A place to grow

“Ontario is expected to be among the faster-growing economies in 2016,” says Robert Hogue, senior economist with Royal Bank of Canada in Toronto.

Hogue is projecting real gross domestic product (GDP) growth in Ontario of 2.5% in 2016, up from an estimated 2.1% in 2015.

His forecast is in line with those of other economists, although Helmut Pastrick, chief economist at Central 1 Credit Union in Vancouver, has an even rosier prediction: 2.6% growth in GDP for 2016.

Robert Kavcic, vice president and senior economist at BMO Capital Markets Corp. in Toronto, is slightly more conservative: he forecasts 2.3% growth in GDP. “The growth rate isn’t the strongest by historical standards, but Ontario, along with B.C., will be head and shoulders above the rest of Canada,” Kavcic says. “Ontario’s growth is pretty solid in this environment of softer global growth.”

The darkest shadow hovering over Ontario falls on the mining industry, which is particularly important to northern Ontario and is suffering from low commodity prices and slowing demand from China.

As well, interprovincial exports of all kinds will be constrained by negative fallout from sagging energy prices in the producing provinces. Although Ontario benefits from the lower price of oil, the province may feel the pinch of higher electricity prices and rising labour costs.

Kavcic says the cost of oil is the key determinant of winners and losers among Canada’s provinces. The low commodity price acts as a boon for the provinces that are net consumers and as an albatross for oil-producing provinces such as Alberta and Newfoundland and Labrador. Consumers in Ontario will benefit from lower prices at the pump, he says, which gives people more money to spend on other things, and the province’s large manufacturing base will benefit from lower oil-related “input” costs in areas such as transportation.

Although both the C$ and the price of oil have been weakening for more than a year, the consequences took time to take hold. Hogue says broad-based gains in exports weren’t seen until the second quarter of last year after they suffered a significant setback in the first quarter related to retooling downtime at two Ontario automobile assembly plants and supply-chain disruptions caused by a labour strike at U.S. port.

In addition, Pastrick says, a nasty winter created a bit of a “soft patch” for the U.S. economy early in 2015 and crimped demand for various goods.

Exports account for roughly half of Ontario’s economic activity, according to Peter Hall, chief economist at Export Development Canada (EDC) in Ottawa.

Although the pace of growth in Europe, Asia and parts of Latin America may be slipping, the powerful U.S. economy dominates Ontario’s export picture, accounting for three quarters of the province’s merchandise export trade.

Hall says the benefits of the weak C$ are kicking in gradually: first, with a boost to manufacturers’ profits as their revenue from U.S. sales is converted to C$; and, second, with the strengthening U.S. economy adding to demand for more Canadian goods, investment in production capacity and renewal of supply-chain relationships is expanding. U.S. consumers saved an estimated US$103 billion at the gas pumps last year, he adds, and those spare dollars can be channelled to consumer spending on a variety of goods and services.

“It’s Ontario’s moment in the sun when it comes to exports,” Hall says. “It’s hard to see the light in the midst of all the financial market turmoil, stock market volatility and a lot of negative buzz. But there is a strong growth story unfolding in the province.”

The surge in Ontario’s exports shows up clearly in EDC’s numbers for the year ended Nov. 30, 2015, Hall says, with exports of motor vehicles and autoparts up by 25%, forest products up by 23%, industrial machinery up by 20%, electrical and electronic components up by 16%, and consumer goods up by 15%.

“The auto sector is bursting at the seams, with plants running at overcapacity,” Hall says. “There’s been a staggering increase in what we’re getting out of our facilities. Vehicle sales to the U.S. are on a rocket ride. The average age of a car is more than 10 years, and consumers feel it’s time to replace.”

Automobile purchases in Canada totalled a record 1.9 million units in 2015, almost 3% above the previous year’s record. In the U.S., purchases were 17.4 million units, overtaking the previous annual peak set in 2001. The fear is that Ontario’s capacity is so stretched that any further increases in demand could go to facilities in the southern U.S. and Mexico.

The positive trends also are filtering into services in Ontario. Tourism will benefit as more Canadians stay home for vacations and shopping, and as U.S. residents travel to Canada to take advantage of the strong US$. The financial services sector, along with associated professions such as law and accounting, are an important and thriving stimulus for Ontario.

In addition, Pastrick says, the housing market is a powerful engine, with Toronto and Hamilton expected to experience particularly strong residential sales and price increases in 2016. Other outlying cities, such as London, Guelph, Kitchener and Waterloo, will ride the wave as affordability becomes more challenging in Toronto.

Pastrick projects Toronto’s housing prices will increase by 9.2% in 2016, reaching an average sale price of $685,000. This increase will lead to continued strength in housing starts, renovation and construction activity, with no significant interest rate increases or price correction in sight this year.

“Construction was a surprise on the upside last year, and there’s a bit of upside left,” says Hogue. “Pre-construction sales have been strong for condo projects, and building will be going ahead. The cycle isn’t done yet.”

A further spark could be provided by immigration, as workers who have lost jobs in other provinces and international immigrants and refugees arrive in Ontario. The number of Ontario jobs increased by 80,000, or 1.2%, last year, and further increases are expected in 2016.

Pastrick forecasts Ontario’s unemployment rate will drop to 6.6% in 2016 from 6.9% last year. Retail sales should grow by 5.5% in 2016, up from 3.8% last year, according to Central 1’s forecast.

Ontario also will benefit from spending on infrastructure by the provincial government and the newly elected federal Liberal government.

ONTARIO

Population: 13,782,340

GDP, 2014 ($bil.): 722

GDP, % change: 4.1

2015-16 deficit ($bil.): 7.5

Estimated net debt ($bil.): 298.3

Per capita wage growth, % change, 2015: 3.2

Household disposable income, per capita: $32,192

Figures from latest available reports/estimates

Sources: Conference Board of Canada; Provincial government.

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