First Quarter of 2016
(January, February, March)
Ontario Ministry of
Table of Contents
Ontario Real GDP Rises in 2016Q1
- Ontario’s real gross domestic product (GDP) advanced 0.8% (3.0% annualized) in the first quarter (January to March) of 2016, after rising 0.8% (3.3% annualized) in the fourth quarter (October to December) of 2015.
- Increases in exports and household spending were the primary drivers of Ontario’s first quarter gain in real GDP.
- Nominal GDP increased 0.7% (2.8% annualized) in the first quarter. Compensation of employees rose 0.7%, while the net operating surplus of corporations increased 1.2%.
- Economic production, measured on an industry basis, advanced 0.9% (3.7% annualized) in the first quarter. Output in the goods sector rose 1.4%, while service sector activity grew by 0.8%.
- Employment in Ontario continues to rise, while other economic indicators also point to continuing growth.
- Ontario posted stronger first quarter real GDP growth than Canada, the U.S. and all of the other G7 countries.
- Ontario’s economy has continued to grow in an uncertain economic environment. Expectations for global economic growth have moderated in recent weeks due to the results of the Brexit referendum.
Household Spending and Exports Boost Ontario’s Real GDP
Ontario’s real GDP increased 0.8% in the first quarter of 2016, reflecting positive contributions from household spending, investment in residential structures and exports. This was partially offset by lower capital spending on machinery and equipment and non-residential construction, as well as a decline in business inventories.
Ontario household consumption spending increased 0.6%, following a 1.3% advance in the fourth quarter of 2015. The first quarter increase was driven by solid gains in durable goods (+2.6%), semi-durable goods (+1.7%), and services (+0.6%). Durable goods spending continued to be boosted by purchases of motor vehicles, which rose for the fourth consecutive quarter.
Business investment advanced by 0.8%. This was led by a 2.7% gain in residential construction investment, which expanded for the fifth consecutive quarter. Stronger investment in new housing and increased home ownership transfer spending, which reflects movement in the home resale market, contributed to the gain. Business investment in non-residential structures (-1.6%) and machinery and equipment (-0.4%) declined in the quarter. First-quarter growth was also dampened by a $2.3 billion reduction in business inventories.
Exports rose by 1.7%, rising for the fourth consecutive quarter. Higher exports of automotive products and consumer goods led the first-quarter gain. The lower Canadian dollar continues to support growth in Ontario’s exports. After a modest 0.2% increase in the fourth quarter, imports advanced 1.4% in the first quarter.
Nominal GDP Rises
GDP in current dollars increased 0.7% in the first quarter, following a 0.9% advance in the fourth quarter of 2015.
Supported by job gains, compensation of employees, which includes both wages and salaries, and supplementary labour income, rose 0.7%, following a 1.3% advance in the previous quarter. Similarly, net mixed income, which is composed of farm, non-farm and rental income, advanced 1.0%, following a 1.1% increase in the fourth quarter of 2015.
Business sector profits, measured by net operating surplus of corporations, increased 1.2% in the first quarter of 2016, partially recovering from a 1.5% decline in the previous quarter.
Household disposable income increased 0.9%, after rising 1.1% in the fourth quarter of 2015.
While household disposable income increased at a moderate pace, advances in consumption expenditure and a decline in pension entitlements led to a slight slowing in the household savings rate to 1.0%, from 1.1% in the previous quarter.
Economy-Wide Prices Edge Down
Economy-wide prices, as measured by the implicit price index for GDP, edged down 0.1%, after rising 0.1% in the fourth quarter. The implicit price index for final domestic demand increased 0.4%, after rising at an identical pace in the fourth quarter of 2015.
Prices for household expenditures increased 0.2%, after advancing 0.3% in the fourth quarter of 2015. Prices for motor vehicles, electricity and food increased, but were partially offset by lower natural gas and gasoline prices.
Machinery and equipment prices increased 1.1%, while non-residential construction prices rose 0.6%. Residential construction prices advanced 2.8%, the largest increase since early 2004.
Import prices rose 0.3%, while export prices declined 0.2% in the first quarter, both influenced by depreciation in the Canada-U.S. exchange rate.
Growth Widespread Across Sectors
Based on production by industry, Ontario real GDP expanded 0.9%, matching growth in the previous quarter. Both the goods (+1.4%) and service (+0.8%) industries contributed to first quarter growth.
Within the goods-producing sector, manufacturing (+1.2%) was the main driver of growth. The auto industry posted a 3.1% gain, with increased output in both auto assembly and parts. Food, beverage and tobacco manufacturing rebounded 3.7% following a 1.1% decline in the final quarter of 2015. Partially offsetting these gains were declines in machinery (-2.1%), chemical and petroleum (-1.2%) and paper products and printing (-1.0%).
Other goods-producing industries also mostly increased output. Construction output advanced 1.2% in the first quarter, with gains in both residential (+2.6%) and non-residential (+0.1%) buildings. The utilities sector posted a 5.6% gain, following three consecutive quarterly declines. Output in primary industries declined by 0.7%. This included a 0.5% decrease in mining due to weaker output in support activities and gold and silver production.
Almost all service industries increased output in the first quarter. The largest contributor was the finance and insurance industry, up 1.3%, supported by strength in banking. Retail trade advanced by 1.7%, with strong contributions from auto dealers and clothing stores. Wholesale trade rose 1.0%, supported by gains in machinery and equipment wholesalers. Public sector services were also a strong contributor to growth in the quarter with gains in health care and social services (+1.2%) and education (+1.3%), while public administration edged up by 0.2%.
Job Growth Continues in 2016
Ontario employment has advanced considerably since the 2008-09 recession. In June 2016, employment was 5.3% (+352,600 jobs) above the pre-recession peak and 9.8% (+625,100 jobs) above the recessionary low.
So far in 2016, job creation has been steady. On a year-to-date basis, Ontario’s employment advanced 1.2% during the first six months of 2016, compared to the same period in 2015.
Since the recessionary low, the majority of jobs created were full-time positions (+599,400), while part-time employment (+25,600) also increased. Most of these net new jobs were in the private sector (+446,600) and in industries paying above–average wages (+478,900).
Ongoing job gains have led to a steady reduction in Ontario’s unemployment rate, which has now been below the national average for over a year. As of June 2016, Ontario’s unemployment rate was 6.4%, below the Canadian rate of 6.8%.
Growth Continues in Exports, Manufacturing Sales
Ontario’s international merchandise exports advanced 12.6% in the first five months of 2016 compared to the same period in 2015. This increase was led by exports to the United States, supported by solid growth in the U.S. economy and a more competitive Canadian dollar, which depreciated 7.7% against the U.S. dollar over the same time period.
Manufacturing sales advanced 8.3% on a year-to-date basis to April, led by transportation equipment and food product manufacturing.
Retail sales advanced 7.8% and wholesale trade by 7.4% compared to the first four months of 2015. Both wholesale and retail trade benefited 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.
Sales of existing homes were 10.3% higher in the first five months of 2016, compared to the same period in 2015. This strength was broad based, with all regions of Ontario posting year-to-date gains.
Average home resale prices have also been on the rise, reaching $516,000 in May. During the first five months of 2016, average home resale prices were 12.1% higher than the previous year. The upward trend has been in part the result of declining listings. New listings have decreased 6.8% on a year-to-date basis.
Housing starts advanced 15.4% in the first six months of 2016. Both single-detached and multiple-family starts increased on a year-to-date basis.
Ontario Tops Real GDP Growth Across the G7
Ontario posted stronger quarter-over-quarter real GDP growth (+0.8%) than Canada, the United States and all of the other G7 countries in the first quarter of 2016.
Across the G7 countries, economic growth generally improved in the first quarter of 2016 compared to the previous quarter. Germany led the G7 in economic growth, with real GDP rising 0.7%. France posted a 0.6% gain, following a 0.4% rise in the fourth quarter of 2015. After contracting 0.4% in the previous quarter, Japan’s economy grew 0.5% in the first quarter. The United Kingdom posted a 0.4% increase, slowing from a 0.7% advance in the fourth quarter. Italy’s economic growth rebounded slightly to 0.3%, breaking the downward trend in real GDP growth throughout 2015.
Canada wide, real GDP rose 0.6% in the first quarter, after edging up 0.1% in the fourth quarter of 2015. The acceleration in economic growth was primarily attributed to increases in household expenditure (+0.6%) and net trade, as exports (+1.7%) grew more than imports (+0.3%). Business investment (-0.4%) continued to moderate national economic growth as investment in non-residential structures and machinery and equipment decreased 2.5%. Quebec recorded a 0.5% increase in real GDP, after recording no growth in the previous quarter. Household (+0.8%) and government (+0.3%) consumption both rose and were the main drivers of real GDP growth. Business investment (-1.1%) dampened Quebec’s economic growth for the tenth consecutive quarter.
In the U.S., real GDP advanced 0.3%, matching growth in the previous quarter. Personal consumption expenditure was the main contributor to growth, increasing 0.4%. Exports rose 0.1% in the first quarter, after declining 0.5% in the previous quarter.
Global Economic Developments
Global Economic Uncertainty Prevails
Expectations for an improvement in the global economy in 2016 have eased in recent months. In April, the IMF lowered their world growth forecast from 3.4% to 3.2% in 2016 due to weakness in both advanced and emerging economies. The slowdown has been evident in markedly slower growth in global trade flows due, in part, to financial uncertainty and capital outflows from China. The slowdown in global trade has been exacerbated by commodity-related weakness in Russia, the Middle East and Africa.
Global growth expectations will likely be revised lower following the results of the Brexit referendum which saw the United Kingdom vote to leave the European Union (E.U.). Since then, global uncertainty and financial market volatility increased markedly, causing significant declines in global bond yields and a strong appreciation in the U.S. dollar. Most forecasters expect the impact of Brexit to be felt more strongly within the E.U. and among countries with significant trade ties to the region. Due to more limited financial and trade ties, the U.S. and Ontario will likely experience a modest impact.
Following a slow start to the year, real GDP growth in the U.S. will likely improve in the second quarter, boosted by a rebound in consumer spending and signs of a return to growth in exports. Weakness in the energy sector is expected to continue weighing on business investment while conditions in the U.S. labour market remain tight. In June, payrolls added 287,000 jobs while the unemployment rate was 4.9% and wage growth accelerated.
After falling to 14-year lows last February, oil prices have risen to over $45 US per barrel in July, supported by escalating production cuts in the U.S. and supply disruptions in Alberta and other parts of the world. The recent price recovery is unlikely to reverse the dramatic reduction in investment and production in the North American oil sector. As well, excessive global oil inventories signal the reduction in North American oil supply is not yet over.
Rising oil prices, in addition to recent monetary policy developments, raised the value of the Canadian dollar. As of late-June, it has risen by over 11% to 78 cents US from below 70 cents US in mid-January. The Canadian dollar has experienced a stronger appreciation against the British pound and the euro on concerns related to the outcome of the Brexit referendum.
Canadian interest rates have remained low in 2016, with the Government of Canada 10-year bond yielding around 1.2% so far this year, down from 1.5% in 2015. The decline has been a global phenomenon with government 10-year bond yields hitting all-time lows in the United Kingdom, and falling below zero in Germany, Japan and Switzerland. In addition to slower economic growth and Brexit-related uncertainty, a key factor in the decline in global bond yields has been persistently low inflation and falling inflation expectations. In the U.S., CPI inflation was 1.0% in May from a year-earlier while inflation in the euro area, the UK and Japan has been close to 0.0%.
Following the temporary downturn early in 2016, equity markets bounced back with the TSX rising over 8%, while the S&P 500 is up over 4% since early January. However, since mid-April both indices have been little changed despite modestly elevated volatility in financial markets around the Brexit vote. In China – a source of financial market disruption in 2015 – significant government intervention has maintained relative stability in equity markets so far this year.
International geopolitical risks remain elevated. Low commodity prices have contributed to high inflation and prolonged recessions in Brazil and Nigeria while Venezuela faces significant economic challenges. In China, though financial markets have stabilized after a turbulent 2015, significant capital outflows pose a risk to global financial market stability.
A Closer Look at Ontario’s International Exports
In today’s highly interconnected world, global supply chains are crucial in international trade flows. With the on-going changes in the global supply chains, the destination and composition of Ontario’s exports are continuously evolving.
Over the past decade, Ontario’s export growth continued despite a generally challenging global economic environment. In addition to a relatively high Canadian dollar, the global market has become increasingly competitive as a result of the growing importance of emerging economies. While the U.S. remains Ontario’s primary foreign market, receiving 80.5% of the province’s merchandise exports in 2015, this is down from 88.8% in 2005. Ontario has sent an increasing share of its exports over this time to the United Kingdom, Mexico, China and Hong Kong.
Ontario’s merchandise exports have not only become more diverse in terms of export destinations, but have also changed in terms of the composition of products. In 2005, the top two categories – automotive and machinery and equipment products – accounted for about 57% of total goods exports. In 2015, these two sectors accounted for just over 48% of total goods exports. Over the same period, exports of high-tech products, such as aerospace and pharmaceuticals, grew by nearly 50%, increasing their share of total exports to 6.3% in 2015 from 4.7% in 2005.
Goods continue to make up the bulk of Ontario’s exports, but services are now playing a more prominent role. During the 2008-2009 global recession, Ontario’s international goods exports experienced a steep decline, while international service exports continued to grow. This resulted in the services share of total international exports growing from 14.9% in 2008 to nearly 19% by 2009. This share would increase further to 19.7% by 2012, but has since edged down to 17.5% in 2015. While service exports once had limited global exposure, technological advances and the digitization of the economy mean services will continue to play an important role in Ontario’s economy.
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.