2011 Ontario Economic Outlook and Fiscal Review

CHAPTER II: Ontario's Economic Outlook


  • Private-sector average projected 2011 real GDP growth:
    • 2011 Budget — 2.6 per cent.
    • Current — 2.0 per cent
  • Private-sector average projected 2012 real GDP growth — 1.9 per cent.
  • Private-sector average projected 2013 real GDP growth — 2.6 per cent.
  • Net new jobs created since recessionary low in May 2009 — 266,800.
    • The majority of these net new jobs are full-time, paying above-average wages.


Because of strong leadership, the Ontario economy weathered the global recession of 2008–09. A weak U.S. economy, European sovereign debt concerns, higher oil prices and disruptions from the Japanese tsunami crisis have all combined to slow Ontario’s economic growth during 2011. As a result of these global economic challenges, the Ontario economy is expected to grow at a more modest pace than previously forecast.

Over the last eight months, the global economy has seen a widespread, downward shift in projections for economic growth. In March, when the government published the 2011 Budget the average private-sector forecast for Ontario’s economy was real gross domestic product (GDP) growth of 2.6 per cent for 2011. This has declined to 2.0 per cent.

Chart 1: Private-Sector Economic Forecasts for Ontario Softening

This drop in the rate of growth has an impact on Ontarians, creating uncertainty. It also has a direct impact on government revenues and how the government manages its planning, particularly when it comes to balancing the implementation of new programs and protecting public services with meeting its targets for eliminating the deficit.

The degree of change is even greater for 2012. In March 2011, the average private-sector forecast placed GDP growth at 2.8 per cent, but by November, those forecasts had fallen to 1.9 per cent. In the face of such volatility, the government must plan and react accordingly.

The Ministry of Finance is projecting real GDP growth of 1.8 per cent in 2011, 1.8 per cent in 2012, 2.5 per cent in 2013 and 2.6 per cent in 2014. Solid household spending and robust business capital investment will contribute to growth.

Table 1
Ontario Economic Outlook

(Per Cent)
  2008 2009 2010 2011p 2012p 2013p 2014p
Real GDP Growth (0.6) (3.2) 3.0 1.8 1.8 2.5 2.6
Nominal GDP Growth 0.5 (0.9) 5.3 4.0 3.7 4.4 4.5
Employment Growth 1.6 (2.5) 1.7 1.8 1.1 1.4 1.5
CPI Inflation 2.3 0.4 2.5 3.2 2.0 2.0 2.0
p = Ontario Ministry of Finance planning projection.
Sources: Statistics Canada and Ontario Ministry of Finance.

Recent Economic Developments

Following seven consecutive quarters of growth over which GDP advanced 5.6 per cent, Ontario real GDP edged down 0.3 per cent in the second quarter of 2011. Real GDP also edged down for Canada as a whole (–0.1 per cent) and Quebec (–0.2 per cent) in the quarter. A number of temporary factors slowed the economy in the quarter, including the disruption of global supply chains triggered by the devastating earthquake and tsunami in Japan as well as the spike in oil prices precipitated by political unrest in the Middle East and North Africa.

Recent economic data indicate that economic growth resumed in the third quarter of 2011. International merchandise exports increased 3.8 per cent in the third quarter, reflecting gains in machinery and equipment and industrial goods and materials. As well, manufacturing sales have increased 5.5 per cent from a low in June. Quarterly forecasts by private-sector economists are all projecting steady but modest economic growth over the final two quarters of this year.

Despite the recent easing in the pace of growth, the Ontario economy has largely recovered from the global recession of 2008–09. As of the second quarter of 2011, Ontario real GDP was just 0.1 per cent below the pre-recession level. Solid growth in consumer spending, a strong rebound in business investment and government actions all supported Ontario’s recovery from the global recession. However, external trade has lagged domestic demand. Merchandise exports have risen 39.5 per cent from a recessionary low, but remain 8.2 per cent below their pre-recession level.

Table 2
Tracking Ontario's Economic Recovery
(Key Economic Indicators for Ontario)
Change During
to Date
Comparison to
Pre-Recession Level
Jobs (000s) 6,709 (257) 267 10
+ 0.1%
Real GDP1
($ Billions, 2002)
532.4 (26.7) 26.3 (0.4)
Merchandise Exports
($ Billions)
14.3 (4.9) 3.7 (1.2)
Manufacturing Sales
($ Billions)
24 (7.1) 4.6 (2.5)
Retail Sales
($ Billions)
12.9 (1.2) 1.7 0.5
Unemployment Rate
6.4 Up 3.0
to 9.4
Up 1.7
Down 1.3
to 8.1
  • 1 Based on Ontario Economic Accounts, October 2011.
  • Sources: Statistics Canada and Ontario Ministry of Finance.

Over the past two years, 266,800 net jobs have been created from the recessionary low in May 2009. Full-time employment rose 237,900 over this period while part-time employment increased 28,900. The vast majority of net new job gains over the past two years are among employees who receive above-average wages. As of October 2011, employment was 10,000 jobs above the pre-recession peak in September 2008. Ontario’s unemployment rate has also moved lower, falling from a recessionary high of 9.4 per cent in May 2009 to 8.1 per cent in October 2011.

Chart 2: Job Recovery in Ontario

Statistics Canada reports that Ontario employment has fallen in three of the last four months. Despite this, Ontario has created 128,400 net new jobs so far this year, accounting for over 45 per cent of all the jobs created across Canada. Full-time employment has increased by 133,100 jobs this year while part-time employment has edged down by 4,700. The pace of job creation in Ontario is ahead of that of the United States and most of the G7 nations.

The Challenging Global Economic Environment

European Sovereign Debt

Concern over the sovereign debt of several euro zone countries has been among the most prominent global economic issues of the past two years. While the risks associated with Greece’s public debt are the most acute, there are also challenges related to the debt financing of other European Union (EU) member states. The EU and International Monetary Fund (IMF) rescue plans for Greece, Ireland and Portugal, and a recently strengthened European Financial Stability Facility, may help to contain the problem. However, the outcome is highly uncertain.

Chart 3: European Debt

The direct impact of the euro zone debt crisis on Ontario is unclear. Ontario’s exports to Europe, although growing in recent years, account for just over 10 per cent of total international merchandise exports. Canadian banks have little direct exposure to the troubled euro zone economies. However, Europe’s debt challenges could hurt Ontario indirectly through increased volatility in financial markets and by weakening business and consumer confidence.

Global Economic Outlook Weakening

The pace of economic recovery in North America, Europe and Japan has slowed significantly from last year. This is largely due to the sharp slowdown in U.S. growth over the first half of 2011 as well as the impact of the tsunami disaster in Japan. Weakness in European economies as a result of the sovereign debt crisis has also contributed to the general slowdown. The outlook for emerging economies continues to be more positive, although weaker export demand, volatile commodity prices and geopolitical tensions remain key risks.

Chart 4: Weakening Global Economic Growth Forecasts

U.S. Economy

The United States faces a number of significant challenges to its economic outlook. In particular, job creation has been very weak, with only 26 per cent of the jobs lost in the global recession recovered to date. As well, the U.S. unemployment rate remains at 9.0 per cent compared to a pre-recession level of 4.7 per cent. Housing activity also remains severely depressed.

Based on revised estimates from the U.S. Bureau of Economic Analysis, the U.S. economy suffered a deeper recession and slower recovery than previously reported. At the same time, private-sector forecasts for U.S. economic growth have been revised downward over the past several months. As a result, the U.S. economic recovery is significantly less robust than was anticipated a few months ago. After expanding 3.0 per cent in 2010, private-sector forecasters are projecting modest real GDP growth of 1.8 per cent in 2011 and 2.1 per cent in 2012.

Chart 5: U.S. Recession Deeper and Recovery Slower

The outlook for both U.S. motor vehicle sales and housing starts remains relatively positive, with renewed growth from current low levels. Growth in these markets should help support a broader, sustained economic expansion. Solid growth in retail sales and industrial production so far this year also provides evidence of slowly improving economic conditions in the United States.

Although the share of Ontario exports to the United States has trended lower in recent years, the United States remains Ontario’s largest trading partner by far. It is the destination for nearly 80 per cent of Ontario’s international merchandise exports. Ontario exports of motor vehicles and parts to the United States totalled $45.4 billion in 2010 and accounted for nearly 40 per cent of the province’s U.S.-bound exports.

In the United States, sales of light motor vehicles are projected to increase from 10.4 million units in 2009 and 11.6 million units in 2010 to 12.7 million units in 2011, and to grow steadily to 14.7 million by 2014. Ontario’s auto exports will continue to strengthen over the next several years. However, despite the solid recovery, U.S. motor vehicle sales are expected to remain below pre-recession levels, which exceeded 16 million units.

Chart 6: U.S. Light Motor Vehicle Sales Continue to Grow

The risks for the U.S. economy remain high. Over the next year, U.S. fiscal policy measures are likely to have a significant influence on growth. Additional political uncertainty, similar to the summer debate on the U.S. debt ceiling, could further undermine consumer and business confidence. The U.S. economy is also vulnerable to further external shocks, such as any financial turbulence arising from developments in Europe.

Oil Prices

Oil prices have been very volatile over the past year, reflecting geopolitical uncertainty in many oil-producing states, supply constraints and shifting economic conditions. West Texas Intermediate (WTI) crude oil traded close to $114 US per barrel at the end of April, reflecting tight supply conditions due to political instability in the Middle East and North Africa. Oil prices trended lower through the summer, then averaged $86 US per barrel in October. Based on futures market contracts, traders expect the price for WTI oil to average approximately $90 US per barrel in December.

Softer demand is expected to restrain oil prices in the short term, although upward pressure remains due to supply uncertainty and reduced inventories in some parts of the world. There is a wide range of views on the path of oil prices, with most forecasts for WTI falling within the range of $84 US to $99 US per barrel in 2012.

Based on recent average prices for crude oil futures contracts, the price for WTI oil is expected to average $90 US per barrel in 2012, down from $94 US per barrel in 2011. Brent crude oil, an alternative benchmark, is expected to average $111 US per barrel in 2011 and decline to $106 US per barrel in 2012.

Oil prices are expected to trend lower from their 2011 highs. However, strong growth in oil demand from emerging economies combined with more moderate supply growth will keep oil prices at relatively high levels. By 2014, the price for WTI oil is forecast to average $89 US per barrel while the Brent standard is projected to average $97 US per barrel.

Chart 7: Continued High Oil Prices Expected

The Canadian Dollar

The Canadian dollar appreciated relative to the U.S. dollar through mid-summer, averaging 104.7 cents US in July 2011. In August, intensification of European debt concerns combined with a weaker global outlook and falling commodity prices caused the Canadian dollar to slip back to below parity. Private-sector forecasters expect that, over the next four years, as global economic conditions improve and commodity prices strengthen, the Canadian dollar will average just above parity.

Chart 8: Canadian Dollar to Remain Close to Parity

A higher dollar makes it more challenging for Ontario’s exporters to compete internationally and for domestic firms to compete with foreign producers. However, a strong dollar also lowers the cost of importing productivity-enhancing machinery and equipment, which improves the competitive position of Ontario businesses.

Financial Markets

Long-term Canadian interest rates have declined sharply in recent months, with the yield on the 10-year Government of Canada bond falling to a record low of 2.2 per cent in September 2011. Since last September, the Bank of Canada has maintained its target for the overnight rate at one per cent, following three increases of 25 basis points through the spring and summer of 2010.

Chart 9: Interest Rates to Rise

With the recent weakening of the global economic outlook, the Bank of Canada is now expected to keep its target interest rate near historic lows until 2013. Private-sector economists expect the interest rate on three-month treasury bills to average 0.9 per cent this year and to rise to 2.9 per cent by 2014. The yield on 10-year Government of Canada bonds is expected to rise gradually from 2.8 per cent this year to 4.1 per cent by 2014.

Forecasts for key external factors are summarized in the table below. These are used as the basis for the Ministry of Finance forecast for Ontario’s economic growth.

Table 3
Outlook for External Factors
  2009 2010 2011p 2012p 2013p 2014p
World Real GDP Growth (Per Cent) (0.7) 5.1 4.0 4.0 4.5 4.7
U.S. Real GDP Growth (Per Cent) (3.5) 3.0 1.8 2.1 2.8 2.9
West Texas Intermediate Oil1 ($US/bbl.) 61.7 79.4 93.6 89.7 89.5 89.2
Brent Oil1
61.5 79.5 111.3 106.0 101.3 96.9
Canadian Dollar (Cents US) 87.6 97.1 101.1 100.1 101.4 101.4
Three-Month Treasury Bill Rate2 (Per Cent) 0.3 0.6 0.9 1.1 1.8 2.9
10-Year Government Bond Rate2 (Per Cent) 3.3 3.2 2.8 2.5 3.3 4.1
  • p = Ontario Ministry of Finance planning projection based on external sources.
  • 1Based on crude oil futures contracts over the two-week period ending October 28, 2011.
  • 2Government of Canada interest rates.
  • Sources: U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (October and November 2011), IMF World Economic Outlook (September 2011), New York Mercantile Exchange, IntercontinentalExchange and Ontario Ministry of Finance Survey of Forecasts (November 8, 2011)

Table 4 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 stable. The relatively wide ranges of the impacts reflect uncertainty in estimates of how the economy would respond to changing external conditions.

Table 4
Impacts of Sustained Changes in Key External Factors
on Ontario's Real GDP Growth
(Percentage Point Change)
  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.

Outlook for Ontario Economic Growth

For 2011 as a whole, the Ministry of Finance is projecting growth of 1.8 per cent in Ontario real GDP. Rising consumer and business investment spending will support growth this year while net trade is expected to lag the overall economy.

Chart 10: Contributions to Real GDP Growth in 2011

Employment is forecast to increase by 1.8 per cent in 2011, or 120,000 net new jobs. Strong employment gains and higher personal incomes have supported increases in household spending. Retail sales are projected to grow 3.4 per cent this year while housing starts are expected to increase 12.7 per cent. Business investment is expected to increase by a strong 15.7 per cent this year, benefiting from the higher exchange rate and Ontario’s improved tax competitiveness.

However, a challenging external environment and, in particular, the weak U.S. economy are expected to contribute to a small 2.8 per cent gain in Ontario exports this year. Imports are projected to grow by 4.2 per cent in 2011. As a result, net external trade will detract from growth.

The Ministry of Finance is projecting continued growth in Ontario’s economy. Real GDP is projected to grow by 1.8 per cent in 2012, 2.5 per cent in 2013 and 2.6 per cent in 2014. Domestic demand is projected to remain a source of strength, supported by gains in household spending, a solid housing market and strong business capital investment. Growth in international demand, particularly from the United States, is expected to be modest, limiting gains to Ontario’s net trade position over the forecast period.

Chart 11: Ontario Real GDP Growth

Over the 2012–14 period, employment growth is expected to average 1.3 per cent annually. The unemployment rate is expected to continue trending lower from an annual average of 7.9 per cent in 2011 to 6.9 per cent by 2014.

Chart 12: Increasing Empoloyment
Chart 13: Lower Unemployment Rate

Labour income is expected to increase on average by 4.1 per cent annually over the 2012 to 2014 period. Similarly, personal income growth is projected to average 4.1 per cent annually over the same period.

Job gains, personal income growth and relatively low interest rates will support continuing gains in household spending over the forecast period. Real consumer spending is expected to rise by 2.3 per cent this year and in 2012.

Chart 14: Sustained Gains in Household Spending

A rise in gasoline pump prices, driven by higher oil costs, was largely responsible for pushing Ontario’s consumer price index (CPI) higher in 2011. However, this is expected to reverse in 2012, with lower average gasoline prices contributing to more moderate consumer price inflation. Ontario’s CPI is forecast to increase by an average of 2.0 per cent per year over the 2012 to 2014 period, the mid-point of the Bank of Canada’s target range for Canadian CPI inflation.

Rising corporate profits and improved tax competitiveness from Ontario’s Tax Plan for Jobs and Growth — including the Harmonized Sales Tax (HST) — are supporting strong growth in business investment. Corporate profits rose 19.1 per cent in 2010 and are projected to increase by a further 7.3 per cent in 2011. Ontario’s businesses have responded by increasing real investment in machinery and equipment by 15.2 per cent in 2010 and by an estimated 17 per cent in 2011. Real business investment in plant and equipment is forecast to increase by an average annual rate of 6.2 per cent over the 2012 to 2014 period.

Chart 15: Sustained Gains in Business Machinery and Equipment Spending

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 rise by 2.8 per cent in 2011 and 2.6 per cent in 2012.

The Ontario housing market remains well balanced, supported by healthy fundamentals and record low mortgage rates. Home resales are expected to moderate in 2012 and 2013 from the strong levels experienced in 2010 and 2011. House price gains are also expected to be more subdued, increasing by an average of nearly three per cent per year from 2011 to 2014.

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 three years, consistent with recent experience. This will mean an additional 490,000 people living in the province by 2014. Housing starts are projected to exceed 70,000 units per year by 2014.

Chart 16: Housing Starts to Remain Strong

The rising level of household debt remains a key risk for the outlook. Record low interest rates have allowed households to increase debt levels over the past several years. With interest rates expected to remain near record lows into 2013, debt servicing costs should 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.

Details of the Ontario Economic Outlook

The following table provides details of the Ministry of Finance’s economic outlook for 2011 to 2014.

Table 5
The Ontario Economy, 2009 to 2014
(Per Cent Change)
  Actual Projection
  2009 2010 2011 2012 2013 2014
Real Gross Domestic Product (3.2) 3.0 1.8 1.8 2.5 2.6
Personal Consumption 0.2 3.6 2.3 2.3 2.6 2.7
Residential Construction (8.7) 8.3 3.8 1.8 2.1 1.8
Non-residential Construction (11.4) (1.6) 11.0 3.9 5.6 5.4
Machinery and Equipment (18.5) 15.2 17.0 7.6 6.0 5.9
Exports (12.6) 7.5 2.8 2.6 4.0 3.8
Imports (10.4) 13.3 4.2 1.6 3.2 3.0
Nominal Gross Domestic Product (0.9) 5.3 4.0 3.7 4.4 4.5
Other Economic Indicators            
Retail Sales (2.5) 5.4 3.4 4.0 3.9 4.3
Housing Starts (000s) 50.4 60.4 68.1 65.3 66.1 70.3
Personal Income 0.2 4.2 3.3 3.1 4.5 4.7
Labour Income (0.6) 3.9 3.7 3.6 4.3 4.4
Corporate Profits (14.9) 19.1 7.3 6.0 5.5 4.8
Consumer Price Index 0.4 2.5 3.2 2.0 2.0 2.0
Employment (2.5) 1.7 1.8 1.1 1.4 1.5
Job Creation (000s) (164) 108 120 76 94 105
Unemployment Rate (Per Cent) 9.0 8.7 7.9 7.7 7.3 6.9
Key External Variables            
U.S. Real Gross Domestic Product (3.5) 3.0 1.8 2.1 2.8 2.9
WTI Crude Oil ($ US per Barrel) 61.7 79.4 93.6 89.7 89.5 89.2
Canadian Dollar (Cents US) 87.6 97.1 101.1 100.1 101.4 101.4
3-month Treasury Bill Rate* 0.3 0.6 0.9 1.1 1.8 2.9
10-year Government Bond Rate* 3.3 3.2 2.8 2.5 3.3 4.1
* Government 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 (October and November 2011), New York Mercantile Exchange and Ontario Ministry of Finance.

Private-Sector Forecasts

The Ministry of Finance consults with private-sector economists and tracks their forecasts in order to inform the government’s planning assumptions. In the process of preparing the Ontario Economic Outlook and Fiscal Review, the Minister of Finance met with private-sector economists to hear their views on the economy. These forecasters included members of the Ontario Economic Forecast Council, established by the Fiscal Transparency and Accountability Act, 2004. All of these private-sector economists are forecasting continued growth for the Ontario economy over the rest of 2011 and the next three years. On average, private-sector forecasters are projecting growth of 1.9 per cent in 2012, 2.6 per cent in 2013 and 2.7 per cent in 2014.

GDP Growth">
Table 6
Private-Sector Forecasts for Ontario Real GDP Growth
(Per Cent)
  2011 2012 2013 2014
BMO Capital Markets (November) 2.1 1.9
Central 1 Credit Union (November) 2.1 1.8 2.6 3.3
Centre for Spatial Economics (November) 2.3 2.1 2.2 1.7
CIBC World Markets (November) 2.0 1.8 2.3
Conference Board of Canada (October) 1.8 2.2 3.3 2.7
Desjardins Group (October/September) 2.0 1.9 2.5 2.5
IHS Global Insight (November) 2.0 1.8 2.5 2.8
Laurentian Bank Securities (September) 1.8 1.9
National Bank (October) 2.1 1.6
RBC Financial Group (September) 2.3 2.4
Scotiabank Group (November) 2.0 1.5
TD Bank Financial Group (September) 2.3 2.1 2.7
University of Toronto (October) 1.8 1.8 3.0 3.2
Private-Sector Survey Average 2.0 1.9 2.6 2.7
Ontario's Planning Assumption 1.8 1.8 2.5 2.6
Sources: Ontario Ministry of Finance Survey of Forecasts (November 8, 2011) and Ontario Ministry of Finance.

Comparison to the 2011 Ontario Budget

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.

Table 7
Changes in Key Economic Forecast Assumptions
2011 Fall Economic Statement Compared to 2011 Budget
(Per Cent Change)
  2011 2012 2013
Real Gross Domestic Product 2.4 1.8 2.7 1.8 2.7 2.5
Nominal Gross Domestic Product 4.6 4.0 5.1 3.7 4.8 4.4
Retail Sales 4.1 3.4 4.3 4.0 4.0 3.9
Housing Starts (000s) 58.6 68.1 63.8 65.3 66.5 66.1
Personal Income 4.2 3.3 4.4 3.1 4.6 4.5
Labour Income 4.3 3.7 4.7 3.6 4.8 4.3
Corporate Profits 12.2 7.3 9.2 6.0 5.9 5.5
Employment 1.7 1.8 1.8 1.1 1.8 1.4
Job Creation (000s) 116 120 118 76 126 94
Key External Variables            
WTI Crude Oil ($ US per Barrel) 99.7 93.6 102.2 89.7 100.6 89.5
U.S. Real Gross Domestic Product 3.1 1.8 3.3 2.1 3.2 2.8
Canadian Dollar (Cents US) 100.0 101.1 99.7 100.1 99.3 101.4
3-month Treasury Bill Rate*
(Per Cent)
1.4 0.9 2.6 1.1 3.7 1.8
10-year Government Bond Rate*
(Per Cent)
3.5 2.8 4.1 2.5 4.7 3.3
* Government of Canada interest rates.
Sources: New York Mercantile Exchange, Blue Chip Economic Indicators (March, October and November 2011) and Ontario Ministry of Finance.