FOURTH QUARTER 2008 SUMMARY

• Ontario’s real Gross Domestic Product (GDP) contracted by 1.4% (5.6% annualized) in the fourth quarter after posting no change in the third quarter.  Canadian real GDP fell 0.8% (3.4% annualized), while the U.S. economy declined 1.6% (6.2% annualized) in the quarter.
• The decline of Ontario real GDP in the fourth quarter reflects the steep sudden downturn of the global economy.  Led by the United States, all G7 economies slid into recession last year, precipitated by the global credit crunch and financial-market turbulence.  Weak global demand, particularly in the U.S., resulted in a decline in Ontario exports, which dropped 6.0% in the fourth quarter.
• Ontario’s domestic economy was also affected by the global downturn through declines in consumer and business confidence.  Consumer spending fell 1.0% in the fourth quarter of 2008, the first quarterly decline in five years, while the personal savings rate rose to 3.6%.
• Residential construction investment spending dropped 7.2% in the fourth quarter.  The deterioration was largely due to a 26% decline in real estate transfer costs which, in turn, reflected the sharp drop-off in home resales.
• The deteriorating economic climate led to a reduction in business investment in the fourth quarter.  Machinery and equipment investment spending fell 9.0% while non-residential construction spending declined 2.7%.
• Overall, final domestic demand dropped 1.9% in the fourth quarter.
• With imports (-8.3%) down by more than exports (-6.0%), Ontario’s real net trade balance improved by $7.9 billion to a surplus of $3.8 billion.
• Ontario businesses added $2.4 billion ($2002) to real inventories in the fourth quarter, a slower rate of increase than the average $5.4 billion build-up recorded over the previous six quarters.
• In current dollars, GDP decreased 1.7% in the fourth quarter, the first decline since the second quarter of 2003.  Economy-wide prices, as measured by the GDP implicit price index, fell 0.3%, largely reflecting a record decline in energy prices.
• On an industry basis, economic production contracted 1.4% in the fourth quarter of 2008.  Declines were posted for both goods (-3.7%) and services (-0.6%) and were broadly based across major sectors.

2008 OVERVIEW

• Ontario’s real GDP fell 0.4% in 2008.
• Final domestic demand – the sum of consumer spending, business investment and government spending – increased 2.6% in 2008, following a gain of 4.0% in both 2006 and 2007.
• Consumer spending was a major contributor to economic growth in 2008.  Personal spending grew 3.0%, with spending on durable (+6.6%) and semi-durable (+5.4%) goods leading the overall increase.
• Business investment declined 0.9% in 2008.  Real capital spending on machinery and equipment fell 1.0% after posting robust gains, averaging 8.5% in the previous five years.  Real investment spending on both residential (-1.0%) and non-residential (-0.5%) construction fell in 2008.
• Net trade – exports minus imports – weakened considerably in 2008, falling to a deficit of $0.7 billion.  Real exports fell 7.4%, the steepest annual decline on record. Real imports fell 3.8%.
• In current dollars, GDP grew 1.7% in 2008.  Labour income increased 4.3% while corporate profits (national accounts basis) declined 4.5%.
• Economy-wide prices, as measured by the GDP price deflator, rose 2.1% in 2008.  Import prices (+6.7%) rose faster than export prices (+5.8%) mainly as a result of a sharp rise in interprovincial import prices (+12.7%) which reflected higher average energy prices.  Machinery and equipment investment prices increased 1.0% following five annual declines. Consumer prices (+1.6%) continued to increase at a moderate pace in 2008.
• Real output by industry contracted 0.3% in 2008, following a 2.2% gain in 2007.  Manufacturing fell by 8.6%.

ONTARIO ECONOMIC ACCOUNTS: HIGHLIGHTS (% change from previous period)
	2007	2008	2008q1	2008q2	2008q3	2008q4
Real GDP (Chained $ 2002)	2.3	-0.4	-0.5	0.1	0.0	-1.4
(annualized rate)			-2.0	0.6	0.0	-5.6
Personal spending	3.8	3.0	0.5	0.4	0.0	-1.0
Government spending	2.9	4.2	1.1	2.1	0.5	-0.5
Residential construction	2.0	-1.0	-2.2	2.7	-1.5	-7.2
Non-residential construction	14.1	-0.5	-1.6	-3.5	-3.3	-2.7
Machinery & equipment	7.8	-1.0	-3.7	1.9	0.3	-9.0
Final Domestic Demand	4.0	2.6	0.1	0.9	-0.1	-1.9
Exports	0.9	-7.4	-3.6	-1.8	0.8	-6.0
Imports	3.8	-3.8	-5.0	0.8	0.3	-8.3
Business inventories (Chained $2002 billions)	4.1	4.4	3.2	6.3	5.7	2.4
Nominal GDP ($ Current)	4.5	1.7	0.2	0.6	0.3	-1.7
Corporation profits	-0.4	-4.5	-1.1	3.4	2.7	-18.2
Personal income	5.2	4.1	1.9	0.6	0.4	0.0
Personal disposable income	4.5	4.9	2.4	1.2	0.5	-0.1
Implicit price index, GDP	2.1	2.1	0.8	0.5	0.3	-0.3

EXPENDITURE AND INCOME DETAILS

Consumer Spending Declines

Real consumer spending declined for the first time in five years, falling 1.0% in the fourth quarter of 2008.  Household spending, which had been slowing since the beginning of the year, was lower in all major personal expenditure categories.

Durable spending fell by 2.9% as car sales dropped 5.2%.  Spending on furniture and appliances also dropped in the fourth quarter, falling 4.1% after five consecutive quarterly advances.

Consumer spending on semi-durable (-2.1%) and non-durable (-0.3%) goods was also weaker as purchases of clothing, alcohol and natural gas declined from third quarter levels.

Spending on services fell 0.7% in the final quarter, after posting gains in the preceding two quarters.

In annual terms, real consumer spending grew 3.0% in 2008, decelerating from 3.8% growth in 2007.  Spending on durables remained solid, growing at a healthy 6.6% pace, the largest annual increase in six years.  Strong demand earlier in the year for big-ticket items such as motor vehicles and furniture and appliances was spurred on by a host of auto manufacturers’ incentives.  Consumer spending on semi-durable goods also grew at a healthy pace in 2008, rising 5.4%, propelled by brisk clothing and footwear sales in the first half of the year.

Growth in spending on non-durables slowed to 1.2% in 2008 from 2.7% in 2007 while consumer spending on services decelerated to 2.5% from a 3.8% gain in 2007.

Residential Construction Drops in Fourth Quarter

Real residential construction investment declined by 7.2% in the final quarter of 2008.  This was the second consecutive quarterly drop in Ontario’s housing sector investment.  The slide was largely due to a drop in the resale housing market which pushed spending on real estate transfer costs down 26%.  A 5.8% contraction in renovation activity also contributed to the overall residential investment decline.  New housing construction was unchanged in the fourth quarter.

For 2008 as a whole, real residential construction investment fell 1.0%, the first annual decline since 1998.  A decline in home resales pushed spending on ownership transfer costs down 12.2%, its largest drop since 1995.  Partially offsetting this slide was a 1.8% gain in new housing construction and a 2.1% jump in renovation spending.

Business Investment Declines

Capital spending by Ontario businesses decreased in the fourth quarter with real machinery and equipment spending dropping 9.0%.  Higher prices for capital goods contributed to the drop in investment spending.  Machinery and equipment prices climbed 8.2% in the fourth quarter, propelled by a 14.1% depreciation in the Canadian dollar relative to its U.S. counterpart.  In current dollar terms, machinery and equipment spending fell by 1.5% in the final quarter of 2008.

Real non-residential construction spending decreased 2.7%, the fourth consecutive quarterly decline.  The decline was due to weaker building construction investment.

On an annual basis, business investment in non-residential structures declined 0.5% in 2008, following three years of solid growth propelled, in part, by investments in major engineering projects in the electrical utilities sector.  Business investment in real machinery and equipment also fell in 2008 with spending dropping 1.0%, the first annual decline in six years.  Lower profits, falling industrial capacity utilization rates and higher prices for imported equipment contributed to reduced machinery and equipment spending in 2008.

Inventory Accumulation Slows in Fourth Quarter

Ontario businesses added $2.4 billion ($2002) to real inventories in the fourth quarter.  While this marked the seventh consecutive quarter of rising inventories, it was also the smallest quarterly increase in six quarters.  The fourth quarter inventory build-up was largely due to a further increase in retail stocks, particularly of motor vehicles.

In 2008, businesses raised inventories by $4.4 billion ($2002), the fifth consecutive annual increase in inventories, and the largest over the five year period. 

Exports and Imports Drop in Fourth Quarter

Real exports (both international and interprovincial) fell 6.0% in the final quarter of 2008, the sharpest quarterly decline on record.  The decline was due largely to the slide in U.S. economic growth as that country slipped into recession in 2008.  U.S. auto sales dropped 20.0% in the fourth quarter, severely impacting Ontario’s exports.  A 9.7% drop in Ontario’s exports of international goods included declines in exports of forestry products, industrial goods and materials, machinery and equipment and automotive products.

Real imports also dropped in the fourth quarter, falling 8.3%.  The decrease reflected weakness in domestic demand as well as rising import prices raised by the depreciation of the Canadian dollar.  The import weakness was broadly-based with major declines in automotive products, machinery and equipment and industrial goods and materials.

With the decline in imports steeper than exports, Ontario’s real net trade balance improved by $7.9 billion to a surplus of $3.8 billion.

On an annual basis, Ontario real exports fell by a record 7.4% in 2008, hurt by slumping U.S. demand for automotive products, forestry products and industrial goods and materials.  Ontario’s international exports fell 11.7% in 2008.  Interprovincial exports grew by 2.0%.

Real imports also declined in 2008, falling 3.8%, the first annual drop since 2001.  Significant import declines occurred in forestry, industrial goods and materials and automotive products.

With the decline in exports steeper than imports, Ontario’s real trade balance measured at 2002 prices, declined to a $743 million deficit in 2008—the first annual deficit on record.

Current Dollar GDP Falls in Fourth Quarter

Ontario’s Gross Domestic Product measured in current dollars contracted by 1.7% (-6.8% annualized) in the fourth quarter.  The year-end drop in current dollar GDP reflected a slowing in labour income growth along with a steep decline in corporate profits.

Labour income, the largest component of household income, grew 0.2%.  The deceleration in income growth reflected a decline in employment.  Weaker labour income, coupled with declines in investment income, pushed personal disposable income down 0.1%.  Consumers, faced with lower disposable income, cut back on spending.  Consumer spending in current dollar terms declined by 1.5% in the fourth quarter.  As a result, the personal savings rate* jumped to 3.6%, the highest rate in almost two years.

*Note: Personal savings is calculated in the System of National Accounts as the difference between the amount households receive as income, and their expenditures on taxes and personal consumption. It does not include changes in household wealth, such as financial assets, home equity and retirement savings.

Corporate profits (national accounts basis) dropped 18.2% in the fourth quarter, the steepest decline in 18 years.  Both non-financial and financial industries posted lower earnings with significant declines in mining, manufacturing, retailing and banking.

On an annual basis, current dollar GDP grew 1.7% in 2008, the weakest nominal growth since 1992.  A 4.1% rise in personal income in 2008 helped household spending increase 4.6% in current dollar terms.  Labour income increased 4.3%, reflecting a 1.4% (93,500 jobs) employment gain and a 4.1% increase in average hourly wages.

Ontario corporate profits (national accounts basis) declined 4.5% in 2008.  Ontario’s banking and manufacturing sectors recorded weaker earnings.

Prices Fall in Fourth Quarter

Economy‑wide prices, as measured by the GDP implicit price index, fell 0.3% in the fourth quarter, the first quarterly decline in three years.  The downward price pressure was largely due to a record decline in energy prices.  World oil prices fell by almost 51% in the fourth quarter, while Ontario gasoline prices fell by an unprecedented 30%.  The decline in energy prices was most evident in a 0.5% decrease in personal expenditure prices and in particular, by a 2.9% drop in the price of non-durable goods consumption.  Ontario’s softening housing market also helped restrain overall prices.  Residential construction prices were little changed (+0.1%) in the fourth quarter, following a 1.4% jump in the third quarter.

The impact of falling energy prices was moderated by a significant rise in the price of imported goods in the fourth quarter.  The price of international imports climbed 10.1% in the fourth quarter, reflecting a 14.1% depreciation in the Canada-U.S. exchange rate – the largest drop since the adoption of a floating exchange rate in 1970.  Rising import prices were evident in the steep 8.2% jump in the price of machinery and equipment in the fourth quarter.

For 2008 as a whole, prices as measured by the GDP price deflator, increased 2.1%, matching the rise in 2007.  The Canadian dollar, which fell sharply in the fourth quarter, appreciated only slightly (+0.7%) against the U.S. dollar on an average annual basis in 2008.  As a result, the impact of the currency on prices was more limited in 2008 compared to the 2003-2007 period, when the dollar appreciated significantly each year.  Overall consumer prices increased 1.6% in 2008, up from 1.2% in 2007.  Price increases were stronger in the construction sector with residential construction prices up 3.1% while non-residential construction prices increased 5.6%.

Both import and export prices increased significantly in 2008.  Export prices were up 5.8% in 2008, their highest rate of increase since 1982.  Much of the increase occurred earlier in the year when the demand for industrial goods and automotive products was stronger.  Import prices increased 6.7% in 2008, a 27-year high.  Most of the increase was due to higher energy prices in the first three quarters of the year and to the rapid depreciation of the Canadian dollar in the final quarter of 2008.

PRODUCTION BY INDUSTRY

Fourth Quarter 2008 Highlights

Output by industry contracted 1.4% in the fourth quarter of 2008 following no change in the third quarter.  Output in both the goods-producing (-3.7%) and service (-0.6%) sectors fell as manufacturing (-5.0%), wholesale trade (-6.2%), construction (-2.8%) and retail trade (-2.0%) all posted declines.

On an annual basis, industry output declined 0.3% in 2008, following a 2.2% increase in 2007.  Notable declines were recorded in the manufacturing (-8.6%), wholesale trade (-0.9%) and professional and administrative services (-0.5%) sectors. Production was higher in finance, insurance and real estate (+1.8%), retail trade (+2.9%) and information and cultural (+1.6%) industries in 2008.

OUTPUT BY INDUSTRY (% change from previous period, chained $2002)
	2007	2008	2008q1	2008q2	2008q3	2008q4
Goods Sector	-0.8	-5.6	-2.6	-0.4	-1.0	-3.7
Primary Industries	-5.5	-3.7	-1.0	2.1	1.1	2.5
Utilities	2.8	1.5	-0.8	-1.0	-1.8	0.6
Construction	4.0	1.7	-0.3	1.3	-1.2	-2.8
Manufacturing	-2.1	-8.6	-3.6	-1.1	-1.1	-5.0
Of which: Auto Industry	-4.7	-22.7	-10.7	-2.7	-5.4	-17.1
Service Sector	3.1	1.7	0.3	0.6	0.4	-0.6
Wholesale Trade	4.3	-0.9	-2.7	0.5	-1.6	-6.2
Retail Trade	3.8	2.9	2.0	1.4	0.3	-2.0
Transportation and Warehousing	0.5	0.5	-0.1	0.6	1.1	-1.8
Information and Cultural Industries	2.3	1.6	0.0	0.4	1.7	1.5
Finance, Insurance, Real Estate	4.0	1.8	0.6	0.2	0.8	0.2
Public Administration	2.0	3.6	1.0	1.2	0.7	0.5
Ontario Output at Basic Prices	2.2	-0.3	-0.5	0.3	0.0	-1.4
(annualized rate)			-1.9	1.4	0.0	-5.5

Manufacturing Output Declines

The manufacturing sector’s output dropped 5.0% in the fourth quarter, the seventh consecutive quarterly decline and one of the sharpest on record.  Eight of eleven manufacturing industries reduced their output as the sector faced reduced foreign and domestic demand.

A significant drop in transportation equipment production
(-12.9%) accounted for almost two thirds of the overall decline in manufacturing production.  Within the transportation equipment sector, auto production fell 17.1% as both motor vehicle assembly and auto parts posted steep declines.

Production by the primary and fabricated metal
(-10.6%) and plastic and rubber (-10.0%) products industries also declined significantly in the final quarter of 2008.  Chemical and petroleum (+4.8%), electrical and electronic (+3.7%) and food, beverage and tobacco (+2.3%) products were the only manufacturing industries to increase output.

For 2008 as a whole, manufacturing sector output fell by 8.6%, following 2.1% declines in both 2006 and 2007.  Auto production plummeted 22.7%, following a 4.7% decline in 2007.  Other industries including plastic and rubber (-15.2%), primary and fabricated metal (-6.5%) and wood and furniture
(-11.5%) products also posted sharp drops in production.  The chemical and petroleum industry recorded solid growth in 2008 (+2.8%), the largest annual gain since 2002.

Wholesale and Retail

Wholesale output fell 6.2% in the fourth quarter, following a 1.6% decline in the third quarter. Decreased activity across a number of trade groups including motor vehicles, machinery and equipment and metal products dragged down output for the overall sector.

Production in the retail trade sector decreased 2.0% in the fourth quarter, following four consecutive quarterly gains.  Lower activity by new car dealers and home centres and hardware stores contributed to the decline.

In annual terms, wholesale trade declined 0.9% in 2008, after a healthy 4.3% increase in 2007.  Retail trade output increased 2.9% in 2008, decelerating from a 3.8% increase in 2007.

Resources, Utilities and Construction

Construction sector output declined 2.8% in the fourth quarter of 2008, following a 1.2% decrease in the third quarter of 2008. Both residential (-5.0%) and non-residential and engineering (-1.3%) construction recorded declines. 

Mining output declined 3.4%, retreating after a 4.6% increase in the third quarter. Utilities output advanced 0.6%.

In 2008, construction sector output rose 1.7% driven mainly by strong growth in engineering and repair activities (+3.9%).  Utilities also grew in 2008 (+1.5%) while mining output rose 0.6%.

Note: Construction industry output is measured by the value added of the industry. This is a different statistical measure than the construction investment spending estimates included as part of expenditure-based Gross Domestic Product.

Education, Health Care and Public Administration

Education services output edged down 0.2% in the fourth quarter, after slipping 0.1% in the third quarter.  Production in the health care and social services sector grew 0.7%, matching its average quarterly growth rate over the past three years.  Public administration output increased 0.5%.

For 2008 as a whole, education services output rose 3.8%, building on the 3.0% increase in 2007.  Output by the health care and social services sector grew 2.9%.

 

Finance, Insurance and Real Estate

Real output of the finance, insurance and real estate sector grew 0.2% in the fourth quarter with a decline in activities of real estate agents and brokers holding back overall growth for the sector.

In annual terms, the financial sector’s output grew 1.8% in 2008.

Other Service Sectors

Output in the information and culture sector (which includes telecommunications) rose 1.5% in the fourth quarter, decelerating slightly from the 1.7% third quarter rate.  Increased output was accompanied by the creation of 2,600 net new jobs.

Professional and administrative services output declined 0.5%, the second consecutive quarterly decline. Transportation and warehousing declined 1.8%.

Annually, professional and administrative services output declined 0.5% in 2008.  Activity in the accommodation and food sector advanced 2.3% in 2008, building on the 1.1% increase in 2007.
 

 

LIST OF TABLES

Income and Expenditure Data

Quarterly Data, 2005:1-2008:4

Table 1: Ontario Gross Domestic Product (Income-Based)
Table 2: Ontario Gross Domestic Product (Expenditure-Based)
Table 3: Ontario Gross Domestic Product at Chained 2002 Prices
Table 4: Sources and Disposition of Ontario Personal Income
Table 5: Ontario Trade
Table 6: Ontario Deflators

Annual Data, 2005-2008

Table 7: Ontario Gross Domestic Product (Income-Based)
Table 8: Ontario Gross Domestic Product (Expenditure-Based)
Table 9: Ontario Gross Domestic Product at Chained 2002 Prices
Table 10: Sources and Disposition of Ontario Personal Income
Table 11: Ontario Trade
Table 12: Ontario Deflators

Ontario Production by Industry at 2002 Prices

Table 13: Quarterly Data, 2005:1-2008:4
Table 14: Annual Data, 2005-2008

Historical tables, both annual and quarterly, from 1981 are available on request by e-mailing macroeconomics.fin@ontario.ca.

Historical Tables and Charts 1994:1-2008:4