2016 Ontario Economic Outlook and Fiscal Review
Chapter III: Economic and Fiscal Outlook

Section A: Ontario’s Economic Outlook

Ontario’s economy continues to grow in an uncertain global environment. The unemployment rate is at an eight-year low and more than 641,000 net new jobs have been created since the depths of the 2008–09 global recession. Ontario’s economic growth in the past two years has outpaced Canada’s, and private-sector economists expect Ontario to be a growth leader over the next two years. While global economic challenges persist, Ontario continues to benefit from steady economic growth in the United States, low oil prices and a competitive Canadian dollar. Ontario’s economic outlook is characterized by a balanced set of risks.

The Ministry of Finance is forecasting growth in Ontario real gross domestic product (GDP) of 2.2 per cent on average over the 2016–19 period. For prudent fiscal planning, these real GDP growth projections are slightly below the average of private-sector forecasts.1

TABLE 3.1 Ontario Economic Outlook
(Per Cent)
  2013 2014 2015 2016p 2017p 2018p 2019p
Real GDP Growth 1.5 2.7 2.5 2.5 2.2 2.1 1.9
Nominal GDP Growth 2.2 4.7 4.9 3.4 4.1 4.1 3.9
Employment Growth 1.8 0.8 0.7 1.0 1.2 1.2 1.1
CPI Inflation 1.0 2.4 1.2 1.9 2.0 2.0 2.0
p = Ontario Ministry of Finance planning projection.
Sources: Statistics Canada and Ontario Ministry of Finance.

Steady growth in the U.S. economy, along with the ongoing impacts of a more competitive Canadian dollar and low oil prices, continues to support Ontario’s economic growth. Exports have shifted higher, businesses are hiring more workers, productivity has improved and household incomes are rising. Ontario’s economy is expected to remain a provincial growth leader over the next two years, largely as projected at the time of the 2016 Budget.

Ontario’s Recent Economic Performance

In 2015, Ontario’s real GDP increased by 2.5 per cent, comparable to growth in the United States, and outperforming Canada and all other G7 countries. Ontario’s growth was driven by higher consumer spending, stronger exports and solid business investment.

Solid growth continued for Ontario in the first quarter of 2016. Real GDP advanced by 0.8 per cent, driven by increases in exports and household spending. In the second quarter, economic growth moderated to 0.2 per cent, mainly reflecting a decline in exports, following a strong increase over the previous four quarters. However, recent economic indicators show Ontario’s growth is regaining momentum in the second half of 2016.

Ontario Employment Continues to Advance

Steady employment gains since the 2008–09 global recession have led to continued improvements in Ontario’s unemployment rate, which is at an eight-year low. As of October, Ontario’s unemployment rate was 6.4 per cent, lower than the rate of 7.4 per cent in the rest of Canada.

Ontario Exports Remain Solid

In 2015, Ontario’s export growth was driven by a strong gain in international merchandise exports, with notable gains to Ontario’s top three trading partners (the United States, United Kingdom and Mexico).

External Economic Environment

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 3.2
Outlook for External Factors
  2013 2014 2015 2016p 2017p 2018p 2019p
World Real GDP Growth (Per Cent) 3.3 3.4 3.2 3.1 3.4 3.6 3.7
U.S. Real GDP Growth (Per Cent) 1.7 2.4 2.6 1.5 2.2 2.1 2.1
West Texas Intermediate Crude Oil ($US/bbl.) 98 93 49 43 53 59 64
Canadian Dollar (Cents US) 97.1 90.5 78.2 75.6 77.0 80.0 82.0
Three-Month Treasury Bill Rate1
(Per Cent)
1.0 0.9 0.5 0.5 0.5 1.0 1.6
10-Year Government Bond Rate2
(Per Cent)
2.3 2.2 1.5 1.2 1.5 2.2 2.8
p = Ontario Ministry of Finance planning projection based on private-sector forecasts.
[1], [2] Government of Canada interest rates.
Sources: International Monetary Fund World Economic Outlook (October 2016), U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (October 2016), U.S. Energy Information Administration, Bank of Canada, Ontario Ministry of Finance Survey of Forecasters (October 2016) and Ontario Ministry of Finance.

The external environment remains supportive for Ontario’s economic growth, with a more competitive Canadian dollar, low oil prices and stronger global growth.

Outlook for Ontario’s Economic Growth

Ontario’s economy is expected to strengthen as growth broadens across major sectors of the economy, including household spending and exports.

Employment is forecast to increase by 1.0 per cent, or 68,000 net new jobs, in 2016, up from growth of 0.7 per cent in 2015. Employment gains of 1.2 per cent annually, on average, are expected over the 2017 to 2019 period. Ontario’s unemployment rate is projected to be 6.6 per cent this year, down from 6.8 per cent in 2015. The unemployment rate is forecast to steadily decline to 6.2 per cent by 2019.

Ontario’s Housing Market

The affordability of homes in most areas of Ontario was within recent historical ranges as of 2015, while recent growth in prices has affected affordability in the Greater Toronto Area and, to a lesser extent, in the Hamilton–Burlington area. Price increases have been influenced by several factors, including rising incomes, growth in the number of households and low borrowing costs. However, available data sources do not provide a comprehensive explanation of all factors affecting house prices. The Ontario government is taking steps to better understand Ontario’s housing market and is committed to supporting affordability for homebuyers (see Chapter I, Section E: Towards a Fair Society and Chapter V, Section B: Modernizing Land Transfer Tax and Other Tax Measures for more details).

Risks to Ontario’s Economic Outlook

Table 3.3 provides current estimates of the impact of sustained changes in key external factors on the growth of Ontario’s real GDP, assuming other external factors are unchanged. The relatively wide range for the impacts reflects uncertainty regarding how the economy would be expected to respond to these changes in external conditions.

TABLE 3.3 Impacts of Sustained Changes in Key External Factors on Ontario’s Real GDP Growth
(Percentage Point Change)
  First Year Second Year
Canadian Dollar Depreciates by Five Cents US +0.1 to +0.7 +0.2 to +0.8
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 +0.2 to +0.6 +0.3 to +0.7
Canadian Interest Rates Increase by One Percentage Point –0.1 to –0.5 –0.2 to –0.6
Source: Ontario Ministry of Finance.

Low oil prices benefit the Ontario economy through reduced fuel costs for businesses and households. If oil prices remain at low levels, they could provide a stronger-than-expected boost to the Ontario economy. In addition, the low interest rate environment could continue longer than expected, adding further support to domestic spending and investment, including Ontario’s housing market.

Weaker-than-expected global economic growth could dampen demand for Ontario exports and lead to increased volatility in financial markets. This could weigh on business and consumer confidence and negatively impact investment and consumer spending in Ontario. Rising global competition and the increase in global trade protectionism could also represent a potential challenge for Ontario’s export sector. Deteriorating affordability and high mortgage debt loads could contribute to a downturn in the housing market.

Details of the Ontario Economic Outlook

The following table provides details of the Ministry of Finance’s economic outlook for 2016 to 2019.

TABLE 3.4 The Ontario Economy, 2014 to 2019
(Per Cent Change)
  Actual
2014
Actual
2015
Projection
2016
Projection
2017
Projection
2018
Projection
2019
Real Gross Domestic Product 2.7 2.5 2.5 2.2 2.1 1.9
Household Consumption 2.8 2.7 3.0 2.1 1.8 1.6
Residential Construction 0.7 7.2 7.0 1.5 1.2 1.8
Non-residential Construction 7.7 9.7 (0.8) 2.0 5.0 4.1
Machinery and Equipment 4.3 6.8 (2.4) 3.8 6.5 6.0
Exports 4.4 2.8 2.4 2.5 2.5 2.4
Imports 4.0 3.7 1.8 2.5 2.4 2.2
Nominal Gross Domestic Product 4.7 4.9 3.4 4.1 4.1 3.9
Primary Household Income 3.6 4.4 3.9 3.9 4.1 4.1
Compensation of Employees 3.5 4.2 3.8 4.0 4.4 4.5
Net Operating Surplus — Corporations 14.9 9.1 1.3 7.5 6.3 4.5
Other Economic Indicators - Retail Sales 5.0 4.2 4.7 3.6 4.1 4.1
Other Economic Indicators - Housing Starts (000s) 59.1 70.2 73.0 68.0 68.0 72.0
Other Economic Indicators - Home Resales 4.0 9.6 6.9 (2.0) 0.9 2.7
Other Economic Indicators - Consumer Price Index 2.4 1.2 1.9 2.0 2.0 2.0
Other Economic Indicators - Employment 0.8 0.7 1.0 1.2 1.2 1.1
Other Economic Indicators - Job Creation (000s) 55 45 68 85 88 81
Other Economic Indicators - Unemployment Rate (Per Cent) 7.3 6.8 6.6 6.5 6.4 6.2
Key External Variables - U.S. Real Gross Domestic Product 2.4 2.6 1.5 2.2 2.1 2.1
Key External Variables - WTI Crude Oil ($ US/bbl.) 93 49 43 53 59 64
Key External Variables - Canadian Dollar (Cents US) 90.5 78.2 75.6 77.0 80.0 82.0
Key External Variables - Three-month Treasury Bill Rate1 0.9 0.5 0.5 0.5 1.0 1.6
Key External Variables - 10-year Government Bond Rate2 2.2 1.5 1.2 1.5 2.2 2.8
[1], [2] Government of Canada interest rates (per cent).
Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Canadian Real Estate Association, Bank of Canada, U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (October 2016), U.S. Energy Information Administration 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 2016 Ontario Economic Outlook and Fiscal Review, the Minister of Finance met with private-sector economists to discuss their views on the economy.

Private-sector economists are projecting continued growth for Ontario over the forecast horizon. On average, private-sector economists are calling for real GDP growth of 2.6 per cent in 2016, 2.3 per cent in 2017, 2.2 per cent in 2018 and 2.0 per cent in 2019. For prudent fiscal planning, the Ministry of Finance’s real GDP growth projections are slightly below the average private-sector forecasts.

TABLE 3.5 Private-Sector Forecasts for Ontario Real GDP Growth
(Per Cent)
  2016 2017 2018 2019
BMO Capital Markets (October) 2.6 2.3 1.7 1.7
Central 1 Credit Union (October) 2.3 2.2 2.4 2.8
Centre for Spatial Economics (August) 2.6 2.3 1.7 1.6
CIBC World Markets (October) 2.5 2.2 2.3
Conference Board of Canada (July) 2.8 2.2 1.9 1.9
Desjardins Group (October) 2.6 2.3 2.2 1.5
IHS Global Insight (July) 2.5 2.5 2.5 2.1
Laurentian Bank Securities (August) 2.7 2.4 2.4
National Bank (September) 2.3 2.1
RBC Financial Group (September) 2.7 2.4
Scotiabank Group (October) 2.6 2.3 2.2
TD Bank Financial Group (September) 2.7 2.0 1.7
University of Toronto (October) 2.7 2.6 2.7 2.2
Private-Sector Survey Average 2.6 2.3 2.2 2.0
Ontario’s Planning Assumption 2.5 2.2 2.1 1.9
Source: Ontario Ministry of Finance Survey of Forecasters (October 26, 2016).

Comparison to the 2016 Budget

The current private-sector average outlook for Ontario real GDP growth is 2.6 per cent in 2016, up from 2.3 per cent projected at the time of the 2016 Budget. The stronger outlook reflects relatively strong economic growth recorded in Ontario over the second half of 2015 and early 2016. The outlook over the 2017–19 period has moved slightly lower compared to the 2016 Budget.

Key changes since the 2016 Budget include:

  • Higher real GDP growth in 2016, but marginally lower over the 2017–19 period;
  • Lower nominal GDP growth over the outlook;
  • A higher level of housing starts over the 2016–17 period;
  • Upward revisions to the Canadian dollar over the 2016–17 period; and
  • Downward revisions to U.S. real GDP growth and interest rates over the forecast period.
TABLE 3.6 Changes in Ministry of Finance
Key Economic Forecast Assumptions:
2016 Budget Compared with 2016 Fall Economic Statement (FES)
(Per Cent Change)
  2016p:
2016
Budget
2016p:
2016
FES
2017p:
2016
Budget
2017p:
2016
FES
2018p:
2016
Budget
2018p:
2016
FES
2019p:
2016
Budget
2019p:
2016
FES
Real Gross Domestic Product 2.2 2.5 2.4 2.2 2.2 2.1 2.0 1.9
Nominal Gross Domestic Product 4.0 3.4 4.6 4.1 4.2 4.1 4.0 3.9
Retail Sales 4.8 4.7 3.7 3.6 3.4 4.1 3.2 4.1
Housing Starts (000s) 64.0 73.0 65.0 68.0 68.0 68.0 72.0 72.0
Primary Household Income 4.5 3.9 4.4 3.9 4.2 4.1 4.2 4.1
Compensation of Employees 4.4 3.8 4.5 4.0 4.5 4.4 4.4 4.5
Net Operating Surplus — Corporations 3.7 1.3 8.5 7.5 5.7 6.3 3.9 4.5
Employment 1.1 1.0 1.2 1.2 1.2 1.2 1.1 1.1
Job Creation (000s) 78 68 85 85 82 88 79 81
Consumer Price Index 1.8 1.9 2.0 2.0 2.0 2.0 2.0 2.0
Key External Variables - U.S. Real Gross Domestic Product 2.1 1.5 2.4 2.2 2.4 2.1 2.2 2.1
Key External Variables - WTI Crude Oil ($ US/bbl.) 42 43 53 53 60 59 67 64
Key External Variables - Canadian Dollar (Cents US) 72.0 75.6 75.5 77.0 81.0 80.0 83.0 82.0
Key External Variables - Three-month Treasury Bill Rate1 (Per Cent) 0.5 0.5 0.8 0.5 2.2 1.0 2.8 1.6
Key External Variables - 10-year Government Bond Rate2 (Per Cent) 1.6 1.2 2.3 1.5 3.3 2.2 3.6 2.8
p = Ontario Ministry of Finance planning projection.
[1], [2] Government of Canada interest rates.
Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, U.S. Energy Information Administration, U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (October 2016) and Ontario Ministry of Finance.

[1] Based on information available as of October 26, 2016. On November 9, 2016, Statistics Canada released the Provincial Economic Accounts for 2015, including revisions back to 2013. These new data have been incorporated into the 2016 Ontario Economic Outlook and Fiscal Review. However, economic forecasts for 2016 to 2019 are based on previous GDP estimates published in the Ontario Economic Accounts.

Chart Descriptions:

Chart 3.1: 2015 Real GDP Growth, Ontario and the G7

The bar chart shows the annual per cent change in real GDP for all G7 countries and Ontario for 2015. The change in real GDP for each jurisdiction is as follows: Japan (+0.5 per cent), Italy (+0.7 per cent), Canada (+0.9 per cent), France (+1.3 per cent), Germany (+1.7 per cent), United Kingdom (+2.2 per cent), Ontario (+2.5 per cent) and United States (+2.6 per cent).

Return to Chart 3.1

Chart 3.2: Employment Gains Concentrated in Full-Time, Private-Sector, Above-Average Wage Industries

The bar chart shows different characteristics of Ontario employment gains since June 2009. Total employment increased by 641,000 since June 2009, with full-time employment up by 577,000, while part-time employment rose by 64,000. Private-sector employment increased by 462,000, while public-sector employment rose by 81,000 and self-employment was up by 98,000. Employment in above-average wage industries rose by 489,000, compared to a 152,000 employment increase in below-average wage industries.

Return to Chart 3.2

Chart 3.3: Ontario Trade Continues to Support the Economy

The combined bar and line chart show Ontario’s annual real exports (solid line), real imports (dashed line) and positive trade balance contribution to real GDP (bars) over the 1981 to 2015 period. From 1981 to 2009, real exports were greater than real imports, resulting in a positive trade balance throughout the entire period. After a brief reversal beginning in 2010, Ontario’s trade balance became positive once again in 2012 and has remained positive ever since.

Return to Chart 3.3

Chart 3.4: Ontario Economic Growth Expected to Broaden

The bar chart shows the composition of Ontario growth over the outlook (2016 – 2019). The overall economy is expected to average real GDP growth of 2.2 per cent, led by residential and business investment with average annual increases of 2.8 per cent for both. Average growth between 2016 and 2019 is expected to be 2.1 per cent for household spending, 1.4 per cent for government, 2.4 per cent for exports and 2.2 per cent for imports.

Return to Chart 3.4

Chart 3.5: Ontario’s Labour Market Expected to Improve Further

The line chart shows Ontario’s unemployment rates from 2013 to 2019. The unemployment rate declined from 7.6 per cent in 2013 to 7.3 per cent in 2014 and 6.8 per cent in 2015. The unemployment rate is forecast to decrease further to 6.6 per cent in 2016, 6.5 per cent in 2017, 6.4 per cent in 2018 and 6.2 per cent in 2019.

Return to Chart 3.5

Chart 3.6: Mortgage Carrying Costs in the GTA and Hamilton-Burlington Elevated Relative to Historical Trends

The bar chart shows the 2000–14 range and 2015 estimate of mortgage carrying costs as a share of total income for Ontario and its regions. The 2015 estimates of mortgage carrying costs as a share of total income by region are as follows (from highest to lowest): GTA (39.9 per cent), Ontario (29.1 per cent), Hamilton-Burlington (26.2 per cent), Kitchener-Waterloo (20.8 per cent), St. Catharines-Niagara (20.6 per cent), Ottawa (18.8 per cent), London-St. Thomas (17.3 per cent), Greater Sudbury (13.8 per cent), Windsor-Essex (12.8 per cent) and Thunder Bay (12.7 per cent). The GTA, Ontario and Hamilton-Burlington are the only regions with 2015 estimates that are above the 2000–14 range of mortgage carrying costs in that region.

Return to Chart 3.6