Out of the doldrums

“Finally, economic circumstances are hitting a positive note in Ontario,” says Aaron Stokes, provincial forecast manager at the Centre for Spacial Economics in Milton, Ont. “Economic forecasting is known as the ‘dismal science,’ and it certainly has been dismal for Ontario for the past few years. Things are picking up at last, and it’s nice to see.”

Several economic growth forecasts have been rejigged upward since the new year began, based on a strong finish for Ontario at the end of 2014 and expectations that oil prices, while they may not hold at below US$50 a barrel for the balance of the year, certainly will be moderate.

For example, Jonathan Bendiner, regional economist with Toronto Dominion Bank, has raised his target for growth in Ontario’s 2015 real gross domestic product (GDP) from his previous level of 2.6%, saying GDP now could move as high as 3%.

Similarly, Helmut Pastrick, chief economist with Vancouver-based Central 1 Credit Union, says GDP growth will be 2.5%- 3% in 2015, significantly higher than his estimate of 2%-2.1% for 2014 and impressively ahead of the 1.3% annual growth recorded in 2013.

A Royal Bank of Canada report also has jacked up the bank’s forecast due to the invigorated outlook, projecting GDP growth of 2.3% in 2014 and 3.1% in 2015.

“There will be a significant improvement in the cost structure as lower oil prices feed through the system,” says Pastrick. “This will help consumers, as well as many businesses. Transportation is a huge beneficiary, from trucking to taxis, as well as manufacturing and any business for which the transport of goods is a large factor.”

Pastrick expects oil prices to average US$50-US$55 a barrel in 2015, and says the feeble Canadian dollar (C$) could fall a little further from the US81¢, the exchange rate at which the C$ stood in late January. The weaker C$ will make Canadian goods more competitively priced in the important U.S. market, Ontario’s major customer for manufactured goods of all kinds, including cars.

Economic growth in the U.S. should be a healthy 3%, up from about 2.4% last year. Although the U.S. could face an interest rate hike later in the year if growth continues to be robust, Pastrick believes that with inflation under control, the Bank of Canada will delay any interest rate hikes to 2016 to avoid derailing Canada’s national economy.

Merchandise exports in Ontario were up by 7.5% for the first 10 months of 2014, the strongest pace since 2010 and second-strongest level in 14 years. While exports of motor vehicles and parts were up by 8.5% in the same period, exports of consumer goods surged by 15%. There also were gains in a range of other items, from forest products to electronic equipment.

Peter Hall, chief economist with Ottawa-based Export Development Canada (EDC), says machinery and equipment exports are riding a “big wave of activity,” due to renewed investment in buildings and factories.

“U.S. business investment had been shut down for six years, and there was oodles of spare production capacity,” he says. “There’s no question – circumstances have changed. Suddenly, orders are surging, and the U.S. needs machinery and equipment. Construction is booming, and we’re estimating 10% growth in Ontario’s machinery and equipment exports in 2014, rising to 17% in 2015. That is the strongest category for growth, there’s a lot of pent up demand.”

Buoyed by the better economic outlook, some Ontario-based companies have announced investments, including aircraft engine maker Pratt & Whitney Canada Inc., which is investing $1 billion in research and development during the next four years; and Linamar Corp., an integrated autoparts company undertaking a $508-million expansion in Guelph, Ont., creating 1,200 new jobs in the next 10 years.

All-time highs for North American auto production are expected this year, with combined production in Canada, Mexico and the U.S. likely to surpass the 2000 sales peak of 19.8 million units, according to Bank of Nova Scotia’s latest report on the global auto industry. In the U.S. alone, purchases are set to approach 17 million units in 2015 – the highest level since 2001 – fuelled by strong economic growth, improved household balance sheets and rising replacement demand.

This level, Pastrick says, could expand to 20 million units in the next three to five years.

Scotiabank economist Carlos Gomes estimates that after several years of weak sales, almost 40% of vehicles on the road in the U.S. are at least 12 years old, setting the stage for an extended replacement cycle.

An EDC report is calling for the auto industry, which accounts for about one-third of Ontario’s exports, to expand by 3% in 2015 after a strong 8% expansion in 2014. Hall says the industry is bumping up against some capacity constraints in Ontario after some facilities were shut down, as well as facing tough competition from low-cost regions such as Mexico and the southern U.S.

Among the rays of sunny news, Fiat Chrysler Automobiles NV recently announced an investment of more than US$2 billion – including a revamp of the firm’s assembly plant in Windsor, Ont. – to produce the next generation of minivans, scheduled to be on retail auto lots by 2016. Last year, the Windsor minivan plant produced more vehicles than any other assembly plant in Canada, employing 5,100 people working on three shifts.

“Ontario is more dependent on U.S. economic activity than most provinces, due to the strong role of exports, and that’s now paying dividends,” Hall says. “The resurgence in global demand is beginning in the U.S. What the oil-producing parts of Canada are losing in economic activity and revenue due to lower oil prices, Ontario is gaining in manufacturing activity.”

The province’s important housing and construction industry also is expected to be healthy, with moderate price gains. Housing starts are expected to exceed 60,000 units in 2015, up from an estimated 58,000 units last year.

Higher exports and renewed domestic economic activity will be good for job growth. Pastrick expects Ontario’s unemployment rate will drop to 6.8% in 2015 from 7.3% in 2014.

Ontario

Population: 13,678,740

GDP, 2013 ($bil.): 695.7

GDP % change: +2.4

2014-15 deficit ($bil.): 12.5

Estimated net debt ($bil.): 289.3

Per capita wage growth, % change, 2013-14: +2.4

Household disposable income, per capita: $30,442

Figures from latest available reports/estimates

Sources: Conference board of Canada; provincial government investment executive chart

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