Ontario’s families and businesses are still feeling the effects of the global financial and economic crisis. Despite the rebound of 91,700 jobs since May, Ontario employment is still down by 158,000 jobs from the pre-recession level. Over the five-year period before the global recession, Ontario employment had increased by almost 490,000 net new jobs. The global economy remains fragile, which is a threat to Ontario’s continuing recovery.
The Ministry of Finance is projecting real gross domestic product (GDP) growth of 2.7 per cent in 2010, 3.2 per cent in 2011, 3.2 per cent in 2012 and 3.0 per cent in 2013, slightly below or in line with the private-sector average each year.1 Growth is expected to strengthen due to improving global demand for Ontario exports, significant government actions to support jobs and the economy (see Chapter I: Ontario’s Plan for Prosperity) and government policies to promote long-term competitiveness and growth (see Chapter III: Tax and Pension Systems for Ontario’s Future).
|Real GDP Growth||2.3||(0.5)||(3.4e)||2.7||3.2||3.2||3.0|
|Nominal GDP Growth||4.5||0.4||(3.5e)||4.4||5.0||5.3||5.0|
Due to the sharp decline in GDP resulting from the global recession, Ontario real GDP is expected to remain below its pre-recession level until the first quarter of 2011. Since employment growth tends to lag real GDP growth, it is expected to take somewhat longer for the province to see the same level of employment as before the global recession.
There are clear signs that the Ontario economy has stabilized and that a recovery is taking shape. All major indicators in Ontario have improved from lows posted during the recession.
|Pre-Recession Levels||Global Recession||Recovery to Date|
|Real GDP ($ Billions, 2002)||534.9||(25.1)||+10.3|
|Merchandise Exports ($ Billions)||14.3||(4.9)||+1.7|
|Manufacturing Sales ($ Billions)||24.4||(7.4)||+2.7|
|Retail Sales ($ Billions)||12.8||(1.2)||+1.0|
Ontario real GDP declined for four consecutive quarters, falling 4.7 per cent from the second quarter of 2008 to the second quarter of 2009. Since the low point, Ontario real GDP has increased for two consecutive quarters, rising 0.5 per cent in the third and 1.6 per cent in the fourth quarter of 2009. Despite the improvement, the level of real GDP is still 2.8 per cent below the pre-recession level.
In the period from September 2008 to May 2009, Ontario employment dropped by 249,700. Since May 2009, as the Ontario economy has stabilized, employment has increased by 1.4 per cent or 91,700 net new jobs, recovering more than one-third of the jobs lost during the recession. Over the past nine months, Ontario’s employment growth has been stronger than most other provinces’ and significantly above that of the United States as a whole and every U.S. state.
Retail trade has posted the strongest gains, recovering almost 80 per cent of the decline that occurred during the recession. Much of this decline was due to the sharp drop in auto sales, which plummeted 22.1 per cent during the recession.
Ontario’s manufacturing sector suffered a sharp decline in activity during the recession. Manufacturing sales have begun to recover but remain 18.9 per cent below pre-recession levels. Auto production improved to 476,000 units in the fourth quarter of 2009 but is still almost 19 per cent below pre-recession levels. Ontario’s international merchandise exports have also improved but remain 22.3 per cent below the pre-recession levels of July 2008.
Housing sales plunged 28.4 per cent during the recession but have fully recovered over the past year. Ontario housing prices declined 5.8 per cent during the recession but have risen since then, reaching new highs.
Ontario’s real GDP posted a larger decline in 2009 than that of Canada or the United States, but not as severe as in many G7 countries (Germany, Italy, Japan and the United Kingdom). In 2009, Ontario represented about 40 per cent of Canadian GDP but accounted for 51 per cent of the decline in Canada’s output. This degree of change reflects the relative size of the auto sector, which represented 2.6 per cent of Ontario’s GDP in 2009, compared to 0.2 per cent in the rest of Canada. Government support for the auto sector last year preserved at least 85,000 Ontario jobs. The auto industry directly and indirectly supported about 400,000 Ontario jobs in 2008. Output in Ontario’s automotive sector declined by 28.7 per cent in 2009.
Ontario’s decline in real GDP in 2009 was not as steep as Michigan’s (-5.1 per cent) but was similar to that of other Great Lake States (Ohio -3.4 per cent and Indiana -3.2 per cent). Ontario’s real GDP fell more than that of any other province, except Newfoundland and Labrador.
Similarly, employment in Ontario posted a steeper decline in 2009 than in G7 countries, with the exception of the United States (-4.3 per cent). This reflects the importance of the auto industry to Ontario and the impact of the global recession on this industry. Some individual U.S. states posted particularly severe job losses in 2009: Michigan (-7.4 per cent), California (-4.6 per cent), Illinois (-4.9 per cent) and Ohio (-4.2 per cent). Ontario employment has risen modestly since May 2009 while U.S. employment has continued to decline.
Ontario’s economic outlook is heavily influenced by global economic and financial conditions, particularly U.S. demand, oil prices, the Canadian dollar exchange rate and interest rates. Private-sector forecasts for these factors are summarized in the table below.
|U.S. Real GDP Growth (Per Cent)||3.1||3.0||3.4||3.2|
|Crude Oil ($US per Barrel)||79.1||85.6||92.3||101.3|
|Canadian Dollar (Cents US)||96.1||97.5||97.0||96.4|
|Three-Month Treasury Bill Rate* (Per Cent)||0.6||2.2||3.5||4.3|
|10-Year Government Bond Rate* (Per Cent)||3.7||4.2||4.8||5.1|
The United States, which is beginning to recover from one of the deepest recessions on record, is Ontario’s most important export market. It accounts for about 80 per cent of the province’s international exports. U.S. businesses are increasing investment and consumer spending is rising. Although residential investment improved in the second half of 2009, recent indicators suggest it remains fragile. A weakening in U.S. residential housing investment would continue to have a negative impact on Ontario’s forestry industry.
U.S. real GDP is expected to rise by 3.1 per cent in 2010, 3.0 per cent in 2011 and by an average of 3.3 per cent annually in 2012 and 2013. Canada and the United States recently reached an agreement under which the United States has waived the Buy American provisions under the American Recovery and Reinvestment Act of 2009.
This agreement will allow Ontario businesses to participate in U.S. infrastructure projects and gain access to a variety of U.S. state and local public works projects, estimated at nearly $65 billion US.
U.S. auto sales are expected to rise 12.5 per cent to 11.7 million units in 2010. Sales are expected to continue to rise, to 13.2 million units in 2011 and to average 14.7 million units in 2012 to 2013. Although U.S. auto sales are expected to rebound strongly, they will remain well below the 2007 peak of 16.1 million units. U.S. demand for Ontario exports will likely be hampered by continuing weakness in U.S. consumer and business credit growth, the high value of the Canadian dollar and withdrawal of government actions to stimulate the economy. In addition, job losses are continuing and the unemployment rate remains high at around 10 per cent, the highest rate since 1983. As a result, the U.S. recovery is expected to be weaker than in previous post-recession periods.
Stronger global growth is leading to firmer commodity prices. Oil prices rose from below $34 US a barrel in February 2009 to over $83 in January 2010. Recently, oil has been trading at around $80 US a barrel. Private-sector forecasters, on average, expect oil prices to increase from $79 US per barrel in 2010 to $101 US per barrel in 2013. There is a wide range of views on oil prices, reflecting uncertainty about demand conditions and available supply. For planning purposes, the Ministry of Finance forecast is based on the futures contract for oil prices as of March 10, 2010. Oil prices are projected to rise from $82 US per barrel in 2010, to around $86 US per barrel in 2011 and average $87 US per barrel in 2012 and 2013.
The Canadian dollar rebounded sharply in the middle of 2009, rising from below 77 cents US in March to over 97 cents US in October, influenced by higher commodity prices, global economic stabilization and a broad depreciation in the U.S. dollar. Recently the dollar has been trading at around 97 cents US. Private-sector forecasters expect the exchange rate to remain high over the medium term.
The Bank of Canada’s Senior Loan Officer Survey reported a stabilization and slight improvement in business credit conditions, the first improvement since the start of the credit crisis in mid-2007. Business credit has begun to grow again, led by market-based financing. Household credit has expanded briskly in response to low interest rates and a resurgence in housing market activity.
Interest rates for both businesses and consumers are at or near record lows. The Bank of Canada has committed to keeping its overnight interest rate target unchanged until the middle of this year. Most forecasters expect the Bank to begin raising interest rates later this year. Over the next few years, interest rates are expected to move back up, approaching more normal pre-crisis levels. There is a risk that interest rates could increase faster and be higher than expected. Interest rates affect consumer spending and business investment as well as the projected expense for interest on the Province’s debt (see Chapter IV: Borrowing and Debt Management).
Table 8 shows the implications of changes in each of the key external factors on Ontario’s growth, assuming that the other external factors do not change. The wide range shows how difficult it is to predict economic performance, creating uncertainty and risks for the Ontario economic outlook.
|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 Barrel||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|
Ontario’s export growth is reviving as the U.S. and global economies recover. The global rebound in auto sales is prompting a sharp turnaround in Ontario’s auto exports. Ontario’s trade with the rest of the world will benefit from increased demand for commodities, industrial goods and machinery and equipment, particularly from emerging Asian markets. As well, growth in other provinces will support interprovincial exports. Despite the improvement, the volume of exports is not expected to surpass its previous peak until the middle of the decade. Real exports are forecast to increase by 5.0 per cent in 2010 and an average of 4.5 per cent annually over 2011 to 2013, reflecting the improving global environment.
Following the large decline last year, improving business conditions are expected to support a strong rebound in corporate profits, which are projected to rise by an average of 13.6 per cent annually between 2010 and 2013. The rebound in corporate profits, coupled with rising global demand and increased tax competitiveness due to Ontario’s Tax Plan for Jobs and Growth, is expected to support strengthening business investment over the coming years. Investment in machinery and equipment is expected to increase by an average of 6.9 per cent annually between 2010 and 2013 while investment in non-residential construction is projected to increase by an average of 5.5 per cent annually from 2010 to 2013.
Ontario’s economic recovery continues to be supported by strong public-sector capital spending. Following strong growth in spending in 2009 (14.0 per cent), capital expenditures by all levels of government in Ontario are expected to increase by a further 16.4 per cent in 2010, second among all provinces and well above the national average (9.9 per cent). For more information on Ontario government infrastructure investments, including record investments in 2009–10 and plans for significantly more in 2010–11, see Chapter I: Ontario’s Plan for Prosperity.
The housing market is expected to be healthy in 2010. Housing resales are projected to rise by five per cent in 2010, drop by 10 per cent in 2011 as a result of higher average mortgage rates, and increase by an average of four per cent annually in 2012 and 2013. Accordingly, house price appreciation is set to moderate in coming years, averaging 2.4 per cent annually between 2010 and 2013. Demographic demand for new homes will support a gradual pickup in housing starts, which are projected to increase from 58,000 units in 2010 to 72,000 units in 2013.
Employment is projected to increase by 1.1 per cent in 2010, strengthening to an average of 2.1 per cent annually over 2011 to 2013, resulting in 504,000 more jobs in 2013, than in 2009. The unemployment rate is expected to stabilize at 9.1 per cent in 2010 as job creation keeps pace with the increase in the number of people seeking jobs. Ontario’s employment forecast is in line with private-sector forecasts. These forecasts have incorporated the benefits of the Tax Plan for Jobs and Growth and other government actions to support jobs and the economy. Over the medium term, Ontario’s unemployment rate is expected to decline to 6.8 per cent in 2013.
Labour income is expected to rebound by 2.7 per cent in 2010 and increase by an average of 5.1 per cent annually over 2011 to 2013, supported by solid employment gains. Healthy housing activity and increasing incomes will spur solid growth in household spending. Real consumer spending is expected to increase by 2.2 per cent in 2010 and then accelerate to an average of 2.7 per cent annually in 2011 to 2013.
Private-sector forecasters expect Ontario’s Consumer Price Index (CPI) inflation rate to be 1.9 per cent in 2010 and 2.1 per cent in 2011. It is projected to average 2.0 per cent from 2012 to 2013, the mid-point of the Bank of Canada’s target range of one to three per cent.
The following table shows details of the Ministry of Finance’s economic outlook for 2010 to 2013.
|Real Gross Domestic Product||(0.5)||(3.4e)||2.7||3.2||3.2||3.0|
|Machinery and Equipment||1.3||(16.7e)||4.7||8.1||7.9||7.1|
|Nominal Gross Domestic Product||0.4||(3.5e)||4.4||5.0||5.3||5.0|
|Other Economic Indicators|
|Housing Starts (000s)||75.1||50.4||58.0||60.0||70.0||72.0|
|Consumer Price Index||2.3||0.4||1.9||2.1||2.0||2.0|
|Job Creation (000s)||94||(161)||73||139||155||138|
|Unemployment Rate (Per Cent)||6.5||9.0||9.1||8.5||7.6||6.8|
|Key External Variables|
|Crude Oil ($ US per Barrel)||99.6||61.8||82.1||85.7||86.9||87.9|
|U.S. Real Gross Domestic Product||0.4||(2.4)||3.1||3.0||3.4||3.2|
|Canadian Dollar (Cents US)||93.7||87.6||96.0||97.5||98.0||98.0|
|3-month Treasury Bill Rate*||2.3||0.3||0.6||2.2||3.5||4.3|
|10-year Government Bond Rate*||3.6||3.3||3.7||4.2||4.8||5.1|
The Ministry of Finance surveys private-sector forecasts to determine appropriate planning assumptions. Private-sector forecasters are calling, on average, for Ontario real GDP to grow by 3.0 per cent in 2010, 3.2 per cent in 2011, 3.2 per cent in 2012 and 3.0 per cent in 2013. However, there is a wide range of views among forecasters. The Conference Board of Canada is the most optimistic, calling for growth of 3.5 per cent in 2010 and an average of 3.6 per cent over 2011 to 2013, while IHS Global Insight is the most pessimistic, expecting growth of only 2.3 per cent in 2010 and an average of 3.3 per cent over 2011 to 2013.
|BMO Capital Markets (March)||2.8||3.0||–||–|
|Centre for Spatial Economics (January)||2.9||3.6||3.2||3.2|
|CIBC World Markets (March)||2.8||2.7||–||–|
|Conference Board of Canada (January)||3.5||3.7||3.9||3.1|
|Desjardins Group (February)||2.6||2.8||2.0||2.5|
|IHS Global Insight (January)||2.3||3.2||3.4||3.3|
|RBC Financial Group (March)||3.3||4.1||–||–|
|Scotiabank Group (March)||3.2||2.5||–||–|
|TD Bank Financial Group (March)||3.2||3.0||–||–|
|University of Toronto (January)||3.1||3.4||3.3||2.9|
|Private-Sector Survey Average||3.0||3.2||3.2||3.0|
|Ontario’s Planning Assumption||2.7||3.2||3.2||3.0|
To ensure reasonable and accountable economic projections, the Ministry of Finance consults extensively with private-sector forecasters. 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 Minister of Finance met with council members and other private-sector forecasters in the process of preparing the 2010 Budget. Council members were asked to review the Ministry of Finance’s economic assumptions in February 2010. All of the forecast council members provided letters stating that the forecast was reasonable. Subsequent to the review, small adjustments were made to the economic forecast to maintain consistency with revisions to private-sector forecasts as of March 12, the date the economic assumptions for the Budget were finalized.
Private-sector forecasts for Ontario economic growth have strengthened since the Fall 2009 Ontario Economic Outlook and Fiscal Review. All of the 10 forecasters surveyed by the Ministry of Finance have raised their Ontario 2010 economic growth projections, with the average projection for real GDP growth increasing from 2.4 per cent to 3.0 per cent. The growth projections have increased recently due to a stronger U.S. economy and an improved Ontario labour market. Private-sector forecasts for real GDP growth are expected to move higher given the strength of recent data. As a result, the ministry’s forecast is a prudent basis for fiscal planning.
|Real Gross Domestic Product||(2.5)||(3.4e)||2.3||2.7||3.3||3.2|
|Nominal Gross Domestic Product||(2.4)||(3.5e)||3.6||4.4||4.7||5.0|
|Housing Starts (000s)||50.0||50.4||55.0||58.0||65.0||60.0|
|Job Creation (000s)||(135)||(161)||54||73||107||139|
|Key External Variables|
|Crude Oil ($ US per Barrel)||47.3||61.8||55.5||82.1||60.4||85.7|
|U.S. Real Gross Domestic Product||(2.6)||(2.4)||1.9||3.1||3.4||3.0|
|Canadian Dollar (Cents US)||80.0||87.6||85.0||96.0||88.0||97.5|
|3-month Treasury Bill Rate* (Per Cent)||0.6||0.3||1.1||0.6||3.1||2.2|
|10-year Government Bond Rate* (Per Cent)||2.9||3.3||3.3||3.7||4.4||4.2|
|Real Gross Domestic Product||(3.5)||(3.4e)||2.0||2.7||3.0||3.2|
|Nominal Gross Domestic Product||(3.8)||(3.5e)||3.6||4.4||4.7||5.0|
|Housing Starts (000s)||48.5||50.4||50.0||58.0||60.0||60.0|
|Job Creation (000s)||(171)||(161)||40||73||152||139|
|Key External Variables|
|Crude Oil ($ US per Barrel)||61.2||61.8||78.5||82.1||81.8||85.7|
|U.S. Real Gross Domestic Product||(2.5)||(2.4)||2.5||3.1||3.1||3.0|
|Canadian Dollar (Cents US)||88.0||87.6||95.0||96.0||96.0||97.5|
|3-month Treasury Bill Rate* (Per Cent)||0.3||0.3||0.7||0.6||2.4||2.2|
|10-year Government Bond Rate* (Per Cent)||3.3||3.3||3.8||3.7||4.3||4.2|