Second Quarter of 2016
(April, May, June)
Ontario Ministry of
Table of Contents
RECENT ECONOMIC DEVELOPMENTS
Ontario Real GDP Growth Moderates in 2016Q2
- Ontario’s real gross domestic product (GDP) increased by 0.2% in the second quarter (April to June) of 2016, after rising 0.8% in each of the previous two quarters.
- Household spending, government expenditures and business investment advanced in the quarter, but a decline in exports softened overall economic growth.
- Nominal GDP increased 0.4% in the second quarter. Compensation of employees rose 1.1%, while the net operating surplus of corporations declined 0.9%.
- Economic production, measured on an industry basis, advanced 0.2% in the second quarter. Output in the services sector (0.6%) led the gain, which was partially offset by a decline in the goods sector (-1.3%).
- Ontario was among several jurisdictions that experienced moderating growth in the second quarter. All G7 countries except the U.K. and U.S had lower real GDP growth in the second quarter compared to the first quarter of 2016.
- Modest employment growth continued in Ontario, while other indicators have also advanced, pointing to steady growth in the province’s economy.
- External conditions remain favourable for Ontario with low interest rates and oil prices, a still-competitive exchange rate and improved financial market stability.
Exports Weigh on Ontario’s Real GDP Growth
Ontario’s real GDP increased 0.2% (0.7% annualized) in the second quarter of 2016, supported by growth in household spending, government expenditures and business investment. A decline in exports dampened overall economic growth for the quarter.
Ontario’s household consumption spending
increased 0.4%, following a 0.6% advance in the first quarter. Consumer spending on services (+1.1%) and non-durables (+0.5%) rose in the quarter, while spending was lower for durables (-2.0%) and semi-durables (-0.9%). Durable goods spending declined, following four consecutive quarterly increases, as higher purchases of furniture, appliances and motor vehicle parts were more than offset by lower purchases of motor vehicles. Food and non-alcoholic beverages, electricity, gasoline and other fuels contributed to the overall increase in household spending.
Business investment advanced by 0.6%, adding to the 0.9% gain in the first quarter. The second quarter gain was led by a 0.9% increase in residential construction investment, reflecting strong resale activity. Business investment in machinery and equipment (+1.5%) rose, while non-residential structures (-0.8%) declined and business inventories were reduced slightly. Government current (+1.0%) and capital (+0.4%) expenditures rose in the quarter.
Exports declined 3.3% in the quarter, following a strong increase of 6.2% over the previous four quarters. The decline in exports was largely concentrated in international goods (-5.3%), with fewer exports of motor vehicles, consumer goods, and metal and non-metallic mineral products.
edged down 0.4% in the second quarter, following two consecutive gains.
Nominal GDP Continues to Rise
GDP in current dollars advanced 0.4% (1.5% annualized) in the second quarter, following a 0.7% increase in the first quarter of 2016.
Compensation of employees, which includes both wages and salaries, and supplementary labour income, posted a solid increase of 1.1%, following a 0.8% advance in the previous quarter. Similarly, net mixed income, comprised of farm, non-farm and rental income, rose 1.3%, following a 1.0% increase in the first quarter of 2016.
Business sector profits, measured by net operating surplus of corporations, declined 0.9% in the second quarter of 2016, partially offsetting the 1.5% gain in the first quarter.
Household disposable income increased 1.7%, after rising 1.5% in the first quarter of 2016.
In the second quarter, household disposable income advanced at a stronger pace than consumption expenditure, leading to an improvement in the household savings rate
to 2.1%, up from 1.4% in the previous quarter.
Economy-Wide Prices Edge Up
Economy-wide prices, as measured by the implicit price index for GDP, increased 0.2% in the second quarter, after edging down 0.1% in the first quarter. The implicit price index for final domestic demand also increased 0.2%, after rising 0.3% in the previous quarter.
Prices for household expenditures edged up 0.1%, after advancing 0.2% in the first quarter. Prices for motor vehicles, natural gas and gasoline increased, while prices for food and non-alcoholic beverages decreased in the quarter.
Machinery and equipment prices declined 1.1%, while non-residential construction prices were unchanged in the quarter. Residential construction prices advanced 1.7%, following a 1.5% increase in the previous quarter.
Import prices declined 1.5%, while export prices decreased 1.1% in the second quarter. During this period the Canadian dollar appreciated by 6.7% against the U.S. dollar.
Service Industries Lead Growth
Based on production by industry, Ontario real GDP growth slowed to 0.2% (0.7% annualized), following a gain of 1.0% in the previous quarter. Service producing industries advanced by 0.6%, which was partially offset by a 1.3% decline in the goods sector.
Growth in the service producing industries was relatively widespread, driven by gains in real estate (+0.9%), finance and insurance (+1.0%), wholesale trade (+0.8%) and professional and administrative services (+0.6%). Public sector output was also a significant contributor to second quarter growth, with gains in health care and social services (+0.7%), education (+0.6%) and public administration (+0.5%). Retail trade posted the most notable decline (-0.7%), only the second decrease in the past thirteen quarters.
Manufacturing output decreased 1.6% following an increase of 4.3% over the past three quarters, with declines reported in nine of eleven subsectors. Output was lower in transportation equipment (-1.8%) and chemical and petroleum (-4.7%). The decline in transportation equipment production was due to a 2.3% decrease in the auto sector, which followed three consecutive quarters of growth. This decline was related, in part, to supply chain disruptions caused by an earthquake in Japan in April.
Results for the other goods-producing industries were mixed in the second quarter. The utilities sector declined by 4.8%, partially offsetting the 5.5% gain in the first quarter. Construction output edged down 0.1%, the first decline since the end of 2013. Residential building construction declined by 0.6%, due to lower new home construction, while non-residential building and engineering rose by 0.3%. The mining industry posted a 1.5% gain, led by copper, nickel, lead and zinc ore mining.
Economic Growth Moderates
Across the G7
In the second quarter, Ontario’s real GDP growth (+0.2%) slowed along with most G7 countries, excluding the United Kingdom and the United States.
Across the G7 countries, average real GDP growth in the G7 moderated from 0.4% in the first quarter to 0.3%. The United Kingdom led the G7, with real GDP rising 0.7%, after a 0.4% gain in the first quarter. Economic growth in Germany slowed from 0.7% to 0.4% in the quarter. Japan’s economy grew 0.2%, following a 0.5% advance in the previous quarter. In France, real GDP edged down 0.1% in the quarter, after a 0.7% gain, and in Italy, real GDP was unchanged, following a gain of 0.3% in the first quarter.
Canada wide, real GDP decreased 0.4% in the second quarter, the weakest performance amongst the G7. However, Statistics Canada estimated that the Canadian economy would have grown by 0.1% if the effects of the Fort McMurray wildfires were excluded. The decline was primarily attributed to a sharp 4.5% decrease in exports and a 0.1% decline in business investment. Household spending (+0.5%) partially offset the overall decrease in the second quarter. Quebec recorded a 0.2% increase in real GDP, slowing from a 0.7% gain in the previous quarter. Final domestic demand (+0.4%) as well as household (+0.2%) and government (+0.8%) spending drove economic growth in the quarter. A 1.1% decrease in exports dampened the overall increase in real GDP.
In the U.S., real GDP advanced 0.4%, following a 0.2% gain in the previous quarter. Personal consumption expenditure continued to be the main contributor to growth, increasing 1.1%. Private fixed investment (-0.3%) and government spending (-0.4%) dampened overall growth in the second quarter.
Employment Growth Continues
Ontario employment continues to advance. On a year-to-date basis, employment increased by 70,800 jobs during the first nine months of 2016, compared to the same period in 2015. Including the September advance, employment was 5.2% (+343,200 jobs) above the pre-recession peak and 9.7% (+615,700 jobs) above the recessionary low.
Since the recessionary low, the majority of jobs created were full-time positions (+583,900), while part-time employment (+31,700) also increased. Most of these net new jobs were in the private sector (+467,300) and in industries paying above–average wages (+461,000).
Ontario’s unemployment rate has also improved considerably, reaching an eight-year low in mid-2016. As of September 2016, Ontario’s unemployment rate was 6.6%, below the Canadian rate of 7.0%.
Economic Indicators Recording Solid Year-to-Date Gains
Ontario’s international merchandise exports advanced 7.2% in the first eight months of 2016 compared to the same period in 2015. The rise in overall exports was led by increases to the United States (+8.9%), the United Kingdom (+8.6%) and Mexico (+30.2%). Exports continue to be supported by steady growth in the U.S. economy and a competitive Canadian dollar.
Manufacturing sales advanced 5.4% on a year-to-date basis to July, driven largely by transportation equipment and food product manufacturing.
Retail sales advanced 5.3% and wholesale trade by 6.4% in the first seven months of 2016, compared to the same period a year earlier. Both wholesale and retail trade continued to benefit from solid gains in the motor vehicle and parts industries.
Ontario’s Housing Market Still Growing Strongly
Housing market activity in Ontario continues to be strong so far in 2016, supported by demographic formation, employment gains and low mortgage rates.
Sales of existing homes
were 9.3% higher in the first eight months of 2016, compared to the same period in 2015. This strength was broad based, with most regions of Ontario posting year-to-date gains.
Average home resale prices have also risen, reaching $540,000 in August. During the first eight months of 2016, average home resale prices were 13.0% higher than the previous year. The upward trend has been in part the result of declining listings. New listings have decreased 7.0% on a year-to-date basis.
Housing starts advanced 6.2% in the first nine months of 2016. Both single-detached (+17.1%) and multiple-family (+0.8%) starts increased on a year-to-date basis.
Global Economic Developments
Global Economy Continues to Face Uncertainty
In the uncertainty following the Brexit vote, the IMF edged down its expectations for global real GDP growth from 3.2% to 3.1% in 2016. Data in the U.K. and euro area point to continued, though slower growth following the Brexit vote. Indicators in China have been somewhat better than expected and momentum has picked up in the U.S. economy recently.
The aftermath of the Brexit referendum triggered a downward revision to growth expectations in the U.K. and across Europe. Since the referendum, according to Consensus Forecasts, expectations for 2017 U.K. real GDP growth declined by over 0.3 percentage points while the euro area were revised down by almost half a percent. Despite the downward revision in growth expectations, much of the uncertainty and volatility seen in financial markets following the Brexit vote has eased. Limited financial and trade ties suggest the U.S. and Ontario will experience a very modest impact.
Real GDP growth in the U.S. slowed in the first half of the year, though much of the weakness was due to lower inventories and declining business investment. However, domestic sales grew at a stronger pace with consumer spending rising. In September, payrolls added 156,000 jobs while the unemployment rate was 5.0%.
After rising to over $50 US per barrel in June from the 14-year lows last February, oil prices slowly trended lower over the summer. Trading around $45 US per barrel throughout September, rising oil inventories, partly due to the resumption of production in Alberta following the wildfires in June, have contributed to the downward pressure on oil prices.
After easing almost 5% from its recent peak of 79.7 cents US in May, the Canadian dollar remained generally in a tight range over most of the summer. Trading around 76 cents US in September, gains in the Canadian dollar have been limited due the modest slide in oil prices as well as softer economic growth that is likely to result in the Bank of Canada not changing policy this year. The Canadian dollar held on to its post-Brexit gains against the British pound, rising over 17%, though it has edged slightly lower against the euro.
Canadian interest rates have remained low in 2016, with the Government of Canada 10-year bond yielding around 1.2%, down from 1.5% in 2015. In recent months Canadian yields have followed their US counterparts with the 10-year yield slightly higher after spending most of the summer hovering around 1.0%. Solid employment growth and a low unemployment rate have added modestly to expectations for a Federal Reserve interest rate hike later this year, though still-low inflation has kept rate expectations contained.
After quickly reversing a short-lived plunge following the Brexit vote, equity markets recovered further over the summer, with the FTSE 100 up over 7% since early July while the TSX and the S&P 500 are up a more modest 3% and 2% respectively. Steady global indicators and a lack of market disruption and uncertainty helped keep equity volatility low over the summer.
Though Brexit-related economic concerns have eased, other international risks remain. In China, government-led, credit-driven growth raises the risk of a disruptive adjustment when lending is eventually pulled back. As well, geopolitical tensions and conflict remain elevated in several regions, particularly the Middle East.
A Closer Look at Ontario’s Science and Engineering Workforce
The science and engineering (S&E) workforce refers to workers employed in professional and technical occupations related to physical and life sciences, engineering, mathematics, architecture, and information technology. These workers are crucial for a knowledge-based economy, and are strongly linked to innovative outcomes such as the introduction of new goods and services.
Ontario’s S&E workforce continues to grow and outpace growth in all other employment. In 2015, Ontario industries employed 566,200 S&E workers – a 2% increase from the previous year, and the third consecutive annual increase.
Between 1990 and 2015, Ontario’s S&E workforce grew by almost 95%, while all other employment grew by almost 30%.
Ontario S&E workers had an unemployment rate of 2.9% in 2015, unchanged from 2014, and much lower than the provincial average of 6.8%.
In 2015, 8.2% of Ontario workers were employed in science and engineering occupations, compared to 7.6% in the rest of Canada. Ontario employed 40.4% of all Canadian S&E workers in 2015, followed by Quebec (24.4%) and Alberta (13.7%).
In 2015, the real median weekly earnings of workers in S&E occupations ($1,030) were significantly higher than the provincial median earnings ($649).
S&E occupations experienced faster earnings growth compared to the provincial average. Between 1997 and 2015, real median earnings for S&E workers rose by 14.9% compared to 4.1% for all occupations.
How GDP is Measured
The Ontario Economic Accounts provide measurements of GDP using three different methodologies: by expenditure, income and industry.
The GDP by expenditure approach defines GDP as the aggregate of all expenditures on final consumption, gross capital formation and net trade by consumers, governments and businesses that occur within Ontario’s economy over a given time period. This measurement of GDP can also be defined as the sum of consumer spending, gross investment, government spending and net trade.
The GDP by income approach equates GDP to the total income earned through contributions to production within Ontario’s economy by labour and capital over a given time period. That is, GDP is the sum of all wages and salaries paid to employees, the gross operating surplus of businesses, gross mixed income and indirect taxes less subsidies.
The GDP by industry approach measures GDP by calculating the total output of the goods and services producing industries within Ontario’s economy and subtracting the cost of intermediate inputs used in final production. This approach can also be referred to as the value-added approach as it quantifies the additional value generated by industries through the production of final products within the economy.
For a full list of definitions used in the Ontario Economic Accounts, please see Statistics Canada’s System of Macroeconomic Accounts Glossary at http://www.statcan.gc.ca/eng/nea/gloss/gloss_a.