2012 Ontario Economic Outlook and Fiscal Review

CHAPTER II: Economic Outlook


  • Private-sector average projected 2012 real GDP growth:
    • 2012 Budget — 1.9 per cent.
    • Current — 2.0 per cent.
  • Private-sector average projected 2013 real GDP growth — 2.0 per cent.
  • Private-sector average projected 2014 real GDP growth — 2.4 per cent.
  • Net new jobs created since recessionary low in June 2009 — 356,000.
    • The majority of these net new jobs were full-time positions, and in industries paying above-average wages.


The Ontario economy continues to grow in a challenging global environment, although the pace of growth remains modest. At the same time, economic growth is becoming more balanced. Business investment and net exports will provide the primary foundation for growth over the next several years. Ontario is expected to create nearly 350,000 net new jobs by 2015, reducing the unemployment rate to 6.8 per cent from a high of 9.4 per cent in June 2009. As of September 2012, Ontario employment was 356,000 net jobs above its recessionary low in June 2009. 

Since the 2012 Budget, expectations for global economic growth have weakened. There are considerable risks to the outlook. Economic conditions in Europe have worsened, the growth of emerging market economies has slowed and the U.S. economy remains tentative. However, recent actions by the European Central Bank and the U.S. Federal Reserve have boosted equity markets and reduced financial stress.

For planning purposes, the Ministry of Finance is assuming real gross domestic product (GDP) growth of 2.0 per cent in 2012, 1.9 per cent in 2013, 2.3 per cent in 2014 and 2.4 per cent in 2015.1 Continued consumer spending, robust business capital investment and a rebound in net trade will be key contributors to growth.

TABLE 2.1 Ontario Economic Outlook
(Per Cent)
  2009 2010 2011 2012p 2013p 2014p 2015p
Real GDP Growth (3.2) 3.0 2.1 2.0 1.9 2.3 2.4
Nominal GDP Growth (0.9) 5.3 4.3 3.2 3.7 4.1 4.2
Employment Growth (2.5) 1.7 1.8 0.8 1.2 1.5 1.5
CPI Inflation 0.4 2.5 3.1 1.6 2.0 2.0 2.0
p = Ontario Ministry of Finance planning projection.
Sources: Statistics Canada and Ontario Ministry of Finance.

Recent Economic Developments

Ontario Real GDP — Continued Modest Growth

Ontario’s real GDP has increased by 8.1 per cent over the past three years, since the end of the recession in the second quarter of 2009. As of the second quarter of 2012, real GDP is 3.1 per cent above its pre-recession peak.

Ontario’s real GDP rose 0.5 per cent (2.1 per cent annualized) in the second quarter of 2012, following a 0.6 per cent gain in the first quarter. Solid increases in manufacturing output and international exports led second-quarter growth. Ontario’s auto, machinery, and primary and fabricated metal industries all posted healthy gains.

Ontario Job Recovery Concentrated in Full-Time Positions and Industries Paying Above-Average Wages

From the recessionary low in June 2009, 356,000 net new jobs have been created. Full-time employment rose by 364,700 over this period, while part-time employment declined by 8,700. The majority of the net new jobs were in industries paying above-average wages.

Job Recovery in Ontario

As of September 2012, Ontario employment was 90,200 net jobs above its pre-recession peak in September 2008 and 356,000 net jobs above its recessionary low in June 2009. Ontario’s unemployment rate has also declined from a recessionary high of 9.4 per cent in June 2009 to 7.9 per cent in September 2012.

The pace of job creation in Ontario since June 2009 is ahead of that in the United Kingdom, the United States and all the individual Great Lakes States. All the jobs lost in Ontario during the recession have been recovered, while the United States has recovered just 48.5 per cent of jobs lost.

Ontario Job Recovery Stronger Than That of U.S. States

Competitive Challenges Facing Ontario

The sharp appreciation of the Canadian dollar from 62 cents US in January 2002 to above parity by September 2012 has created a significant competitive challenge for Ontario’s exporters.

High Canadian Dollar Hindering International Trade

The strength of the Canadian dollar reflects strong global demand for commodities, general U.S. dollar weakness relative to most major currencies and international investor confidence in Canada as a financially secure and stable jurisdiction. Canada has experienced strong net inflows of capital, a reflection of its strong economic and fiscal position.

However, the high dollar has had an impact on Ontario’s manufacturing and international trade sectors. Ontario’s international trade balance has deteriorated from a $24.6 billion surplus in current dollars in the third quarter of 2002 to a deficit of $45.4 billion in the second quarter of 2012.

Ontario’s interprovincial exports have grown by 15.6 per cent from a low in the first quarter of 2009. However, the gain in Ontario’s interprovincial trade balance has only partially offset the weakness in international trade.

Ontario Trade Balance Weakening

Ontario’s merchandise exports to rapidly growing BRIC countries (Brazil, Russia, India and China) have nearly quadrupled over the last 10 years, rising from $1.0 billion in 2003 to $3.9 billion in 2012. However, over the same period, Ontario’s imports from BRIC countries have nearly tripled to about $30 billion.

Ontario Goods Exports to BRIC Countries

The strong Canadian dollar will continue to pose a challenge for Ontario exporters. At the same time, though, the strong currency is also an advantage to businesses in lowering the costs of imported, productivity-enhancing capital equipment. In addition, Ontario’s improved tax competitiveness, including the introduction of the Harmonized Sales Tax (HST), is encouraging new investment.

Ontario businesses have responded to the competitiveness challenge by significantly boosting investment in plant and equipment. Over the past two years, business investment spending on plant and equipment has risen by over 22 per cent, or $11.1 billion.

Ontario Real Machinery and Equipment Investment

Global Economic Uncertainty

Global economic growth has weakened. Many economies in Europe are in recession, reflecting increased political and financial uncertainty, banking sector problems and concerns about the ability of governments to achieve fiscal targets. Actions that the European Central Bank took in September have helped stabilize sovereign debt yields and relieve some financial stress.

Economic growth has also slowed in a number of important emerging market economies, notably Brazil, China and India, reflecting both the weaker outlook for advanced economies as well as slower domestic demand.

Euro-Zone Economy Expected to Decline This Year

The direct impact of the euro-zone crisis on Ontario has been limited. So far this year, Ontario’s exports to the European Union are up by 9.9 per cent.

U.S. Economy

Economic growth in the United States, Ontario’s largest trading partner, has remained modest. Real GDP growth has averaged just 1.6 per cent (annualized) over the first two quarters of 2012, while employment gains have remained moderate so far this year. At the same time, the outlook for growth remains positive, supported by the recent actions of the U.S. Federal Reserve.

As U.S. households continue to reduce debt, overall consumer spending growth has been moderate, increasing at an average annual real rate of 2.0 per cent over the last two quarters. U.S. vehicle sales have increased 14.5 per cent so far this year and are up 65 per cent from the recessionary low. Motor vehicle sales are projected to increase steadily from 14.3 million units in 2012 to 15.4 million by 2015, providing a growing market for Ontario auto exports.

U.S. Light Motor Vehicle Sales Continue to Grow

The U.S. housing market has begun to recover. Housing starts have improved by 25.7 per cent so far in 2012, while residential construction has emerged as a support for overall growth. U.S. house prices have begun to trend modestly higher, increasing 4.0 per cent between January and July of this year.

Both industrial production and an improving trade performance have helped buoy the U.S. economy, with production up 4.2 per cent so far this year, while exports have risen 5.5 per cent.

After expanding by 1.8 per cent in 2011, U.S. real GDP is projected to grow by 2.1 per cent this year, 2.0 per cent in 2013, 2.8 per cent in 2014 and 3.1 per cent in 2015. Employment is projected to improve modestly, with the unemployment rate declining to 6.9 per cent by 2015.

Strengthening U.S. Recovery

Despite these positive signs, significant risks remain for the U.S. outlook. In particular, if the U.S. Congress and president are unable to reach an agreement, the so-called “fiscal cliff” — a series of scheduled, automatic spending cuts and tax increases — could result in a renewed U.S. recession. While most observers believe that a compromise agreement will be reached, the uncertainty is hurting consumer and business confidence.

Oil Prices

Imports of oil and oil products cost Ontario $20.9 billion in 2011, of which $4.2 billion were international imports. The price of West Texas Intermediate (WTI) crude oil is forecast to average $96 US per barrel in 2012, up slightly from $95 US in 2011. Prices have been volatile this year, with WTI oil prices peaking at $110 US in late February and then declining by almost 30 per cent to $78 US by late June due to a weaker global outlook and rising world inventories.

Rising global demand for oil combined with continued political tensions in North Africa and the Middle East will put upward pressure on oil prices in the near term. There is a wide range of views on the future path of oil prices, reflecting the uncertainty about economic growth and geopolitical risk. Oil prices in 2013 are forecast to average $97 US per barrel, with private-sector forecasts ranging from $90 US to $115 US per barrel. Robust emerging market demand and high recovery costs are expected to keep oil prices at relatively high levels over the forecast period.

Oil Prices to Remain High

The Canadian Dollar

The Canadian dollar is expected to remain at parity with the U.S. dollar in 2012, down slightly from 101.1 cents US in 2011. The exchange rate has been volatile so far in 2012, dipping to a low of 97.3 cents US in June, as global uncertainty increased and commodity prices weakened. More recently, the dollar has appreciated to a high of 103.3 cents US. Private-sector forecasters expect the dollar to remain close to parity over the medium term as commodity prices remain firm.

Canadian Dollar to Remain Close to Parity

Financial Markets

Interest rates remain very low as central banks around the world maintain accommodative policies to support economic recovery. In addition, Canada’s strong fiscal position compared to that of other countries, coupled with heightened global uncertainty and a weakening global economic outlook, has made Canadian bonds attractive to investors. The yield on the 10-year Government of Canada bond fell to a record low of 1.58 per cent in mid-July 2012. As economic growth strengthens over the medium term, private-sector forecasters expect interest rates to rise gradually to more normal levels.

Interest Rates to Rise Gradually

Since September 2010, the Bank of Canada has maintained its target for the overnight rate at one per cent. On average, private-sector economists expect the interest rate on three-month treasury bills to average 1.0 per cent this year, rise to 1.1 per cent in 2013 and reach 2.5 per cent by 2015. The yield on 10-year Government of Canada bonds is also expected to rise gradually from 1.9 per cent this year to 2.2 per cent in 2013, and reach 3.3 per cent by 2015.

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

TABLE 2.2 Outlook for External Factors
  2009 2010 2011 2012p 2013p 2014p 2015p
World Real GDP Growth (Per Cent) (0.6) 5.1 3.8 3.3 3.6 4.1 4.4
U.S. Real GDP Growth (Per Cent) (3.1) 2.4 1.8 2.1 2.0 2.8 3.1
West Texas Intermediate Crude Oil ($US/bbl.) 61.7 79.4 95.1 96.0 96.5 100.5 104.0
Brent Crude Oil ($US/bbl.) 61.7 79.6 111.3 112.5 109.3 110.7 112.4
Canadian Dollar (Cents US) 87.6 97.1 101.1 100.0 101.0 101.5 101.5
Three-Month Treasury Bill Rate1 (Per Cent) 0.3 0.6 0.9 1.0 1.1 1.7 2.5
10-Year Government Bond Rate1 (Per Cent) 3.3 3.2 2.8 1.9 2.2 2.7 3.3
p = Ontario Ministry of Finance planning projection based on external sources.
1 Government of Canada interest rates.
Sources: IMF World Economic Outlook (October 2012), U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (October 2012), CME Group, IntercontinentalExchange, Bank of Canada, Ontario Ministry of Finance Survey of Forecasts (October 2012) and Ontario Ministry of Finance.

Table 2.3 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 unchanged. The relatively wide ranges of the impacts reflect uncertainty in estimates of how the economy would respond to changing external conditions.

TABLE 2.3 Impacts of Sustained Changes in Key External Factors on Ontario's Real GDP Growth
(Percentage Point Increase)
  First Year Second Year
Canadian Dollar Depreciates by
Five Cents US
0.1 to 0.8 0.5 to 1.2
Crude Oil Prices Decrease 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 Decrease by
One Percentage Point
0.1 to 0.5 0.2 to 0.6
Source: Ontario Ministry of Finance.

Outlook for Ontario Economic Growth

The Ministry of Finance is projecting growth of 2.0 per cent in Ontario real GDP this year. Strong residential and business investment, improved net exports and moderate gains in consumer spending will all support growth.

Employment is forecast to increase by 0.8 per cent in 2012, or 51,000 net new jobs. Modest employment and income gains will support a 1.2 per cent increase in real consumer spending this year. Residential investment is expected to increase by 5.0 per cent, reflecting the strength of housing starts and renovation activity. Business investment in plant and equipment is projected to increase by a healthy 3.7 per cent this year, benefiting from the strong Canadian dollar and Ontario’s improved tax competitiveness, including the HST. Ontario exports are expected to rise by 5.4 per cent this year, slightly stronger than a 3.2 per cent increase in imports.

Forecast for Sustained and Better Balanced Growth

The Ministry of Finance is projecting continued moderate growth in Ontario’s economy. Real GDP is projected to grow by 1.9 per cent in 2013, 2.3 per cent in 2014 and 2.4 per cent in 2015. Growth is expected to be more balanced over the forecast horizon than over the past decade.

Net trade, which deteriorated from 2001 to 2011 as a result of the sharp exchange-rate appreciation, is expected to contribute positively to growth over the medium term. Business investment will also make a solid contribution to growth, reflecting Ontario’s strong fundamentals including a competitive tax structure, a skilled labour force and high-quality modern infrastructure. Consumer spending is projected to contribute more modestly to growth as households scale back debt and rely on income growth to finance spending. Government spending, which was a primary support for the economy during the economic downturn, is expected to be restrained as governments focus on returning to fiscal balance.

Continued Economic Growth Expected

Job creation in Ontario is expected to strengthen over the medium term, increasing by 1.2 per cent in 2013 and by 1.5 per cent in both 2014 and 2015, resulting in almost 350,000 more jobs in 2015 compared to 2011. The unemployment rate is projected to fall to 7.6 per cent in 2013 and steadily decline to 6.8 per cent by 2015 as employment outpaces labour force growth.

Employment Will Continue to Increase
Lower Unemployment Rate

Labour income is projected to increase by 3.7 per cent annually on average over the 2012 to 2015 period. Similarly, personal income growth is expected to average 3.7 per cent annually over the same period.

Real consumer spending growth is expected to slow from 2.3 per cent in 2011 to 1.2 per cent in 2012. Over the medium term, real consumer spending is expected to grow in line with real disposable income as households focus on consolidating and reducing overall debt levels.

Sustained Increases in Household Spending

Ontario’s consumer price index (CPI) inflation rate is projected to be 1.6 per cent in 2012. Moderate energy price gains have contributed to lower inflation in 2012. So far this year, the CPI for gasoline has increased by 1.5 per cent, compared to an increase of over 20 per cent in 2011. Consumer price inflation is expected to increase moderately in 2013, reflecting, in part, higher food prices due to drought conditions through much of North America in 2012. Consumer prices are forecast to increase by 2.0 per cent each year over the 2013 to 2015 period.

The Ontario housing market was particularly strong in the first quarter of 2012, supported by solid underlying demand and record-low mortgage rates. Housing indicators through the summer, though, have pointed to a cooling in the market. Demand is expected to moderate further due to recent changes to mortgage rules.

The average resale home price for Ontario is currently almost 40 per cent above the recessionary low in October 2008. House prices are expected to ease over the medium term, although the range of private-sector forecasts varies widely. Some private-sector economists are calling for price declines of up to 15 per cent over three years, while others predict that prices will remain relatively unchanged.

Demand for new homes in Ontario will continue to be sustained by underlying growth in the population, which is projected to average 1.2 per cent annually over the next four years. This will result in an additional 637,000 people living in the province by 2015 and an additional 280,000 new households. Housing starts are projected to average 70,000 units per year between 2012 and 2015, consistent with the pace of household formation.

Canadian Household Debt Continues to Rise

The rising level of household debt remains a risk for the housing market outlook. Record-low interest rates have encouraged households to increase debt levels and, while growth in consumer debt has slowed recently, mortgage borrowing has continued to expand at a brisk pace. But, with interest rates expected to remain near record lows into 2014, debt servicing costs remain affordable.

Housing in Ontario to Remain Affordable

Improving corporate profitability, increased tax competitiveness, including the introduction of the HST, and falling prices for machinery and equipment will support business investment over the forecast horizon. After increasing by 19.1 per cent in 2010, corporate profits rose by 14.0 per cent in 2011 and are expected to rise by a further 2.8 per cent in 2012. At the same time, the price of machinery and equipment has declined in recent years, partly as a result of the strong Canadian dollar. Machinery and equipment investment is forecast to remain robust, increasing by 5.9 per cent in 2012 and by an annual average of 4.4 per cent over the 2013 to 2015 period.

Sustained Gains in Business Machinery and Equipment Spending

Steady gains in U.S. auto sales and generally stronger global growth will support Ontario exports. Real exports are projected to increase by an average of 4.4 per cent annually between 2012 and 2015, outpacing a 3.0 per cent rise in imports and resulting in an improvement in Ontario’s net trade position.

Change in the Economic Outlook

The current private-sector average outlook for Ontario real GDP growth is 2.0 per cent in 2012, slightly stronger than the 1.9 per cent projected at the time of the Budget. For 2013 to 2015, private-sector growth expectations have moderated since the time of the Budget, largely reflecting slower U.S. and global growth.

Private-Sector Economic Forecasts for Ontario Slower in the Medium Term

Comparison to the 2012 Ontario Budget

TABLE 2.4 Changes in Key Economic Forecast Assumptions 2012 Budget Compared to 2012 Fall Economic Statement
(Per Cent Increase)
  2012p 2013p 2014p
Real Gross Domestic Product 1.7 2.0 2.2 1.9 2.4 2.3
Nominal Gross Domestic Product 3.4 3.2 4.1 3.7 4.2 4.1
Retail Sales 3.0 2.2 3.7 3.7 3.9 3.9
Housing Starts (000s) 64.0 77.0 63.0 65.0 69.0 68.0
Personal Income 2.9 2.7 3.7 3.8 4.2 4.1
Labour Income 3.2 2.5 4.2 3.9 4.3 4.3
Corporate Profits 4.0 2.8 4.6 2.1 4.9 3.0
Employment 0.9 0.8 1.3 1.2 1.5 1.5
Job Creation (000s) 59 51 89 84 103 106
Key External Variables            
U.S. Real Gross Domestic Product 2.3 2.1 2.6 2.0 3.0 2.8
WTI Crude Oil ($ US per Barrel) 100.2 96.0 103.8 96.5 106.5 100.5
Canadian Dollar (Cents US) 98.0 100.0 101.0 101.0 102.5 101.5
3-month Treasury Bill Rate1 (Per Cent) 0.9 1.0 1.4 1.1 2.4 1.7
10-year Government Bond Rate1
(Per Cent)
2.2 1.9 2.8 2.2 3.8 2.7
p = Ontario Ministry of Finance planning projection.
1 Government of Canada interest rates.
Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, CME Group, U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (October 2012), Ontario Ministry of Finance Survey of Forecasts (October 2012) and Ontario Ministry of Finance.

Private-Sector Forecasts

The Ministry of Finance consults with private-sector economists and tracks their forecasts to inform the government’s planning assumptions. Additionally, in the process of preparing the 2012 Ontario Economic Outlook and Fiscal Review, the Minister of Finance met with private-sector economists to discuss their views on the economy. All private-sector economists are projecting continued growth for Ontario over the forecast horizon. On average, they are projecting growth of 2.0 per cent in 2012, 2.0 per cent in 2013, 2.4 per cent in 2014 and 2.5 per cent in 2015.

TABLE 2.5 Private-Sector Forecasts for Ontario Real GDP Growth
(Per Cent)
  2012 2013 2014 2015
BMO Capital Markets (October) 2.0 1.8
Central 1 Credit Union (October) 2.1 1.9 2.2 2.6
Centre for Spatial Economics (June) 2.1 2.3 1.8 2.1
CIBC World Markets (October) 2.1 1.8 2.2 2.3
Conference Board of Canada (July) 2.1 2.3 2.9 2.5
Desjardins Group (September) 2.1 2.0 2.5 2.5
IHS Global Insight (July) 1.8 1.9 2.2 2.4
Laurentian Bank Securities (October) 2.0 1.9
National Bank (June) 1.8 1.7
RBC Financial Group (September) 2.2 2.3
Scotiabank Group (September) 1.8 1.7
TD Bank Financial Group (September) 1.9 1.8 2.4
University of Toronto (July) 2.1 2.1 2.9 3.0
Private-Sector Survey Average 2.0 2.0 2.4 2.5
Ontario's Planning Assumption 2.0 1.9 2.3 2.4
Sources: Ontario Ministry of Finance Survey of Forecasts (October 2012) and Ontario Ministry of Finance.

Details of the Ontario Economic Outlook

The following table provides details of the Ministry of Finance’s economic outlook for 2012 to 2015.

TABLE 2.6 The Ontario Economy, 2010 to 2015
(Per Cent Change)
  Actual Projection
  2010 2011 2012 2013 2014 2015
Real Gross Domestic Product 3.0 2.1 2.0 1.9 2.3 2.4
Personal Consumption 3.6 2.3 1.2 1.9 2.4 2.4
Residential Construction 8.3 5.2 5.0 (1.6) (1.1) (0.5)
Non-residential Construction (1.6) 5.6 6.3 3.8 3.3 1.9
Machinery and Equipment 15.2 18.7 3.1 4.9 6.1 4.4
Exports 7.5 1.7 5.4 3.9 4.2 4.1
Imports 13.3 2.4 3.2 2.6 3.2 3.0
Nominal Gross Domestic Product 5.3 4.3 3.2 3.7 4.1 4.2
Other Economic Indicators            
Retail Sales 5.4 3.6 2.2 3.7 3.9 4.2
Housing Starts (000s) 60.4 67.8 77.0 65.0 68.0 70.0
Personal Income 4.2 3.1 2.7 3.8 4.1 4.2
Labour Income 3.9 3.4 2.5 3.9 4.3 4.3
Corporate Profits 19.1 14.0 2.8 2.1 3.0 3.1
Consumer Price Index 2.5 3.1 1.6 2.0 2.0 2.0
Employment 1.7 1.8 0.8 1.2 1.5 1.5
Job Creation (000s) 108 121 51 84 106 106
Unemployment Rate (Per Cent) 8.7 7.8 7.8 7.6 7.1 6.8
Key External Variables            
U.S. Real Gross Domestic Product 2.4 1.8 2.1 2.0 2.8 3.1
WTI Crude Oil ($ US per Barrel) 79.4 95.1 96.0 96.5 100.5 104.0
Canadian Dollar (Cents US) 97.1 101.1 100.0 101.0 101.5 101.5
3-month Treasury Bill Rate1 0.6 0.9 1.0 1.1 1.7 2.5
10-year Government Bond Rate1 3.2 2.8 1.9 2.2 2.7 3.3
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 2012), CME Group, Ontario Ministry of Finance Survey of Forecasts (October 2012) and Ontario Ministry of Finance.

1 Based on information available to October 5, 2012.