quebec Budget 2025: Record deficit and a long and conditional path to balance^[2], has forced policymakers to rethink fiscal priorities. For investors, the implications are clear: exposure to Quebec's markets now demands a nuanced understanding of both risks and opportunities.

The GDP Downturn: Causes and Consequences

Quebec's economic slowdown is rooted in external shocks and structural vulnerabilities. The implementation of U.S. tariffs averaging 10% on key exports—such as aluminum and manufactured goods—has eroded competitiveness, with international exports of goods plummeting by 28% in annualized termsQuebec Quarterly GDP - Desjardins^[3]. Domestic demand, however, has shown resilience, with household consumption and public sector investment offsetting some of the trade-driven lossesQuebec Quarterly GDP - Desjardins^[3]. Yet, the broader picture remains fragile. The Conference Board of Canada now forecasts real GDP growth of 1.2% for 2025, down from earlier projections, with growth averaging 1.6% annually from 2026 to 2029Quebec’s Five-Year Outlook—April 2025^[4].

The fiscal fallout is equally pronounced. Quebec's deficit is expected to expand to 40.4% of GDP in 2025–26, driven by increased infrastructure spending and delayed revenue measuresQuebec: 2025–26 Budget^[5]. A worst-case scenario—25% tariffs—could push the deficit to $14.8 billion and trigger a 0.1% GDP contraction in 2025Quebec: 2025–26 Budget^[5]. These developments underscore the urgency of strategic asset reallocation.

Strategic Reallocation: Infrastructure as a Stabilizer

In response to the economic headwinds, Quebec has launched an ambitious infrastructure plan—the 2025–2035 Québec Infrastructure Plan (QIP)—with $164 billion in investments over the next decadeThe 2025–2035 Québec Infrastructure Plan: the Gouvernement du Québec is taking the necessary steps to fulfill its commitments and contribute to economic growth^[6]. This represents a 7.2% increase from the previous year and a 63% rise since 2018The 2025–2035 Québec Infrastructure Plan: the Gouvernement du Québec is taking the necessary steps to fulfill its commitments and contribute to economic growth^[6]. The plan prioritizes sustainability, with $96.7 billion (65% of total funds) allocated to maintaining and rehabilitating existing infrastructureThe 2025–2035 Québec Infrastructure Plan: the Gouvernement du Québec is taking the necessary steps to fulfill its commitments and contribute to economic growth^[6].

Sector-specific allocations highlight the government's focus on long-term resilience:
- Health and Social Services: $4.6 billion to expand hospitals, long-term care facilities, and senior housingThe 2025–2035 Québec Infrastructure Plan: the Gouvernement du Québec is taking the necessary steps to fulfill its commitments and contribute to economic growth^[6].
- Education: $3.8 billion for school modernization and classroom expansionThe 2025–2035 Québec Infrastructure Plan: the Gouvernement du Québec is taking the necessary steps to fulfill its commitments and contribute to economic growth^[6].
- Transportation: $3.4 billion for road maintenance and $1.4 billion for public transit electrificationThe 2025–2035 Québec Infrastructure Plan: the Gouvernement du Québec is taking the necessary steps to fulfill its commitments and contribute to economic growth^[6].

These investments are not merely fiscal stimuli but strategic bets on sectors poised to drive growth. For instance, the aluminum sector—critically impacted by tariffs—retains a competitive edge due to lower production costs, while early diversification into European markets offers a potential offsetQuebec’s Evolving M&A Market: The Rise of Private Equity and Domestic Buyers^[7].

Equities and Private Capital: A New Frontier

Quebec's equity markets have also seen a shift in investor behavior. The Caisse de dépôt et placement du Québec (CDPQ) reported a 9.4% net return in 2024, with equities and infrastructure contributing disproportionately to gainsCDPQ generates net return of 9.4%, boosted by equities, infrastructure^[8]. Notably, CDPQ's private equity allocation has nearly doubled since 2013, reaching 20.1% of its portfolio in 2022, with plans to reach $100 billion in Quebec investments by 2026Big Ambitions, Tight Purse Strings: Our Analysis of the Quebec Budget 2025^[9].

Government-backed institutions like Investissement Quebec (IQ) and the Business Development Bank of Canada (BDC) are amplifying this trend. In 2024 alone, Quebec accounted for 59% of all Canadian private equity deals and 69% of the total deal value, reflecting a surge in local acquisitions, particularly in technology and manufacturingBig Ambitions, Tight Purse Strings: Our Analysis of the Quebec Budget 2025^[9]. This activity is further supported by a $4.1 billion assistance package for businesses affected by tariffs, including $803 million allocated in the current fiscal yearBig Ambitions, Tight Purse Strings: Our Analysis of the Quebec Budget 2025^[9].

Investment Implications and Recommendations

For investors, Quebec's economic recalibration presents a duality of risk and reward. The immediate outlook is clouded by trade uncertainties and fiscal deficits, yet the province's infrastructure and equity strategies offer long-term upside.

1. Infrastructure Funds: The QIP's emphasis on sustainability and sectoral rebalancing positions infrastructure as a defensive asset class. Investors should prioritize funds with exposure to healthcare, education, and public transit, which are less sensitive to trade cycles.
2. Provincial Equities: The surge in private equity activity—particularly in AI-driven tech and manufacturing—signals opportunities for high-growth exposure. However, liquidity risks persist, necessitating a balanced approach.
3. Hedging Against Tariff Risks: Given the volatility of trade policy, investors should consider diversifying holdings into sectors less reliant on U.S. markets, such as European export-oriented industries.

Conclusion

Quebec's economy is navigating a complex transition, with downgraded GDP forecasts underscoring the need for strategic asset reallocation. While trade tensions and fiscal deficits pose near-term challenges, the province's infrastructure and equity strategies offer a roadmap for resilience. For investors, the key lies in aligning portfolios with these structural shifts, balancing short-term caution with long-term optimism.