The outlook for Ontario’s economy is looking particularly gloomy for 2009. With the province facing a declining manufacturing sector and an auto industry fighting for survival, economists are generally pessimistic.

“Ontario has been under pressure for a while,” says Robert Kavcic, an economist with Bank of Montreal’s investment banking group in Toronto. “But the past quarter or two, it has really fallen on hard times. The manufacturing sector has been struggling under the weight of a strong Canadian dollar and the U.S. downturn. In recent months, that downturn has been exacerbated by what is happening in the auto sector, with sales plunging and output coming to a halt.”

Economists at BMO are now forecasting that Ontario’s economy will have contracted by 0.2% in 2008 and they expect a further 2.3% decline in 2009 — the province’s worst performance since the early 1990s.

But economists are not united in the degree of their pessimism. Toronto-Dominion Bank is forecasting a decline of 1.8% in Ontario’s real GDP growth for 2009, while Vancouver-based Central 1 Credit Union predicts that the province’s economy will contract by 2.5% this year.

Says Helmut Pastrick, chief economist at Central 1: “Last year was the year of the financial crisis, and this year is going to be the year of the recession. We can all take some encouragement from the various policy measures that have been taken or have yet to be taken, particularly on the fiscal side.”

The outlook will become bleaker, Pastrick says, as the recession spreads to other domestic sectors and deepens in the already affected sectors of manufacturing, forestry, mining and housing.

The auto sector is taking the biggest hit. In both the U.S. and Canada, auto sales are plummeting, leading to a domino effect of reduced production and continuing layoffs. Over the past two years, Ontario’s auto sector has seen 5,000 jobs disappear; the Conference Board of Canada predicts the country’s auto industry will lose another 15,000 jobs by the end of 2009. And with the uncertainty hanging over the viability of the U.S.-based Big Three automakers, there could be even more serious repercussions than currently anticipated.

The financial health of Detroit-based giants General Motors Corp., Ford Motor Co. and Chrysler LLC has had a huge impact on plant closures, layoffs and production delays in Ontario. GM’s light-truck plant in Oshawa and Daimler Truck’s North America LLC truck plant in St. Thomas are scheduled to close in 2009. And after GM’s transmission plant in Windsor closes in 2010 the automaker will no longer directly employ anyone in that city.

Even the offshore-based automakers’ operations in Canada are feeling the crunch. Any hope that Toyota Canada Inc.’s new assembly plant in Woodstock, Ont., had brought to the sector when it opened in December 2008 is slowly diminishing as the plant faces production delays.

The same month the Toyota Canada plant opened, the U.S. government agreed to fund US$17.4 billion in emergency loans to the struggling U.S. auto industry. GM will get US$9 billion; Chrysler is requesting US$7 billion but so far has received only US$4 billion. Both companies are required to present a restructuring plan for their entire operations, including their international subsidiaries, by Feb. 17.

Ford has stated it doesn’t need immediate government money, although it may need financial assistance at a later date.

The Canadian and Ontario governments also plan to provide domestic automakers with short-term loans, with up to $3 billion going to General Motors of Canada Ltd. and $1 million to Chrysler Canada Inc. Both companies have been given until Feb. 20 to make submissions that will outline their restructuring plans. They must also demonstrate by March 31 that concrete steps are being taken to achieve those plans.

The Canadian government also has included help for the auto sector in its Jan. 27 budget. It will spend $12 billion to create the Canada Secured Credit Facility, part of which will support financing to buy or lease vehicles and equipment for consumers and businesses.

One of the potentially contentious terms of the Canadian loans to GM and Chrysler is that the companies are required to make their labour costs competitive with those of the U.S. operations of Japan-based automakers. The Canadian Auto Workers union has maintained that Canadian labour costs of the Big Three automakers are justified by higher productivity at Canadian plants.

@page_break@Still, it is unclear if the bailout measures will work, says Dennis DesRosiers, president of Richmond Hill, Ont.-based DesRosiers Automotive Consultants Inc.: “No bailout money will change the fact that Americans aren’t buying vehicles from anyone, including Ontario. The bailout just keeps the companies making these vehicles afloat while we wait for the market to turn around, which isn’t expected for about 18 months. So, in many respects, the auto bailouts will have zero impact on the Ontario economy [in 2009].”

The auto-parts sector is also hurting badly, and many parts suppliers have shut down for inventory adjustment.

“Ontario is the most dependent on the U.S. market,” says Robert Hogue, senior economist with Royal Bank of Canada in Toronto. “Its economic fate highly depends on conditions south of the border. It’s going to be a tough period.”

The crisis in the auto sector has had a huge effect on Ontario’s unemployment rate. For the first time on record, the province’s unemployment rate was higher than that of Canada’s, hitting 7.2% as of Dec. 30, 2008, compared with 6.6% nationally. Whether that gap continues to widen in the coming months will depend on the fate of the auto industry, say economists at National Bank of Canada. November showed a record high of 66,000 jobs lost in Ontario and, BMO’s Kavcic says, although that number probably exaggerates the weakness, he still expects employment in Ontario to decline in 2009 by 0.9% for the first time since 1992.

“Job losses are expected to mount throughout 2009,” adds Arlene Kish, senior economist with IHS Global Insight Inc. in Toronto. “We are forecasting the unemployment rate to average around 8.4% next year and stay high in 2010. Employers are less likely to start hiring until there is sufficient demand for labour. We do not expect the unemployment rate to drop below 8% until 2011.”

Ontario housing starts in 2009 are also expected to drop to their lowest level in a decade. “Housing activity really supported the Ontario economy in 2008,” says Kish, “and Ontario was one of the few provinces in which housing starts actually climbed last year. We don’t anticipate this trend to continue in 2009 and, like other provinces, housing starts are expected to decline.”

Commercial real estate development will also decline as financing for projects slows or is postponed. Recently, a $300-million expansion to Toronto’s internationally recognized MaRS Centre was put on hold. Such events do not bode well for the construction industry.

But despite the gloom, Ontario’s economy should start to see visi-ble signs of growth by 2010, says Hogue. The future depends on many factors, he adds, specifically a return to stability in the banking system and a positive outcome for economic stimulus packages. IE