Ontario: Coming out of the dark

“Ontario depends greatly on the U.S. economy, and I expect the U.S. to pick up substantially in the coming year, which will be a catalyst for Ontario,” says Robert Hogue, senior economist with Royal Bank of Canada (RBC) in Toronto. “However, it’s an incremental improvement rather than a sea change or a total lifting of the fog.”

Hogue predicts real gross domestic product (GDP) growth of 2.6% in Ontario for 2014, the best in four years and double his 1.3% estimate for 2013. His forecast is slightly more bullish than others, including those from Vancouver-based Central 1 Credit Union, which is predicting real GDP growth of 2%; Toronto-Dominion Bank, 2.3%; and the Conference Board of Canada, 2.2%.

Most economists predict U.S. economic growth of almost 3% this year, and the RBC forecast is for a 10-year high of 3.2%. Rising demand in the U.S. for Canadian-made building materials, motor vehicles, transportation equipment, machinery, lumber and a host of other goods and services will stimulate Ontario. About half of Ontario’s economy is dependent on manufacturing.

Growth is also expected to be strong in transportation/warehousing, professional services, financial services, information technology and accommodation/food services. In the important housing construction sector, however, Hogue expects housing starts to drop slightly to 60,300 in 2014, about 1,000 less than a year earlier, due to lower pre-construction condominium sales.

Peter Hall, chief economist with Ottawa-based Export Development Corp., is expecting growth in Ontario’s exports of 4% this year, with the U.S. economic recovery sparking a positive cycle around the globe. “We’re at the beginning of a new growth cycle,” he says. “That’s an optimistic view, but also realistic. The economy has been down in the dumps for the past five years, but the excesses have now been worked off.”

However, Ontario’s automotive industry, which accounts for about a third of the province’s total exports, will not be able to sustain the brisk pace of expansion it has enjoyed since the global financial crisis of 2008. The auto industry’s potential is being hampered by plant closures and cutbacks in capacity. Hall anticipates a pickup of 15% in vehicle sales in the U.S., but only a 1% rise in Ontario vehicle exports.

Although there is a risk that an economic pickup may lead to higher interest rates if it stirs up inflation, Hall expects central banks will be cautious in moving away from their “easy money” stance. “Central banks will be careful not to hamstring the recovery,” Hall says. “They want to keep inflation under control without damaging growth.”

Next: Ontario agriculture
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Ontario agriculture

Hall is particularly optimistic about growth for agricultural products, which accounts for 7% of Ontario’s international exports. He predicts 7% growth for that industry in 2014, following a 10% increase in 2013. All kinds of crops – as well as beef, pork and poultry – are exported from Ontario, he says, which boasts even larger food exports than Canada’s western provinces, the so-called “breadbasket” of Canada.

“As the global economy gets back on its feet, there’s a hungry world facing us, and growing opportunities in emerging markets with the expansion of the middle class,” he says. “Emerging economies are consuming more high-quality goods, and that starts with food.”

The positive forecasts are not without risks, however. The emerging U.S. recovery is fragile and could be derailed by political discord over issues such as the debt ceiling, says the Ontario Ministry of Finance’s autumn economic update. In addition, the withdrawal of the exceptional monetary stimulus of the past few years may have unpredictable consequences.

Despite the benefits of the lower Canadian dollar, which is expected to hover in the range of US93¢ in 2014, the pressure to compete with goods produced in lower-cost markets continues in Ontario, causing traditional blue-collar manufacturing jobs to disappear in industries beyond automobiles. Battle Creek, Mich.-based Kellogg Co. closed an 89-year-old cereal-producing facility last December in London, Ont., putting 550 people out of work, not long after a closure by Pittsburgh-based H.J. Heinz Co. of a tomato-processing plant in Leamington, Ont., killed 740 jobs. Both plants were antiquated and needed large investments to be modernized. Those closures will have a spillover impact on other businesses in those communities.

On the positive side, south Korea-based Samsung Renewable Energy Inc. has partnered with Canadian Solar Inc. to open a factory in London for solar-energy equipment, creating 200 new jobs. It’s the fourth Samsung plant to be opened as part of a “green energy” deal with the provincial government. That agreement, whereby Samsung is investing $5 billion in four wind- and solar-energy facilities across Ontario, will create 900 jobs in total.

In addition, Cisco Systems Inc. recently announced it’s investing up to $4 billion to set up research and development hubs in Ontario, hoping to add as many as 1,700 new high-tech jobs during the next six years. The province is contributing $190 million to the first phase, its biggest commitment so far to the high-tech sector.

Meanwhile, progress is slow in the rich “Ring of Fire” mineral deposit in northern Ontario, an area that requires a huge investment in roads, railway lines and other infrastructure to develop large chromite and other deposits. One of the major players in the region, Cliffs Natural Resources Inc., recently suspended operations due to uncertainty about infrastructure and delays in environmental and First Nations approvals. Helmut Pastrick, chief economist with Central 1 Credit Union, says the Ring of Fire offers considerable long-term potential and forecasts that copper, nickel, zinc and lead prices will revive after 2015, as the recovering global economy spurs demand.

For more, see  Report on the Nation 2014 special feature.

Ontario

Population: 13,537,994

GDP, 2012 ($bil.): 674.5

GDP, % change: +3

2013-14 deficit ($bil.): 11.7

Estimated net debt ($bil.): 272.1

Median after-tax income, all families: $54,600

Household disposable income/capita: $29,745

Figures are from latest available reports/estimates

Sources: conference board of Canada;

Government reports

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