Ontario looks beyond the struggling auto sector

The outlook for On-tario’s economy in 2010 is quite bright, as it is expected to show a heartening recovery. That’s a significant change from the dark days of 2009, when Ontario had the worst deterioration in economic growth and employment among all the provinces.

Alex Koustas, an economist with Bank of Nova Scotia’s economics department in Toronto, is forecasting that Ontario’s real gross domestic product growth will rebound to 2.9% in 2010, following an estimated drop of 3.2% in 2009. The projection is higher than the 2.7% growth the bank forecasts for Canada as a whole.

Heavy government stimulus, consumer spending and exports will all contribute to Ontario’s better economic health this year, says Koustas, while manufacturing, retail sales and housing starts will all gain strength relative to last year’s poor performances.

“Out of all the provinces, Ontario suffered the worst losses in 2009, as it is the most exposed to the U.S. economy,” he says. “There’s been a huge dip in automobile production, which is the industry most tied to U.S. economic fortunes. The effects trickle all the way down the supply chain to components, plastics and fabricated metals. A lot of big industries in Ontario are tied to auto production.”

The auto industry began showing signs of improvement in late 2009, and the renewed vigour is carrying over into 2010 because of pent-up demand and inventory replacement; however, the industry will never return to its former glory, analysts say. This is significant because the auto industry employs more than 150,000 Canadians directly, plus another 340,000 indirectly. It is also the largest industry within Ontario’s manufacturing sector.

After auto production in Canada dropped by 28% to 1.5 million vehicles in 2009, it is expected to rebound to 1.9 million units in 2010, according to Detroit-based J.D. Power & Associates Inc. But Dave Cutting, senior manager of North American forecasting with J.D. Power, does not foresee production getting back to the 2.5 million vehicles produced annually in Ontario earlier this decade.

“The quality of cars is better, people are keeping them longer and maintaining them better,” says Cutting. “The appeal of a new car is not what it used to be, as consumers are now occupied by other priorities, such as the weaker economy and higher unemployment. In addition, the fleet market has shrunk dramatically.”

Ontario’s auto industry is facing ongoing consolidation with the upcoming closing of a Ford Motor Co. plant in St. Thomas in 2011. Last year, General Motors Corp. closed a light truck plant in Oshawa. Auto analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont., says Ontario’s auto industry has lost 50,000 jobs since 2006 and has been hurt by long-term structural change as well as cyclical issues related to the economy.

It is also becoming increasingly difficult to compete with lower-cost plants in parts of the U.S. and Mexico that are not unionized, he says. As a result, he expects Canada’s share of total North American auto production — virtually all of which takes place in Ontario — to drop to as low as 12% during the next four to five years from its current perch of 16%.

“More jobs will be lost in the auto industry, and the need for increased productivity is overwhelming,” DesRosiers says. “Cyclically, there will be an uptick in the next year, but we will never get all the jobs back because, structurally, we are losing jobs to other jurisdictions where labour and other costs are less.”

The pain in Ontario has spread beyond the auto industry, with the high Canadian dollar and low-cost goods from developing countries creating competitive pressures for a variety of manufactured goods. The past year has seen a 12% loss of jobs in the manufacturing sector, overall, accelerating a decline that began before the recession, according to Scotiabank figures.

Many of these jobs will never be recovered in the manufacturing area, but the province will pick up the slack as opportunities increase in services-related businesses, including financial services, real estate, health care and education, as well as in professions such as law and accounting.

Ontario is witnessing “significant healing” in these industries, says Warren Lovely, executive director and senior economist with CIBC World Markets Inc.in Toronto. The financial services industry is a meaningful employer in Ontario, and healthier stock markets and debt markets are benefiting banks, insurance companies and securities firms.

@page_break@“The Canadian financial services industry is headquartered in Ontario,” he says. “And it’s the envy of the world.”

The mining industry also shows promise, with strong metals prices and rising global demand as emerging markets such as China and India scour the world for natural resources. Economists say there is a lot of upside potential in the mining business in Ontario, but it is being hindered somewhat by labour issues, including a prolonged strike at the Sudbury nickel mine owned by Brazilian mining giant Vale Inco. That strike has dragged on for six months now.

Meanwhile, low interest rates have been a boon for housing sales, with the hot demand that characterized the second half of 2009 carrying over into 2010, thus giving a shot in the arm to the building industry. Arlene Kish, an economist with Toronto-based Global Insight Canada Inc., says Ontario housing starts in 2009 suffered a 30% drop from a year earlier, to 50,000, but she is expecting them to climb to 60,000 in 2010, and to 70,000 a few years later.

A strong housing market has powerful spinoffs as demand for appliances and furniture increases in tandem. Furthermore, wages and employment are stimulated, providing fertilizer for retail sales in general. Robert Hogue, senior economist with the Royal Bank of Canada in Toronto, is forecasting a 3.8% increase in overall retail sales in 2010 for Ontario following a 2.7% decline in 2009.

“Consumer spending will jump, but not as much as in past recoveries,” he says, referring to 2009 as an annus horribilis. “It has been a tough and protracted recession in Ontario, and although we are coming back from the bottom of the abyss, the province still faces challenges, particularly in the manufacturing industry.”

However, Helmut Pastrick, chief economist with Central 1 Credit Union in Vancouver, is optimistic about the potential for “green energy” in Ontario, a sector that the provincial government is supporting with favourable regulations and a variety of incentives to lay the foundation for new economic growth.

“Green energy is a new area, but during the next five, 10 and 20 years, it will be a much larger component of the provincial economy,” he says. “Ontario has the entrepreneurial capability to participate in the change, and it will be encouraged by research and development incentives and other forms of government support.”

Case in point: Ontario Premier Dalton McGuinty recently announced a $7-billion agreement with a South Korea-based consortium that will triple Ontario’s wind- and solar-energy generation and create an estimated 1,440 manufacturing jobs and 16,000 related jobs during the next six years. The deal involves the building of four manufacturing plants that will build wind-turbine towers and blades, as well as solar-power inverters and modules. Two of the plants should be running by March 2013, building towers for wind turbines and solar inverters. By December 2013, another factory will be built to assemble solar modules; and the final facility, which will make wind-turbine blades, will open in 2015.

“Green industries are definitely a growth area, and the movement is for real,” says Hogue. “If I were to identify an area of growth, not just for Ontario but for all of North America, I would say that green industries have an attractive future. The need to change our ways has received social recognition, and there is now the political will to get things happening.”

Another plank in McGuinty’s platform to replace the old economic order and stimulate new growth is the implementation of the harmonized sales tax, due to come into effect July 1. Among the benefits, the HST exempts manufacturers from paying sales taxes on various business inputs in the production process, thereby lowering costs.

“The HST is a positive move for Ontario,” says Sabrina Browarski, an economist with the Conference Board of Canada in Ottawa. “Lower business costs should result in lower prices to the consumer and make Ontario’s goods more
competitive.”