|Projected Real GDP Growth, 2012||1.7%|
|Average Projected Private-Sector Growth, 2012||1.9%|
|Projected Real GDP Growth, 2013||2.2%|
|Net New Jobs since June 2009||299,300|
|Net New Jobs since October 2003||508,900|
|Increase in Real GDP (2011 above 2003)1||10.9%|
|Increase in Real Personal Disposable Income
(2011 above 2003)1
1 2011 real GDP and real personal disposable income are Ontario Ministry of Finance estimates.
Sources: Statistics Canada, Ontario Ministry of Finance and Ontario Ministry of Finance Survey of Forecasts (March 2012).
Ontario's economy is growing following the global economic recession. Over the next several years, growth will continue at a modest pace. Ontario is expected to create 360,000 net new jobs by 2015 and the unemployment rate is expected to fall to 6.7 per cent from a high of 9.4 per cent in June 2009.
While a forecast of sustained modest growth is a reasonable basis for planning, there are considerable risks in the global economy. The situations in Europe and the United States continue to pose challenges here at home.
For planning purposes, the Ministry of Finance is assuming real gross domestic product (GDP) growth of 1.7 per cent in 2012, 2.2 per cent in 2013, 2.4 per cent in 2014 and 2.5 per cent in 2015.1 Continued consumer spending, robust business capital investment and a turnaround in net trade will be key contributors to growth.
|Real GDP Growth||(3.2)||3.0||1.8e||1.7||2.2||2.4||2.5|
|Nominal GDP Growth||(0.9)||5.3||4.2e||3.4||4.1||4.2||4.3|
e = estimate. p = Ontario Ministry of Finance planning projection.
Sources: Statistics Canada and Ontario Ministry of Finance.
Ontario real GDP increased by 1.8 per cent in 2011, following a gain of 3.0 per cent in 2010. Business capital spending was a major contributor to growth last year, accounting for more than half of the total increase in real GDP. Investment in machinery and equipment was particularly robust, rising 19.8 per cent in 2011, following a 15.2 per cent increase in 2010. This strong growth in business investment is a reflection of Ontario's improved tax competitiveness, including the introduction of the Harmonized Sales Tax (HST) in July 2010. Household consumption was also a major contributor to overall growth, rising 2.1 per cent.
Ontario real GDP has fully recovered from the global recession of 2008–09. As of the fourth quarter of 2011, Ontario real GDP was an estimated 1.6 per cent above the pre-recession level in 2008. Solid growth in consumer spending, a strong rebound in business investment and government actions all supported Ontario's recovery from the global recession. However, exports remain below their pre-recession level.
Since the recessionary low in June 2009, 299,300 net jobs have been created. Full-time employment rose by 300,300 over this period, while part-time employment has remained stable. The majority of the net new jobs were in industries paying above-average wages. As of February 2012, Ontario employment was 33,500 net jobs above its pre-recession peak in September 2008. Ontario's unemployment rate has also declined from a recessionary high of 9.4 per cent in June 2009 to 7.6 per cent in February 2012.
The pace of job creation in Ontario since June 2009 is ahead of that of the United Kingdom, the United States and all the Great Lakes States. It also leads Canada's as a whole.
Ontario is facing an increasingly challenging economic environment that is expected to persist over the foreseeable future. In particular:
Over the past decade, the growing importance of emerging economies has significantly altered the global economic landscape. For instance, China's share of U.S. merchandise imports increased from eight per cent in 2000 to 18 per cent in 2011, while Ontario's share declined from 11 per cent to seven per cent over the same period.
Corresponding to the increased industrial output of emerging economies, particularly China, there has been a significant increase in demand for a broad range of commodities, resulting in substantial price increases. Most notably, oil prices have risen significantly in recent years. High oil prices are a challenge for Ontario as they drive up costs for businesses and households. Rising oil prices have also led to a strengthening Canadian dollar, posing a further competitive challenge for Ontario businesses. But Ontario's diversified economy is well positioned to meet these challenges.
While higher commodity prices and the stronger Canadian dollar have on balance presented new challenges for the Ontario economy, they have also resulted in new opportunities.
Over the past five years, both the composition and destination of Ontario's exports have diversified. High natural resource prices have spurred economic growth in commodity-rich regions of Canada, notably the western provinces and Newfoundland and Labrador. From 2005 to 2010, Ontario's exports of goods and services to other provinces increased by 11.7 per cent, while international exports declined by 16.1 per cent. Over the same period, as merchandise exports to the United States declined by 28 per cent, exports to the rest of the world grew by over 54 per cent. Similarly, exports of services — including financial, professional, scientific and transportation services — increased by about 18 per cent, while exports of goods decreased by 17 per cent.
While the strengthening Canadian dollar has negatively impacted Ontario exports, it has also reduced the price of imported machinery and equipment. This presents a new opportunity for Ontario companies. Combined with lower taxes on investments under the Tax Plan for Jobs and Growth, the cost of investing in Ontario has decreased significantly. According to the Financial Times' fDi Intelligence, Ontario is a top destination for foreign direct investment in North America, second only to California. In 2010, the province attracted 127 foreign direct investment projects, creating more than 11,200 jobs. As outlined later in this section, Ontario machinery and equipment spending has rebounded sharply since the recession ended and is expected to continue growing at a strong pace.
The global economy slowed unexpectedly during 2011, reflecting the escalation of the sovereign debt crisis in Europe and its impact on global financial markets, consumer and business confidence, and trade. International financial markets remain fragile, weighing down global economic growth.
The deteriorating fiscal prospects of some euro-zone countries eroded confidence in their ability and willingness to meet their financial obligations. This led to a spike in interest rates for some countries' debt and lower rates for others because they were perceived as “safe havens.”
The net effect was to push the euro zone into recession, though the situation varies greatly from country to country. The euro-zone economy as a whole is expected to contract by 0.3 per cent this year, according to private-sector forecasters.
The direct impact of the euro-zone crisis on Ontario's trade is small as Ontario's exports to Europe, although growing in recent years, account for just over 12 per cent of its total international merchandise exports. Canadian banks have little direct exposure to the troubled euro-zone economies. However, rising volatility in Europe could spread around the world through financial-market linkages, leading to a rise in financial-market volatility in Ontario. Prolonged uncertainty about the global economic and financial environment could dampen growth in Ontario's major trade partners and lead to reduced exports and lower growth in the province.
Recovery across the advanced economies continues to face headwinds, with growth expected to moderate further this year. Growth in emerging and developing economies is expected to ease as exports slow due to weaker demand across Europe. Meanwhile, growth in the United States is showing signs of strengthening. U.S. real GDP growth accelerated to 3.0 per cent annualized in the fourth quarter of 2011 from 1.8 per cent in the third quarter.
Although the global economy has weakened, the United States, which is Ontario's largest trading partner, has displayed some encouraging signs of economic growth in recent months. After a slow start in 2011, growth accelerated through the year. Employment growth has been trending higher. The auto industry has strengthened since last August, with motor vehicles and parts production expanding by 12.1 per cent and motor vehicle sales rising by 24.3 per cent. The U.S. housing market has also begun to recover. Housing starts, while still at historically low levels, improved by 9.4 per cent in the fourth quarter of 2011, reaching their highest level since the third quarter of 2008.
After expanding by 1.7 per cent in 2011, U.S. real GDP is projected to grow by 2.3 per cent this year before rising to 2.6 per cent in 2013 and 3.0 per cent in each of 2014 and 2015. Employment is projected to improve modestly, with the unemployment rate declining to 6.7 per cent by 2015.
Despite the recent positive signs, the U.S. economy faces serious challenges. Current account and government fiscal deficits are being financed by massive borrowing from the rest of the world. The U.S. debt-to-GDP ratio reached 72.6 per cent in 2011, up sharply from 42.9 per cent in 2007. The unemployment rate remains well above the pre-recession rate of less than 5.0 per cent. Despite the recent strengthening in housing, the percentage of loans in foreclosure is still high at 4.4 per cent in the fourth quarter of 2011.
The current outlook for both U.S. motor vehicle sales and housing starts remains positive. Growth in these markets should help support a broader, sustained economic expansion. Furthermore, healthy expansion in the manufacturing sector, with rising employment and output, is signalling broad-based economic growth in the United States.
In the United States, sales of light motor vehicles are projected to increase from 12.7 million units in 2011 to 14.3 million units in 2012, and to grow steadily to 15.4 million by 2015. Ontario's auto exports will continue to strengthen over the next several years. However, Ontario's share of the U.S. market is expected to decline due to increased production in countries with lower manufacturing costs.
Although the share of Ontario exports to the United States has trended lower in recent years, the United States remains by far Ontario's largest trading partner. It was the destination for 77 per cent of the province's international merchandise exports in 2011. Ontario exports of motor vehicles and parts to the United States totalled $46.6 billion in 2011, up 2.6 per cent from $45.4 billion in 2010, and accounted for 39 per cent of the province's U.S.-bound exports.
The price of oil rose in 2011, reflecting political instability in North Africa and the Middle East. For 2011 as a whole, West Texas Intermediate (WTI) oil prices averaged $95 US in 2011, up 19.7 per cent from 2010 but slightly below the 2008 annual peak of $100 US. Higher oil prices raise costs for consumers and businesses, which may stretch budgets and lower spending on other goods and services. Currently, tensions involving Iran have added a risk premium to oil prices.
Private-sector forecasts for the price of WTI oil in 2012 range from $91 US to $111 US, with an average of $99 US. The Ministry of Finance is currently projecting that the price of WTI crude oil will average $100 US in 2012, $104 US in 2013 and $108 US over the 2014 to 2015 period.
In late September 2011, the intensifying European sovereign debt crisis, combined with a deteriorating global economic outlook and falling commodity prices, pulled the Canadian dollar below parity with the U.S. dollar. Since then, the dollar has gradually increased from the mid-90 cent level to parity, supported by positive U.S. economic data and a rise in oil prices. Private-sector forecasters expect the dollar to remain close to parity over the medium term as global economic conditions improve and commodity prices remain robust.
Weakening of the global economic outlook and Canada's strong fundamentals have made Canadian bonds very attractive to investors, pushing down interest rates sharply in recent months. The yield on the 10-year Government of Canada bond fell to a record low of 1.84 per cent in mid-December 2011.
Since September 2010, the Bank of Canada has maintained its target for the overnight rate at one per cent. The Bank of Canada is now expected to keep its target interest rate near its historic low until mid-2013. Private-sector economists expect the interest rate on three-month treasury bills to average 0.9 per cent this year, rise to 1.4 per cent in 2013 and reach 3.4 per cent by 2015. The yield on 10-year Government of Canada bonds is expected to rise gradually from 2.2 per cent this year to 2.8 per cent in 2013, reaching 4.5 per cent by 2015.
Forecasts for key external factors are summarized in the table that follows. These are used as the basis for the Ministry of Finance's forecast for Ontario's economic growth.
|World Real GDP Growth
|U.S. Real GDP Growth
|West Texas Intermediate Crude Oil ($US/bbl.)||62||79||95||100||104||107||109|
|Brent Crude Oil ($US/bbl.)||62||80||111||114||112||113||114|
|Canadian Dollar (Cents US)||88||97||101||98||101||103||102|
|Three-Month Treasury Bill Rate1 (Per Cent)||0.3||0.6||0.9||0.9||1.4||2.4||3.4|
|10-Year Government Bond Rate1 (Per Cent)||3.3||3.2||2.8||2.2||2.8||3.8||4.5|
e = estimate. p = Ontario Ministry of Finance planning projection based on external sources.
1Government of Canada interest rates.
Sources: IMF World Economic Outlook (September 2011 and January 2012), U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (March 2012), New York Mercantile Exchange, IntercontinentalExchange, Bank of Canada, Ontario Ministry of Finance Survey of Forecasts (March 2012) and Ontario Ministry of Finance.
Table 2.8 provides the current estimate of the impact of changes in key external factors on the growth of Ontario's real GDP, assuming that other external factors remain unchanged. The relatively wide ranges of the impacts reflect uncertainty in estimates of how the economy would respond to changing external conditions.
|First Year||Second Year|
|Canadian Dollar Appreciates by Five Cents US||–0.1 to –0.8||–0.5 to –1.2|
|Crude Oil Prices Increase 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 Increase by One Percentage Point||–0.1 to –0.5||–0.2 to –0.6|
Source: Ontario Ministry of Finance.
The Ministry of Finance is projecting growth of 1.7 per cent in Ontario real GDP this year. Strong business investment, moderate consumer spending and improved net exports will support growth.
Employment is forecast to increase by 0.9 per cent in 2012, or 59,000 net new jobs. Modest employment and income gains will support limited increases in household spending. Real consumer spending is projected to grow by 1.8 per cent this year. Residential investment is expected to decline by 1.1 per cent as housing starts and resales are expected to ease. Business investment is projected to increase by a healthy 5.6 per cent this year, benefiting from the strong Canadian dollar and Ontario's improved tax competitiveness. Ontario exports are expected to grow by 2.8 per cent this year while imports are projected to grow by 1.8 per cent.
The Ministry of Finance is projecting continued growth in Ontario's economy. Real GDP is projected to grow by 2.2 per cent in 2013, 2.4 per cent in 2014 and 2.5 per cent in 2015. Growth is projected to be better balanced than it was in the last decade. Net trade, which deteriorated from 2000 to 2010 as a result of the sharp exchange rate appreciation, is expected to contribute positively to growth over the medium term. Ontario's strong fundamentals — tax competitiveness, strong public health care, education and training, and infrastructure — will mean a solid contribution from business investment. Consumer spending is projected to contribute less to growth as households adjust to high debt levels. Government spending on goods and services, which supported economic growth as exporters struggled with the appreciating dollar, is expected to be neutral for growth in the medium term as all levels of government restrain spending to restore balanced budgets.
Over the 2013–15 period, employment growth is expected to average 1.5 per cent annually. The unemployment rate is expected to continue trending lower from an annual average of 7.7 per cent in 2012 to 6.7 per cent by 2015.
Labour income is expected to increase on average by 4.0 per cent annually over the 2012 to 2015 period. Similarly, personal income growth is projected to average 3.7 per cent annually over the same period.
Consumption growth is expected to slow, however, as pent-up demand from the recession is satisfied and the Bank of Canada begins to raise interest rates. Following a surge of 3.6 per cent in 2010, real consumption is estimated to have grown by 2.1 per cent in 2011 and is expected to ease further to 1.8 per cent in 2012 before increasing to 2.4 per cent in 2013.
Ontario's consumer price index (CPI) inflation is forecast to be 1.7 per cent in 2012, down from 3.1 per cent in 2011. After rising 22 per cent in 2011, the annual average gasoline pump price is expected to increase by 1.7 per cent in 2012. Ontario's CPI is forecast to increase by an average of 2.0 per cent per year over the 2013 to 2015 period, the mid-point of the Bank of Canada's target range for Canadian CPI inflation.
Business investment is benefiting from a strong resurgence in profit growth, reduced taxes and lower prices. After increasing by 19.1 per cent in 2010, corporate profits are estimated to have increased by 13.8 per cent in 2011. Over the 2005–10 period, the price of machinery and equipment investment declined by 11.8 per cent. Ontario's Tax Plan for Jobs and Growth — including the HST — has also improved the competitive landscape of the province and helped spur a strong recovery in business investment. Real machinery and equipment investment grew by 15.2 per cent in 2010 and an estimated 19.8 per cent in 2011.
Growth in real machinery and equipment investment is forecast to remain robust, increasing by 6.3 per cent in 2012 and by an average annual rate of 5.5 per cent over the 2013–15 period. Real non-residential investment is expected to increase by 3.5 per cent annually over the 2012–15 period.
Continuing steady gains in U.S. auto sales and relatively strong growth in demand from emerging markets will support Ontario exports. Real exports are projected to increase by an average of 3.5 per cent annually between 2012 and 2015, faster than the 2.8 per cent rise in imports. This will lead to an improvement in Ontario's net trade position and contribute to overall economic growth.
The Ontario housing market remains well balanced, supported by solid underlying demand and record-low mortgage rates. Home resales are expected to moderate this year from the strong levels experienced recently, and then to increase modestly through 2015. House price gains are also expected to be more subdued, increasing by an average of 1.5 per cent per year between 2012 and 2015.
Demand for new homes in Ontario will continue to be sustained by population growth, which is projected to average 1.2 per cent annually over the next four years, consistent with recent history. This will result in an additional 650,000 people living in the province by 2015. Housing starts are projected to average 66,800 units per year between 2012 and 2015.
The rising level of household debt remains a risk for the housing market outlook. Record-low interest rates have motivated households to increase debt levels over the past several years, and while growth in consumer debt has slowed recently, mortgage borrowing has continued expanding at a brisk pace. With interest rates expected to remain near record lows into 2013, debt servicing costs remain affordable in the near term. However, rising debt levels may place some households in a vulnerable position when interest rates eventually begin to rise to more historically normal levels.
Long-term plans and projections are increasingly being used around the world to identify key issues that could potentially affect the long-term sustainability of the economy and of the public sector.
Over the long term, Ontario will face slower labour force growth due to its aging population. Growth in the number of people between the ages of 15 and 64 is expected to decline from 14.5 per cent between 2001 and 2011, to 6.6 per cent between 2011 and 2021. The overall labour force participation rate is also expected to fall in the future, primarily due to an aging population. The participation rate for people over age 65 was 12.6 per cent in 2011 compared to 86.1 per cent for people aged 25 to 54.
An aging population is a central challenge facing Ontarians over the long run. A smaller proportion of the population in what have historically been the prime working years is a challenge for growth in Ontario's future economic capacity. The aging population will also demand more public services, such as health care, making efficient delivery of public services even more important.
As Ontario's population ages and growth of the labour force slows, productivity growth will become central to driving economic growth. Between 2001 and 2010, Ontario's average annual labour productivity growth slowed to 0.5 per cent, compared to 1.3 per cent from 1985 to 2000.
Over the coming years, in the face of significant macroeconomic and demographic challenges, Ontario's continued prosperity will be strongly linked to its ability to achieve higher rates of productivity growth. The government has taken actions, such as fundamental business tax reform and labour-market training, which are helping to improve investment and productivity in Ontario.
Over the last year, there has been a widespread downward shift in global economic growth and the outlook has also deteriorated. When the government published the 2011 Budget, the average private-sector forecast for Ontario's real growth was 2.6 per cent for 2011; actual growth came in at 1.8 per cent. For 2012, the average private-sector forecast for real growth is currently 1.9 per cent, down almost a percentage point from the projection a year ago. Forecasts for 2013 have also declined from 2.8 per cent last year to 2.3 per cent.
The following table provides details of the Ministry of Finance's economic outlook for 2012 to 2015.
|Real Gross Domestic Product||3.0||1.8e||1.7||2.2||2.4||2.5|
|Machinery and Equipment||15.2||19.8e||6.3||5.3||5.5||5.6|
|Nominal Gross Domestic Product||5.3||4.2e||3.4||4.1||4.2||4.3|
|Other Economic Indicators|
|Housing Starts (000s)||60.4||67.8||64.0||63.0||69.0||71.0|
|Consumer Price Index||2.5||3.1||1.7||2.0||2.0||2.0|
|Job Creation (000s)||108||121||59||89||103||108|
|Unemployment Rate (Per Cent)||8.7||7.8||7.7||7.4||7.0||6.7|
|Key External Variables|
|U.S. Real Gross Domestic Product||3.0||1.7||2.3||2.6||3.0||3.0|
|WTI Crude Oil ($ US per Barrel)||79.4||95.1||100.2||103.8||106.5||108.6|
|Canadian Dollar (Cents US)||97||101||98.0||101.0||102.5||102|
|3-month Treasury Bill Rate1||0.6||0.9||0.9||1.4||2.4||3.4|
|10-year Government Bond Rate1||3.2||2.8||2.2||2.8||3.8||4.5|
e = estimate.
1Government of Canada interest rates (per cent).
Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (March 2012), New York Mercantile Exchange and Ontario Ministry of Finance.
The Ministry of Finance consults with private-sector economists and tracks their forecasts in order to inform the government's planning assumptions. All of these private-sector economists are forecasting continued growth for the Ontario economy in 2012 and the following three years. On average, private-sector forecasters are projecting growth of 1.9 per cent in 2012, 2.3 per cent in 2013, 2.5 per cent in 2014 and 2.6 per cent in 2015. In the process of preparing the 2012 Budget, the Minister of Finance met with private-sector economists to hear their views on the economy. Additionally, the Ontario Economic Forecast Council, established by the Fiscal Transparency and Accountability Act, 2004, reviewed the Ministry of Finance's economic assumptions in February 2012. All council members found the assumptions to be reasonable.
|BMO Capital Markets (March)||2.0||2.2||–||–|
|Central 1 Credit Union (February)||2.3||2.8||2.2||3.2|
|Centre for Spatial Economics (January)||2.1||2.4||2.2||2.5|
|CIBC World Markets (March)||1.9||1.9||–||–|
|Conference Board of Canada (February)||1.9||2.8||2.6||2.5|
|Desjardins Group (February/December)||1.7||2.1||2.5||2.5|
|IHS Global Insight (January)||1.7||2.5||2.6||2.4|
|Laurentian Bank Securities (December)||1.4||1.6||–||–|
|National Bank (March)||1.7||1.9||–||–|
|RBC Financial Group (December)||2.3||2.3||–||–|
|Scotiabank Group (March)||1.8||1.9||–||–|
|TD Bank Financial Group (January/February)||1.7||2.3||2.4||2.3|
|University of Toronto (February)||1.5||2.7||3.2||3.0|
|Private-Sector Survey Average||1.9||2.3||2.5||2.6|
|Ontario's Planning Assumption||1.7||2.2||2.4||2.5|
Sources: Ontario Ministry of Finance Survey of Forecasts (March 2012) and Ontario Ministry of Finance.
Forecasts for growth are lower than projected at the time of the 2011 Budget. The slower projected growth for Ontario reflects a weaker U.S. economic recovery as well as increased uncertainty surrounding the prospects for the global economy.
|2011 Budget||2011 Actual||2011 Budget||2012 Budget||2011 Budget||2012 Budget|
|Real Gross Domestic Product||2.4||1.8e||2.7||1.7||2.7||2.2|
|Nominal Gross Domestic Product||4.6||4.2e||5.1||3.4||4.8||4.1|
|Housing Starts (000s)||58.6||67.8||63.8||64.0||66.5||63.0|
|Job Creation (000s)||116||121||118||59||126||89|
|Key External Variables|
|WTI Crude Oil ($ US per Barrel)||99.7||95.1||102.2||100.2||100.6||103.8|
|U.S. Real Gross Domestic Product||3.1||1.7||3.3||2.3||3.2||2.6|
|Canadian Dollar (Cents US)||100.0||101.1||99.7||98.0||99.3||101.0|
|3-month Treasury Bill Rate1
|10-year Government Bond Rate1
e = estimate. p = Ontario Ministry of Finance planning projection.
1 Government of Canada interest rates.
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 (March 2012) and Ontario Ministry of Finance.
1 Based on information available to March 6, 2012.