Third Quarter of 2016
(July, August, September)
Ontario Ministry of
Table of Contents
RECENT ECONOMIC DEVELOPMENTS
Ontario Real GDP Advances in 2016Q3
- Ontario’s real gross domestic product (GDP) increased by 0.7% in the third quarter (July to September) of 2016, after rising 0.2% in the second quarter.
- Higher exports were the primary driver behind the third quarter gain, while continued growth in household spending also contributed to the overall increase in real GDP.
- Nominal GDP increased 1.0% in the third quarter. The net operating surplus of corporations posted a solid 6.0% gain and compensation of employees advanced by 0.3%.
- Economic production, measured on an industry basis, advanced 0.5% in the third quarter. Output in both the services and goods-producing sectors increased by 0.5%.
- Real GDP growth in Ontario was slightly better than the weighted average of G7 countries (0.6%) in the third quarter. Canadian real GDP rose by 0.9%, rebounding from a 0.3% decline in the second quarter affected by the Fort McMurray wildfires.
Exports Drive Ontario’s Real GDP Growth
Ontario’s real GDP increased 0.7% (2.6% annualized) in the third quarter of 2016, supported by growth in exports, household spending and housing investment.
Ontario’s household consumption spending increased 0.5%, following a 0.6% advance in each of the previous two quarters. Consumer spending on durables (+0.5%), non-durables (+0.8%) and services (+0.5%) rose in the quarter, while spending was lower for semi-durables (-0.2%). Durable goods spending was supported by increased purchases of motor vehicles and parts. Food and beverages, gasoline and pharmaceutical products also contributed to the overall increase in household spending.
Business investment decreased 0.8%, the first decline since the end of 2013. Business investment in machinery and equipment (-5.9%), non-residential structures (-1.2%) and intellectual property products (-1.8%) declined. This was partially offset by a 1.6% gain in residential construction investment, reflecting strong growth in new construction, renovation and resale activity. Government spending declined by 0.3%, as lower current expenditures (-0.4%) were partially offset by higher capital spending (+0.6%). Businesses accumulated $1.8 billion in non-farm inventories in the third quarter.
Exports rebounded in the third quarter, advancing by 0.8%, following a 2.7% decline in the second quarter. Both international (+0.9%) and interprovincial (+0.6%) exports of goods and services rose in the quarter. The increase in international goods exports was driven by consumer goods and electronic and electrical machinery.
Imports decreased 0.5% in the third quarter, after edging down 0.3% in the second quarter.
Final domestic demand
, which excludes the trade sector and inventories, edged up by 0.1% in the third quarter, following gains of 0.7% in the first two quarters of the year.
Nominal GDP Continues to Rise
GDP in current dollars advanced 1.0% (4.1% annualized) in the third quarter, following a 0.4% increase in the second quarter.
Compensation of employees, which includes both wages and salaries, and supplementary labour income, increased 0.3%, following a 1.1% advance in the second quarter. Net mixed income, which is comprised of farm, non-farm and rental income, edged up 0.1%, following a 1.4% increase in the second quarter.
Business sector profits, measured by net operating surplus of corporations, rose 6.0% in the third quarter, after declining by 0.9% in the second quarter.
Household disposable income increased 2.0%, after rising 1.2% in the second quarter of 2016.
In the third quarter, household disposable income continued to advance at a stronger pace than consumption expenditure, leading to an improvement in the household savings rate,
up 0.9 percentage points to 4.6%.
Economy-Wide Prices Advance
Economy-wide prices, as measured by the implicit price index for GDP, increased 0.3% in the third quarter, after rising 0.2% in the second quarter.
Prices for household expenditures edged up 0.4%, following no change in the second quarter. Prices for motor vehicle parts, furniture and clothing increased, while prices for food and beverages, motor vehicles, natural gas and gasoline decreased in the quarter.
Business investment prices advanced by 1.2% in the quarter. Machinery and equipment prices were unchanged, while non-residential construction prices increased 2.1%. Residential construction prices advanced 1.4%, following a 1.1% increase in the second quarter.
Export prices increased 0.7%, while import prices rose 1.0% in the third quarter. During this period the Canadian dollar depreciated by 1.3% against the U.S. dollar.
The implicit price index for final domestic demand advanced 0.5%, after edging up 0.1% in the second quarter.
Service Industries and Manufacturing
Based on production by industry, Ontario real GDP increased by 0.5% (2.1% annualized), after edging up by 0.1% in the previous quarter. Output of both the goods and service-producing sectors advanced by 0.5% in the quarter.
Growth in the goods-producing sector was primarily led by manufacturing and utilities output. Manufacturing production increased 0.9%, driven by higher output in the chemical and petroleum (+5.0%), machinery (+5.5%) and food and beverage (+2.4%) industries. Lower output in transportation equipment (-1.8%) moderated overall manufacturing growth.
A solid gain in utilities output (+6.2%) also contributed to goods-sector growth, as warmer weather led to increased demand. Construction sector output edged down 0.3% as a gain in the residential sector (+1.9%) was outweighed by a decline in non-residential buildings and engineering (-1.7%). Primary industry output declined by 3.9%, mainly due to lower mining production.
Almost all of the service-producing industries reported gains in the third quarter, with the largest contribution coming from finance and insurance (+0.8%). Solid contributions also came from transportation and warehousing (+1.5%), professional and administrative (+0.6%) and health care and social services (+0.6%).
Ontario Q3 Growth Slightly Stronger Than G7 Average
In the third quarter, Ontario’s real GDP grew by 0.7%, slightly stronger than the average of all G7 countries (+0.6%), only trailing Canada (+0.9%) and the U.S. (+0.9%).
Across the G7 countries, average real GDP growth gained momentum, rising from 0.3% in the second quarter to 0.6%. Canada led the way, with real GDP advancing 0.9%, after decreasing 0.3% in the second quarter. Solid third quarter growth in Canada was primarily attributed to a 2.2% increase in exports, which was driven by a strong recovery in energy exports following the Fort McMurray wildfires. Canadian household spending rose 0.6%, while business investment decreased 0.5% in the quarter. Quebec’s real GDP rose 0.5% in the third quarter, building on a 0.3% increase in the previous quarter. Household spending (+0.8%) continued to drive Quebec growth, while net trade limited growth as imports (+1.3%) grew faster than exports (+0.8%).
In the U.S., real GDP advanced 0.9% in the third quarter, following a 0.4% gain in the second quarter. Personal consumption expenditure (+0.7%) and exports (+2.4%) were the main contributors to real GDP growth in the third quarter. Government spending rose 0.2%, following a 0.4% decline in the second quarter. Private fixed investment was unchanged in the quarter, following two consecutive quarterly declines.
The United Kingdom posted a 0.6% gain in real GDP, following a similar rise in the second quarter. Third quarter growth moderated in Japan (+0.3% from +0.5%) and Germany (+0.2% from +0.4%). Growth picked up in both Italy (+0.3% from +0.1%) and France (+0.2% from -0.1%).
Improves in 2016
Employment growth in Ontario accelerated in 2016. Employment increased by 76,000 in 2016, following gains of 55,000 in 2014 and 45,000 in 2015.
Ontario’s unemployment rate has also improved considerably. As of December 2016, Ontario’s unemployment rate was 6.4%, below the Canadian rate for the 20th consecutive month. On an annual basis, the unemployment rate declined to 6.5% in 2016, the lowest since 2007.
As of December 2016, employment was 6.0% (+397,000 jobs) above the pre-recession peak and 10.5% (+669,000 jobs) above the recessionary low.
Since the recessionary low, the majority of jobs created were full-time positions (+608,000), while part-time employment (+61,000) also increased. Most of these net new jobs were in the private sector (+500,000) and in industries paying above–average wages (+528,000).
Economic Indicators Posting Solid Gains in 2016
Ontario’s international merchandise exports advanced 5.6% in the first eleven months of 2016 compared to the same period in 2015. The rise in overall exports was led by increases to the United States (+6.6%), the United Kingdom (+12.8%) and Mexico (+25.9%). Exports continue to be supported by steady growth in the U.S. economy and a competitive Canadian dollar.
Manufacturing sales advanced 4.5% on a year-to-date basis to October, driven largely by transportation equipment (+11.8%), while food products (+5.8%) have also risen strongly. These gains have been partly offset by lower sales of petroleum and coal products (-18.3%).
Retail sales advanced 4.6% and wholesale trade by 6.5% in the first ten 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 has been strong in 2016, supported by demographic formation, employment gains, higher incomes and low mortgage rates.
Sales of existing homes were 9.6% higher in the first eleven months of 2016, compared to the same period in 2015. Gains have been widespread across most Ontario markets, including the Greater Toronto Area (+11.9% year-to-date).
Average home resale prices in Ontario have also risen, reaching $575,700 in November. During the first eleven months of 2016, average home resale prices were 14.9% higher than the previous year. The upward trend has been in part the result of declining listings. New listings have decreased 6.3% on a year-to-date basis.
Housing starts advanced 6.8% in 2016. Single-detached starts (+16.0%) rose, while multiple-family starts (-0.4%) declined on an annual basis.
Global Economic Developments
Global Economy Resilient Amid Policy Uncertainty
Global economic growth continued at a solid pace in 2016. According to the IMF, global real GDP growth is projected to rise by 3.1% in 2016, similar to the 3.2% advance in 2015. Growth in advanced economies is expected to ease in 2016, while emerging market and developing economies experience a modest pickup.
The global economy has experienced significant geopolitical uncertainty in 2016. Following a downgrade to growth expectations in the U.K. and the Eurozone in the aftermath of the Brexit referendum, anti-EU sentiment continues to gain momentum. The recent U.S. election has raised policy uncertainty.
Conditions continue to improve in the U.S. labour market. In December, payroll employment increased by 156,000 jobs, while the unemployment rate was a low 4.7%. Real GDP growth in the U.S. accelerated strongly to 3.5% (annualized) in the third quarter, driven by solid consumer spending and improving net trade. However, business investment remained weak as firms continued to reduce energy-related capital spending. The housing sector was also a drag on economic growth, though conditions remain supportive.
Oil prices were volatile, rising from $43 US per barrel in early November to around $53 US per barrel by the end of the year. Oil prices have gained significant momentum following an OPEC announcement in late November to cut production. As well, OPEC announced a deal with several non-OPEC countries to also limit production.
Global Financial Markets Improve
The Canadian dollar trended lower over the fall, gradually easing from almost 76 cents US in mid-September to a range of 74 to 75 cents US recently. The loonie has come under some further pressure following the U.S. Federal Reserve rate increase in December, the second hike since their tightening cycle began in December 2015.
Global interest rates have risen markedly in recent months, with the yield on 10-year US treasuries rising from 1.8% to over 2.5% recently. Canadian interest rates have followed their U.S. counterparts, with 10-year government bond yields rising from 1.2% to 1.8% over the same period. Improving yields likely reflect a stronger growth outlook. Weaker economic growth prospects, low inflation and elevated uncertainty are weighing on government bond yields across most other advanced economies where yields have risen to a lesser extent than in the U.S.
Alongside bond yields, equity markets rallied strongly late in the year, with the S&P 500 up almost 8% since early November and the TSX up over 5%. Despite rising geopolitical uncertainty, global economic indicators have remained solid, signalling continued economic growth.
Though financial markets have strengthened significantly, raising the possibility that economic growth could be better than expected, other risks remain. Trade protectionism continues to gain traction. Financial and economic imbalances in China continue to grow, raising the risk of an abrupt and disorderly transition towards slower economic growth, which could disrupt global trade flows.
A Closer Look at Ontario’s
Productivity is a key driver of an economy’s growth. Labour productivity is defined as the ratio of output to labour input, typically measured by real GDP per hour worked.
During 1998-2015, Ontario’s business sector labour productivity growth averaged 1.1% annually. However, there were three distinct sub-periods for growth in Ontario productivity over that time.
- Productivity growth rose at a rapid 2.3% average pace during 1998-2002, then slowed significantly to a 0.4% annual rate during 2003-2013, largely reflecting a sharply higher Canadian dollar and surging commodity prices.
- More recently, productivity growth increased significantly during 2014-2015, averaging 1.9% annually. Data so far in 2016 shows a continuation of this recent trend.
Ontario’s key manufacturing and business services experienced a notable turnaround in labour productivity growth during 2014-2015, following a marked slowdown during 2003-2013 relative to the prior period.
In comparison to other provinces, Ontario’s labour productivity growth was in the middle of the range over the entire 1998-2015 period, and slightly below Canada’s average 1.3% rate. Manitoba had the highest average productivity growth at 1.8% and Alberta the lowest growth at 0.4% per year.
Note: Statistics Canada produced revised labour productivity data at the industry level for Canadian provinces spanning the 1997-2015 period.
Structure of the Ontario 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.
List of Data Tables
Income and Expenditure Data
Quarterly Data, 2013:1–2016:3
Table 1: Ontario Gross Domestic Product (Income-Based)
Table 2: Ontario Gross Domestic Product (Expenditure-Based)
Table 3: Ontario Gross Domestic Product at Chained 2007 Prices
Table 4: Sources and Disposition of Ontario Household Income
Table 5: Ontario Trade
Table 6: Ontario Trade (Chained 2007 Prices)
Table 7: Ontario Deflators
Annual Data, 2012-2015
Table 8: Ontario Gross Domestic Product (Income-Based)
Table 9: Ontario Gross Domestic Product (Expenditure-Based)
Table 10: Ontario Gross Domestic Product at Chained 2007 Prices
Table 11: Sources and Disposition of Ontario Household Income
Table 12: Ontario Trade
Table 13: Ontario Trade (Chained 2007 Prices)
Table 14: Ontario Deflators
Ontario Production by Industry at 2007 Prices
Table 15: Quarterly Data, 2013:1-2016:3
Table 16: Annual Data, 2012-2015
On November 9, 2016, Statistics Canada released its Provincial Economic Accounts, which include annual GDP estimates for all provinces. The release included new provincial expenditure and income based GDP estimates for 2015, and revisions to 2013 and 2014 estimates. Industry based estimates, which had previously been released in May 2016, were revised for 2013 to 2015. The quarterly Ontario Economic Accounts have been updated to reflect these revisions.