Ontario’s economy is on track to edge ahead with a modest pace of growth in 2017, maintaining the province’s position as one of the more resilient economies in Canada.
Rising employment, personal incomes, corporate profits and infrastructure spending augur well for the province’s domestic picture. At the same time, U.S. economic growth and employment are seeing a resurgence that could energize Ontario, a major beneficiary of Canada’s trade with the U.S. A weak loonie and low oil prices continue to act as tailwinds.
However, a new shadow has appeared on the horizon with the election of Donald Trump as the U.S. president. Uncertainty surrounding future trade agreements and protectionist measures implemented by the U.S. could negatively affect Canadian manufacturers’ exports to south of the border.
“We’re looking at a decent outlook for Ontario going forward. But political change is afoot in the U.S. – and that’s a big black box as to what may transpire,” says Peter Hall, chief economist at Ottawa-based Export Development Canada.
Helmut Pastrick, chief economist at Vancouver-based Central 1 Credit Union, anticipates Ontario’s economy will grow at a moderate rate, with an increase in real gross domestic product (GDP) of 2.4% in 2017, compared with an estimated 2.7% increase last year.
Other 2017 GDP growth estimates for Canada’s most populous province are in the same ballpark: Bank of Montreal (BMO) forecasts 2.2% GDP growth: Royal Bank of Canada (RBC) forecasts 2.3%; and the Ottawa-based Conference Board of Canada forecasts 2.4%.
Ontario has benefited over the past few years from solid gains in the auto and autoparts industries, as well as from robust economic growth led by a hot residential housing market in the Greater Toronto Area, according to a provincial outlook published by the Conference Board. Although Ontario’s economy will continue to advance next year, it is running up against capacity limits in some industries, including auto production.
“Industries such as health care, transportation, education and financial services are bolstering the domestic Ontario economy at the same time that the U.S. is picking up,” says Sabrina Bond, economist, custom economic services, at the Conference Board. “The continuing weak dollar supports the trade outlook, as it makes our exports affordable.”
Bond anticipates exports growth of 2.6% – the bulk to the U.S. – with economic strength, job creation and rising consumer confidence in the U.S. being “a boon to Ontario.” Her forecast for U.S. GDP growth in 2017 is 2.3%, following an estimated 3% for 2016.
A lower-value loonie also should help, notes Robert Kavcic, vice president and senior economist at BMO’s capital markets division in Toronto: “The auto industry is bumping up against capacity constraints, but other sectors, such as food processing, can benefit from the advantages of a low Canadian dollar.”
Infrastructure spending will be a key driver in Ontario, with several highway and public transit projects and ongoing refurbishment of nuclear energy plants on the list. Total infrastructure expenditures are expected to surge by 37% to $17.4 billion in fiscal 2016-17. Says Robert Hogue, senior economist with RBC in Toronto: “An increase of this magnitude will add meaningfully to provincial growth.”
Rising home prices have driven strong residential investment for the past three years, but there are concerns about a decline in housing starts and a softer residential market in 2017 as tighter mortgage insurance rules and slightly higher mortgage costs come into play. “The housing market has been hot, but could level off as price increases are beginning to detach from fundamentals, such as personal incomes,” says Kavcic. “However, with new restrictions on non-resident buyers in B.C., we could see some spillover in the Ontario market with more foreign buyers and speculation.”
Pastrick anticipates Ontario housing starts, a major driver of residential investment spending, will pull back moderately to 73,700 units in 2017, down from an estimated 75,200 units in 2016. However, a 3.5% rise in renovation spending and a small gain in other residential construction will keep total residential investment from declining, he forecasts.
Population growth also will be an economic driver, spurring spending on consumer goods and services, and fuelling home rentals and purchases. Pastrick forecasts population growth of 1.4% for 2017 in Ontario, the same as in 2016, but higher than the 1% increase seen in 2014 and 2015.
Other key drivers of GDP growth include tourism, wholesale trade, distribution and transportation, and warehousing services. As well, film industry activity is expected to increase.
Four big automakers have announced investments totalling more than $2 billion to upgrade existing plants in Ontario, including a $400-million investment by Honda Motor Co. Ltd.’s assembly plant in Alliston, Ont., and projects by the Detroit Three. Although North American car sales have been hitting record levels for the past few years, the giant auto industry, which accounts for almost 40% of Ontario’s exports, would be particularly vulnerable to new U.S. border taxes on Canadian exports.
However, protectionist measures can cut both ways, and that may be a consideration for Trump, says Hogue. With the high value of autoparts imported to Canada from the U.S., there could be negative repercussions for U.S. suppliers if anti-trade policies come into force.
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