Ontario was hit hard when the recession descended on the province two years ago, but the resurgence in gross domestic product growth won’t be quite as impressive as that seen in 2010, when there was an unexpectedly strong bounce-back.

Royal Bank of Canada forecasts a real GDP growth rate of 3.1% for the province this year, down slightly from an estimated 3.3% in 2010. However, other forecasters are less optimistic. Bank of Nova Scotia, for example, is forecasting real GDP growth of only 2.2% in 2011, a sizable drop from last year’s pace, although on par with the 2.2% average seen in the five years before the recession.

“We expect 2011 will see a bit of a lull as growth tapers off,” says Alex Koustas, an economist with Scotiabank in Toronto. “Things came back stronger than expected in 2010, and some of the factors contributing to that recovery are starting to wane.”

The Ontario economy must overcome the effects of a strong Canadian dollar on its manufacturing exports, as well as the likelihood of higher interest rates and their dampening effect on the housing market. In addition, government expenditures on infrastructure and other projects that helped fuel the recovery from the depths of the recession will decline as the focus intensifies on balancing the provincial budget.

Says Robin Somerville, director and economist for the Centre for Spatial Economics (a.k.a. the C4SE), a consulting firm in Milton: “Government stimulus packages are winding down after going full-speed ahead in 2010, including everything from repairs to government buildings to construction on roads and sewers.”

Ontario’s manufacturing sector has turned the corner and continues to regain the ground it lost during the recession. Not only is manufacturing the province’s largest industry, but due to the multiplier effect, many non-manufacturing jobs rely upon it. Although this effect was working in a negative direction during the recession — when the contraction in manufacturing indirectly caused large job losses in other sectors — the pickup in manufacturing is now stimulating expansion on many fronts.

According to the C4SE, factory jobs account for less than half of the jobs in Ontario’s manufacturing sector, with many of the other jobs going to trade, transport and equipment operations, scientists and engineers, management, business and financial occupations.

The C4SE predicts that manufacturing will continue to play a strategic role in Ontario, and that it will drive one-third of the province’s GDP growth, one-quarter of new employment and three-quarters of new exports — all considerably in excess of the manufacturing sector’s proportionate share of the economy — in 2011 and 2012. Key drivers are expected to be primary metals and fabricated metal products, industrial machinery and motor vehicles. Other areas with forward momentum include aerospace suppliers, “green energy” manufacturers and food manufacturing.

The auto industry has managed to avoid complete collapse — a serious risk two years ago — and production plants as well as parts suppliers are ramping up. Craig Wright, senior vice president and chief economist with RBC’s economics department, estimates light vehicle sales will reach 13.2 million units in 2011, up from 11.5 million in 2010 and 10.4 million in 2009. However, these levels are far below the annual range of 16 million-17 million units in the decade prior to the recession.@page_break@“Due to rising interest rates, a weak U.S. consumer and a slow recovery in U.S. employment,” Wright says, “we don’t see a return to the old levels.”

House sales also will be dampened by the trend toward higher interest rates, as well as by new mortgage rules that will see Ottawa no longer guaranteeing insured mortgages with terms exceeding 30 years, a drop from the previous 35-year limit. These changes mean higher payments for mortgageholders, which is likely to reduce affordability and demand, says Koustas. He is estimating housing starts in Ontario of 58,000 units in 2011 and a further decline to 57,000 in 2012, vs an estimated 62,000 in 2010. Says Koustas: “I expect a drop in prices, although it won’t be major.”

One of the bright rays of light in Ontario’s economic picture is the mining industry, which is booming as a result of new demand from emerging markets, such as China and India, and strengthening metals prices. Although output in 2010 was somewhat hampered by a prolonged strike at the Sudbury mine owned by Vale Ltd., the issues have been resolved and production is back in high gear. The Kidd Creek copper mine near Timmins, owned by Xstrata Canada Inc., will benefit from expansion of the mining zone, which will extend the life of the mine.

“Mining is the fastest-growing industry in Ontario in percentage terms,” says Somerville, “thanks to the recovery in metals prices. It’s a ‘good news’ story.”

Somerville projects mining production growth of 6.5% in 2011 and manufacturing production growth of 5.9% vs his forecast for overall real GDP growth of 2.9%. As well, he says, job increases in the province should result in a small but steady decrease in the unemployment rate to 8.3% in 2011 from 8.7% in 2010.

Ontario will also benefit from government support for green energy. For example, a $7-billion agreement with a South Korea-based consortium of power companies is designed to triple Ontario’s wind and solar energy generation and create an estimated 1,440 manufacturing jobs and 6,000 spinoff jobs by 2015.

Smaller projects are also in the works. ATS Automation Tooling Systems Inc. of Cambridge recently announced 150 new jobs related to solar panels. This builds on more than 20 companies that have either set up or expanded plans for solar and wind turbine manufacturing in Ontario in the past year.

Ontario is leading Canada in solar energy capacity, says Helmut Pastrick, chief economist with Central 1 Credit Union in Vancouver: “When the government decides to stimulate an industry, that usually comes to pass.”

Ontario should also reap benefits from the business-friendly harmonized sales tax, which exempts manufacturers from paying sales taxes on various stages of the production process.

“The HST has been a good thing,” says Koustas. “It reduces the regulatory burden and lowers capital costs significantly for firms, thereby increasing their competitive edge in a highly competitive environment. That should translate into more capital investment and increased productivity.” IE