Provinces: Sluggish growth

But, with few exceptions — oil-rich Alberta, for one — most provinces are looking at an uphill battle to secure decent economic growth. (The economic outlook for the other provinces and territories begins on page 14.)

In Ontario’s case, projections for its real gross domestic product growth in 2012 range from Toronto-Dominion Bank’s scant 1.7% to Central 1 Credit Union’s 2%-2.5%. Ontario is expected to lag slightly behind the country as a whole as Canada overall receives a boost from energy exports. (Ontario’s GDP growth for 2011 is estimated to have been 2%-2.5%.)

Despite another year of slow growth in the forecast, there are several positives for Ontario, says Alex Koustas, an economist with Bank of Nova Scotia’s economics department in Toronto. In particular, the traditional manufacturing sector is faring better as companies adjust to the shift to the harmonized sales tax and the income-tax reductions for small businesses.

As well, Ontario’s service sector is making a growing contribution to the overall picture, as it now comprises 75% of the province’s economic activity, up from 68% in 2000. (The balance is attributed to manufacturing.) The financial services industry, wholesale and retail trade, and professional services — particularly, the high-technology sector — are strong forces on the services side.

“The size and scope of the manufacturing business has declined in Ontario during the past decade,” says Koustas. “There’s been a shift to value-added manufacturing that requires skilled labour. If we’re going to compete with countries such as China, we must do it through skill, efficiency and innovation, not cost.”

With the U.S. accounting for about 80% of Ontario exports, the province’s economic performance is closely tied to that of its neighbour to the south. In fact, no province’s economy is more closely correlated to that of the U.S. According to a report by Toronto-based CIBC World Markets Inc., for every percentage-point drop in U.S. real GDP growth, Ontario’s economy decreases by 0.3 to 0.7 percentage points.

Although the U.S. economy is still struggling, there are signs of recovery in automobile sales — and this bodes well for Ontario’s automakers in 2012. Ottawa-based Export Development Canada is forecasting an impressive 20% growth in motor vehicles sales in 2012, which will have a big impact as the auto industry accounts for about 34% of Ontario’s international exports.

“We’re seeing early signs that the [American] consumer is on the mend,” says Peter Hall, chief economist with EDC. “Real retail sales are growing at a remarkable rate, and the housing industry is on the march after a few years of wallowing in low levels of activity.”

In December 2011, U.S. auto sales were running at an annualized pace of 13.9 million vehicles, up from 11.5 million in 2010 and 10.3 million in 2009. Americans are finding they can’t wait any longer to replace their old vehicles, Hall says: “The American consumer spent a long time recovering from past excesses, and we’re getting to the end of it. Momentum is building and defying expectations. It’s happening across a broad front, and without stimulus.”

As the cork of pent-up demand bobs to the surface, consumer and business confidence increases, job growth picks up and factory orders increase.

The benefits are spreading beyond vehicles and auto parts to housing and industrial goods. The EDC is forecasting a 6% pickup in demand for industrial goods in 2012 and 6% for machinery and equipment. Industrial goods account for 35% of Ontario’s exports, while machinery and equipment account for 14%.

Hall also predicts a resurgence in the Ontario forestry sector as U.S. housing starts to pick up. Lumber will be a big winner, he says, with production growing by 10% in 2011. Pulp and paper is the “weak sister” in forestry, he adds, and will not pick up until the later stages of the economic recovery.

“There is a story beyond autos; Ontario is not a one-trick pony,” says Robert Hogue, senior economist with Royal Bank of Canada in Toronto. “There is strong demand for a lot of Ontario products, including machinery, electronics and chemicals.”

Helmut Pastrick, chief economist with Central 1 in Vancouver, is optimistic about the outlook for mining, expecting further discoveries and an increase in production capacity. The Sudbury-area nickel mine owned by Brazil-based Vale Ltd. is running full bore after a prolonged strike in 2010; the Kidd Creek copper mine near Timmins, owned by Xstrata Canada Inc., is expanding its mining zone.

“Mining will benefit from strong commodities prices in the medium to long term, fuelled by growing demand in emerging markets,” says Pastrick. “It will be good for northern Ontario, as exploration and production increase.”

As for Ontario’s local economy, the housing sector may not be quite the growth engine it has been the past few years. With housing affordability deteriorating as prices climb, Hogue says, sales of residential investments will stabilize or possibly decline. He expects that interest rates could be higher by the end of the year, which would crimp housing demand.

“The strong market can’t go on forever,” Hogue says. “And while it’s not overheated, there is no pent-up demand left, and we won’t be seeing the boost from first-time buyers. Housing starts could slow and construction activity will edge downward.”

Ontario’s economy will receive little help from government spending on infrastructure projects or new hiring, with the provincial government in restraint mode. The plan is to eliminate the province’s $16-billion annual deficit in five years. Ontario’s deficit amounts to 2.5% of its GDP, among the highest in the country.

“Public-sector hiring was three times the pace of private hiring last year,” Koustas says. “But this year, the pace will slow down considerably as the government tries to balance the books.”

Government belt-tightening will affect employment, and Koustas forecasts a mere 0.8% increase in employment in 2012, less than the 1.8% increase estimated for 2011. Unemployment will hover around 8%, he says. However, Koustas anticipates that Ontario will be cautious about cutting too aggressively and will take a “go slow” approach so that economic growth isn’t strangled. IE