CHAPTER II: Ontario’s Economic Performance and Outlook
Ontario’s Economic Performance and Outlook
This section outlines Ontario’s current macroeconomic outlook, which underlies the fiscal plan.
THE GLOBAL RECESSION AND THE ONTARIO ECONOMY
Like other jurisdictions around the world, the Ontario economy has been hard hit by the global recession and financial crisis. As of the second quarter of 2009, Ontario real gross domestic product (GDP) was 5.0 per cent below the pre-recession peak. Employment has declined by 205,200 jobs, or 3.0 per cent, from a year ago. Since 2003, Ontario has created 291,900 net new jobs.
Although there are signs that the economy has stabilized, the pace of growth is expected to be gradual. Gross domestic product is not expected to return to its pre-recession level until the second quarter of 2011. Because employment tends to lag GDP growth during a recovery — businesses increase the number of hours worked for existing employees before hiring new workers — employment is not projected to reach its pre-recession level until late 2011.
| 2005 | 2006 | 2007 | 2008 | 2009p | 2010p | 2011p | 2012p | |
|---|---|---|---|---|---|---|---|---|
| Real GDP Growth | 2.9 | 2.4 | 2.1 | (0.5) | (3.5) | 2.0 | 3.0 | 3.3 |
| Nominal GDP Growth | 4.1 | 4.1 | 4.5 | 0.5 | (3.8) | 3.6 | 4.7 | 5.1 |
| Employment Growth | 1.3 | 1.5 | 1.6 | 1.4 | (2.6) | 0.6 | 2.3 | 2.5 |
| CPI Inflation | 2.2 | 1.8 | 1.8 | 2.3 | 0.4 | 1.9 | 2.5 | 2.0 |
- p = Ministry of Finance planning projection.
- Sources: Statistics Canada and Ontario Ministry of Finance.
For planning purposes, the Ministry of Finance is assuming a decline of 3.5 per cent in Ontario real GDP in 2009, followed by gains of 2.0 per cent in 2010 and 3.0 per cent in 2011. The Ministry of Finance’s key economic planning assumptions, finalized on October 15, 2009, are more conservative than the average private-sector forecasts available at that time.
Impact of the Global Financial and Economic Crisis
Over the past year, the global recession has had a severe impact on jurisdictions around the world —and Ontario is no exception. The decline in global trade and a sharp drop in consumer and business spending stemmed from the collapse in confidence following the financial crisis that hit last fall. Lower international demand led to a sharp drop in Ontario’s exports, which in turn forced businesses to cut production and employment. The decline in economic activity led to a drop in corporate profits of 49.7 per cent, lower business investment, rising unemployment and lower incomes.
Ontario’s real GDP declined by 1.0 per cent in the second quarter of 2009, following sharper declines in the previous two quarters (-2.1 per cent in the first quarter of 2009 and -1.5 per cent in the fourth quarter of 2008). Since the fourth quarter of 2007, Ontario real GDP has declined by 5.0 per cent. Private-sector forecasters estimate Ontario’s decline in real GDP in 2009 to be similar to that of the neighbouring Great Lakes States — Ontario’s major competitors — though larger than that of the United States as a whole. Ontario has seen less severe declines in employment so far this year (-2.6 per cent) than neighbouring Great Lakes States and the United States as a whole (-3.8 per cent). Entering the downturn, Ontario’s housing market was far healthier than that of the United States. Canada’s sound financial institutions and various actions taken by the McGuinty government have also mitigated the impact of the global recession on the Ontario economy. See Chapter I: Confronting the Challenge for more information on actions the government is taking.
However, the global economic downturn hit Ontario’s economy relatively hard compared to other provinces. Manufacturing, especially the auto sector, is a large and important part of Ontario’s economy and it has been particularly affected by the recession. Declining U.S. demand caused Ontario auto manufacturing sales to fall by 37 per cent over the first eight months of 2009, compared to the same period in 2008. Ontario’s decline in real GDP in 2009 is expected to be significantly larger than Canada’s as a whole, and that of all the other provinces except Newfoundland and Labrador.
Because of the size of the auto sector, Ontario has also had larger job losses than Canada as a whole and all the other provinces except Newfoundland and Labrador and British Columbia. Ontario automotive employment has fallen by 25.5 per cent over the first nine months in 2009 compared to the same period in 2008.
Uncertain and Challenging Global Economic Environment
Ontario’s economic outlook is very dependent on economic and financial conditions outside its own border, particularly U.S. economic growth, oil prices, the Canadian dollar exchange rate and interest rates. Private-sector forecasts for these variables are summarized in the table below.
| 2010 | 2011 | 2012 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Low | Avg. | High | Low | Avg. | High | Low | Avg. | High | |
| U.S. Real GDP Growth (Per Cent) | 1.1 | 2.5 | 3.7 | 1.3 | 3.1 | 4.4 | 1.9 | 3.3 | 5.3 |
| Crude Oil ($US per Barrel) | 66.5 | 74.2 | 90.0 | 68.9 | 77.5 | 86.0 | 74.2 | 83.8 | 95.6 |
| Canadian Dollar (Cents US) | 88.4 | 93.7 | 99.3 | 90.8 | 94.5 | 102.0 | 92.3 | 96.6 | 105.0 |
| Three-Month Treasury Bill Rate (Per Cent) | 0.3 | 0.7 | 1.4 | 1.4 | 2.4 | 3.6 | 2.9 | 3.7 | 4.6 |
| 10-Year Government Bond Rate (Per Cent) | 3.5 | 3.8 | 4.3 | 4.0 | 4.3 | 4.5 | 4.3 | 4.8 | 5.2 |
- Sources: Blue Chip Economic Indicators (October 2009) and Ontario Ministry of Finance Survey of Forecasts (October 15, 2009).
The global economy remains vulnerable to a number of risks that could adversely affect future growth.
For instance, any further rounds of financial market turbulence could once again limit access to financing and reduce confidence and wealth, which could hinder any economic growth.
The U.S. economy, critically important for Ontario’s export-oriented businesses, is beginning to emerge from one of the deepest recessions on record. However, job losses continue, consumer spending remains weak and business investment continues to soften.
Projected increases in oil prices, a strengthening Canadian dollar and rising interest rates all represent challenges for the Ontario economy going forward.
The wide range of forecasts in Table 2 above shows how difficult it is to predict economic performance, creating risks to the Ontario economy. Table 3 shows the implications of changes in key external factors, under the assumption that no other variables will change.
| First Year | Second Year | |
|---|---|---|
| Canadian Dollar Depreciates by Five Cents US | 0.1 to 0.8 | 0.5 to 1.2 |
| World Crude Oil Prices Decrease by $10 US per Barrel2 | 0.1 to 0.3 | 0.1 to 0.3 |
| U.S. Real GDP Growth Increases by One Percentage Point | 0.3 to 0.7 | 0.4 to 0.8 |
| Canadian Interest Rates Decrease by One Percentage Point | 0.1 to 0.5 | 0.2 to 0.6 |
- 1 Impacts based on changes being sustained. The estimated impacts shown in the table are most applicable to small changes in key assumptions. Very large shocks are likely to have less predictable effects, particularly due to their potential impact on confidence and expectations.
- 2 The impact estimates for lower world oil prices reflect the positive effect of lower oil prices on Ontario alone, and exclude the stimulative impact on U.S. and rest-of-world economic activity.
- Source: Ontario Ministry of Finance.
Ontario Economy Beginning to Stabilize
Recent economic data provide early signs that the economy is beginning to stabilize. Financial markets have normalized to a large degree while equity markets and housing sales have moved higher. These developments have helped improve both consumer and business confidence. The Conference Board of Canada’s index of consumer attitudes for Ontario has increased for nine consecutive months and is up almost 43 per cent from a low in December 2008.
Ontario’s international merchandise exports increased in June, July and August, reflecting gains in exports of automotive products. Manufacturing sales are up 9.3 per cent from the recent low in May.
After declines over the first five months of 2009, Ontario’s labour market has shown signs of stabilizing, with modest job gains in the past four months. Wholesale trade, an important indicator of the overall strength of the economy, has increased over the past six months, up almost nine per cent from the recent low in January. Housing resales have increased in seven of the past eight months and are up over 60 per cent from the low in January.
Though some economic signs are improving, the damage caused by the global recession has been considerable. Household wealth and consumer confidence are still below pre-recessionary levels while retail sales remain 5.1 per cent lower. Compared to a year ago, manufacturing sales are down 19 per cent, international exports are down over 28 per cent and wholesale trade has fallen 6.7 per cent. Even with the recent growth, housing resales are down by 1.4 per cent so far this year compared to the same period a year ago and employment is still lower by 205,200 jobs since the peak in September 2008. The measures introduced in Ontario’s 2009 Budget Confronting the Challenge are helping families weather the global economic storm.
Outlook for Ontario Economic Growth
Based on the most up-to-date information, Ontario’s economy is expected to grow by a modest 2.0 per cent in 2010 and then by 3.0 per cent in 2011 and 3.3 per cent in 2012. Despite this growth, it will take Ontario considerable time to regain its pre-recession level of activity.
Improving U.S. and global demand is expected to contribute to a turnaround in Ontario’s export growth. As well, stronger growth in other provinces will boost interprovincial exports. The domestic economy is expected to be a source of strength, supported by a healthy housing market, gains in consumer spending and increased business investment. The prospects for strong growth in investment are even better, due to the major increase in tax competitiveness that would result from the 2009 Budget’s proposed tax cuts and Harmonized Sales Tax. See Chapter V: Creating a More Competitive and Modern Tax System for more information on the benefits of Ontario’s comprehensive tax package. It is projected that this will lead to strengthened business investment in both machinery and equipment as well as commercial and industrial construction.
Private-sector forecasters project 360,000 jobs will be created over the 2010 to 2012 period and employment is expected to reach its pre-recession level during the latter half of 2011. According to private-sector forecasters, the unemployment rate is expected to edge up from 9.3 per cent in 2009 to 9.9 per cent in 2010 as the number of job seekers outpaces the number of people getting jobs. Over the medium term, Ontario’s unemployment rate is expected to remain elevated, declining to 7.8 per cent in 2012.
Future gains in employment and improving household wealth are projected to support an increase in consumer spending of 1.2 per cent in 2010, 2.7 per cent in 2011 and 3.3 per cent in 2012. The number of home resales is expected to rise by 3.6 per cent in 2010 and by an average of 3.6 per cent annually in 2011 and 2012. The resale market should support moderate price gains of 2.0 per cent in 2010 and average 3.0 per cent a year in 2011 and 2012. Current tight conditions in the resale market are expected to ease as housing starts expand with growing housing demand, rising from 50,000 units in 2010 to 70,000 units in 2012.
Sales tax harmonization, together with Corporate Income Tax cuts and elimination of the Capital Tax, would significantly increase Ontario’s competitiveness. The dramatically lower marginal effective tax rate on new investment would spur capital investment in the province. The substantial increases in capital investment in Ontario would help create new, higher-paying jobs for Ontario workers and help increase long-term economic growth in the province.
Private-Sector Forecasts
Table 4 shows current private-sector forecasts for the Ontario economy.
| 2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|
| Conference Board of Canada (October) | (3.0) | 3.2 | 4.0 | 4.5 |
| IHS Global Insight (July) | (2.9) | 1.9 | 3.3 | 3.5 |
| Centre for Spatial Economics (July) | (3.6) | 2.0 | 3.3 | 3.7 |
| University of Toronto (October) | (3.9) | 2.4 | 3.8 | 3.5 |
| RBC Financial Group (September) | (3.1) | 2.6 | – | – |
| Scotiabank Group (October) | (3.0) | 2.6 | – | – |
| TD Bank Financial Group (October) | (2.7) | 2.6 | 3.1 | – |
| Desjardins Group (September) | (3.8) | 2.0 | 2.5 | 2.5 |
| BMO Capital Markets (October) | (3.1) | 2.7 | – | – |
| CIBC World Markets (October) | (3.5) | 2.1 | 3.5 | – |
| Private-Sector Survey Average | (3.3) | 2.4 | 3.4 | 3.5 |
| Ontario's Planning Assumption | (3.5) | 2.0 | 3.0 | 3.3 |
- Sources: Ontario Ministry of Finance and Ontario Ministry of Finance Survey of Forecasts (October 15, 2009).
The Ministry of Finance consults extensively with private-sector forecasters to ensure its economic projections are reasonable and its economic and fiscal policy is appropriate. The Ontario government’s projections are based on an average of private-sector forecasts. In order to plan prudently, the government is more conservative in its projections.
The Ontario Economic Forecast Council was established as part of the Fiscal Transparency and Accountability Act, 2004 to provide advice on macroeconomic forecasts and assumptions. The council members are Peter Dungan from the University of Toronto, Glen Hodgson from the Conference Board of Canada, Ernie Stokes from the Centre for Spatial Economics and Dale Orr from Dale Orr Economic Insight. The Minister of Finance met with Council members and other private-sector forecasters in the process of preparing the 2009 Ontario Economic Outlook and Fiscal Review to hear their views on the economic outlook and how the government should respond to the increase in the deficit, given the current challenging economic climate.
Details of the Ontario Economic Outlook
The following table shows details of the Ministry of Finance’s economic outlook for 2009 to 2012.
| Actual | Projected | |||||
|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
| Real Gross Domestic Product | 2.1 | (0.5) | (3.5) | 2.0 | 3.0 | 3.3 |
| Personal Consumption | 3.9 | 2.7 | (0.2) | 1.2 | 2.7 | 3.3 |
| Residential Construction | 1.9 | (2.2) | (9.5) | 1.3 | 4.3 | 3.5 |
| Non-residential Construction | 18.1 | (9.7) | (21.6) | 1.0 | 1.9 | 4.1 |
| Machinery and Equipment | 5.0 | 0.6 | (18.4) | 1.5 | 5.0 | 6.2 |
| Exports | 0.5 | (5.5) | (15.9) | 2.0 | 5.2 | 5.3 |
| Imports | 3.3 | (2.2) | (16.1) | 3.0 | 5.0 | 5.0 |
| Nominal Gross Domestic Product | 4.5 | 0.5 | (3.8) | 3.6 | 4.7 | 5.1 |
| Other Economic Indicators | ||||||
| Retail Sales | 3.9 | 3.5 | (3.5) | 3.6 | 4.1 | 4.0 |
| Housing Starts (000s) | 68.1 | 75.1 | 48.5 | 50.0 | 60.0 | 70.0 |
| Personal Income | 5.0 | 3.8 | (0.7) | 2.6 | 4.4 | 5.1 |
| Labour Income | 4.5 | 4.2 | (1.2) | 2.1 | 4.4 | 5.1 |
| Corporate Profits | 0.3 | (14.2) | (38.9) | 23.5 | 14.4 | 6.5 |
| Consumer Price Index | 1.8 | 2.3 | 0.4 | 1.9 | 2.5 | 2.0 |
| Labour Market | ||||||
| Employment | 1.6 | 1.4 | (2.6) | 0.6 | 2.3 | 2.5 |
| Job Creation (000s) | 101 | 94 | (171) | 40 | 152 | 168 |
| Unemployment Rate (per cent) | 6.4 | 6.5 | 9.3 | 9.9 | 9.0 | 7.8 |
| Key External Variables | ||||||
| Crude Oil ($ US per Barrel) | 72.3 | 99.6 | 61.2 | 78.5 | 81.8 | 83.7 |
| U.S. Real Gross Domestic Product | 2.1 | 0.4 | (2.5) | 2.5 | 3.1 | 3.3 |
| Canadian Dollar (Cents US) | 93.1 | 93.7 | 88.0 | 95.0 | 96.0 | 97.0 |
| 3-month Treasury Bill Rate | 4.1 | 2.3 | 0.3 | 0.7 | 2.4 | 3.7 |
| 10-year Government Bond Rate | 4.3 | 3.6 | 3.3 | 3.8 | 4.3 | 4.8 |
- Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, New York Mercantile Exchange, U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators and Ontario Ministry of Finance.
Comparison to the 2009 Ontario Budget
Table 6 compares current economic assumptions with those in the 2009 Budget.
| 2009 | 2010 | 2011 | ||||
|---|---|---|---|---|---|---|
| Budget | Fall Update | Budget | Fall Update | Budget | Fall Update | |
| Real Gross Domestic Product | (2.5) | (3.5) | 2.3 | 2.0 | 3.3 | 3.0 |
| Nominal Gross Domestic Product | (2.4) | (3.8) | 3.6 | 3.6 | 4.7 | 4.7 |
| Retail Sales | (1.0) | (3.5) | 3.8 | 3.6 | 4.0 | 4.1 |
| Housing Starts (000s) | 50.0 | 48.5 | 55.0 | 50.0 | 65.0 | 60.0 |
| Personal Income | 0.6 | (0.7) | 3.6 | 2.6 | 4.6 | 4.4 |
| Labour Income | 0.3 | (1.2) | 3.2 | 2.1 | 4.2 | 4.4 |
| Corporate Profits | (24.8) | (38.9) | 9.5 | 23.5 | 8.2 | 14.4 |
| Employment | (2.0) | (2.6) | 0.8 | 0.6 | 1.6 | 2.3 |
| Job Creation (000s) | (135) | (171) | 54 | 40 | 107 | 152 |
| Key External Variables | ||||||
| Crude Oil ($ US per Barrel) | 47.3 | 61.2 | 55.5 | 78.5 | 60.4 | 81.8 |
| U.S. Real Gross Domestic Product | (2.6) | (2.5) | 1.9 | 2.5 | 3.4 | 3.1 |
| Canadian Dollar (Cents US) | 80.0 | 88.0 | 85.0 | 95.0 | 88.0 | 96.0 |
| 3-month Treasury Bill Rate | 0.6 | 0.3 | 1.1 | 0.7 | 3.1 | 2.4 |
| 10-year Government Bond Rate | 2.9 | 3.3 | 3.3 | 3.8 | 4.4 | 4.3 |
- Sources: Blue Chip Economic Indicators and Ontario Ministry of Finance.