2011 Ontario Budget: Chapter II: Ontario's Economic Outlook and Fiscal Plan
Section C: Ontario's Economic Outlook


The Ontario economy is turning the corner after the global recession and is poised for a period of sustained growth.

The best sign for people that Ontario’s economy is growing is the rebound in job creation. During the recession, Ontario had a net loss of 257,000 jobs. Through to February 2011, more than 233,000 net new jobs have been created, recovering 91 per cent of the jobs lost during the recession.

Chart 2: Line Graph: Rebound in Job Creation

The Ontario government, like other jurisdictions in Canada and around the world, chose to help lessen the impact of the recession through short-term infrastructure stimulus investments that created jobs and helped restore growth. The government’s Open Ontario plan also improved Ontario’s long-run economic fundamentals by investing in knowledge, skills and, the green economy, and by dramatically improving business competitiveness through Ontario’s Tax Plan for Jobs and Growth. (For more information on Ontario government economic policies, see Chapter I, Section A: A Better Tomorrow.)

Ontario’s real gross domestic product (GDP) grew by an estimated 2.8 per cent in 2010, following declines of 0.9 per cent in 2008 and 3.6 per cent in 2009. The Ministry of Finance plan is based on Ontario real GDP increasing 2.4 per cent in 2011, 2.7 per cent in 2012 and 2013, and 2.6 per cent in 2014. This projection was reviewed by members of the Ontario Economic Forecast Council,1 who all concluded that these were reasonable assumptions for planning purposes. The Ministry of Finance planning assumptions are slightly below the average among private-sector forecasters for Ontario real GDP growth available at the time this Budget was finalized. The modest but solid pace of growth reflects a fundamentally sound domestic economy and continued increases in global demand for Ontario’s exports.

TABLE 5.    Ontario Economic Outlook
(Per Cent)
  2008 2009 2010 2011p 2012p 2013p 2014p
Real GDP Growth (0.9) (3.6) 2.8e 2.4 2.7 2.7 2.6
Nominal GDP Growth 0.1 (1.1) 6.1e 4.6 5.1 4.8 4.6
Employment Growth 1.6 (2.5) 1.7 1.7 1.8 1.8 1.7
CPI Inflation 2.3 0.4 2.5 2.3 2.1 2.0 2.0
e = Ontario Ministry of Finance estimate. p = Ontario Ministry of Finance planning projection.
Sources: Statistics Canada and Ontario Ministry of Finance.

Continued Economic Recovery in Ontario

Ontario’s key economic indicators, such as employment and real GDP, are approaching pre-recession levels. Renewed growth has been supported by the strong foundations of the Ontario economy, rising international exports and extensive government stimulus measures.

While the economy is turning the corner, many Ontario families and businesses continue to feel the lingering effects of the global recession. Unemployment remains higher than in 2008 and business profits are well below levels reached before the recession.

Ontario’s real GDP increased for five consecutive quarters from the third quarter of 2009 to the third quarter of 2010. The economy was 1.5 per cent below its pre-recession level in the third quarter of 2010. Recent statistics indicate that the economic recovery strengthened in the final quarter of 2010 and continued into 2011. It is likely that the economy will have surpassed pre-recession levels in the first quarter of 2011.

Chart 3: Line Graph: Ontario Real GDP

Job creation has been solid in recent months, with employment increasing by almost 17,000 net new jobs per month on average from November to February. Job creation in Ontario and Canada has been very solid compared to the experience in most other developed countries. While jobs in Ontario are near pre-recession levels, other jurisdictions such as the United States and the United Kingdom have only recovered a very small portion of their job losses — 14.5 per cent and 38.9 per cent, respectively.

Chart 4: Bar Graph: International Comparison of Employment Recoveries

Ontario has also fared well compared to most other provinces and U.S. states. Since May 2009, Ontario employment has grown 3.6 per cent, above that of the other large Canadian provinces and well ahead of all comparable U.S. states, some of which continue to see declines in employment.

Chart 5: Bar Graph: Employment Growth Since May 2009

The unemployment rate in Ontario has fallen from 9.4 per cent at the height of the recession to 8.0 per cent. While there has been a solid recovery in employment so far, there has also been an increase in the number of Ontarians in the labour force. As a result, the Ontario unemployment rate remains well above the pre-recession rate of 6.5 per cent.

Chart 6: Line Graph: Ontario Unemployment Rate Declining

A number of factors, including Ontario’s Tax Plan for Jobs and Growth, have contributed to Ontario’s robust recovery from the recession. Boosted by a rebound in U.S. economic activity, Ontario exporters have played a key role in fuelling the recovery. Last year, total international merchandise exports rose by over 16 per cent, supported by a 35 per cent rise in automotive exports. Exports to the United States rebounded by almost 15 per cent. To date, Ontario’s international merchandise exports have recovered 82.8 per cent of the losses sustained during the recession.

Chart 7: Line Graph: Exports Recovering Strongly

Government stimulus has been essential in supporting jobs through the recession and boosting the economic recovery. Monetary policy contributed to the recovery, with central banks around the world lowering interest rates and enacting measures to keep financial markets operating smoothly. The Bank of Canada lowered its target for the overnight rate to 0.25 per cent in April 2009, providing an unprecedented amount of monetary stimulus for the economy. As the economy recovered, the Bank increased its overnight rate target through the spring and summer of 2010 to its current level of one per cent.

Governments also responded with extensive fiscal stimulus. In 2009–10 and 2010–11, the Province invested $26 billion in infrastructure, including nearly 10,000 stimulus projects. Ontario and the federal government have announced an extension of the stimulus funding deadline to October 31, 2011, for qualifying projects. Public-sector capital expenditure in Ontario, by all levels of government, increased by 24.7 per cent in 2010 and is expected to remain strong in 2011, increasing by 2.4 per cent.

Chart 8: Bar Graph: Recovery Supported by Strong Government Investment in 2010

The Ontario government also responded with the Open Ontario plan, improving the province’s economic fundamentals, encouraging an environment for job creation, and protecting schools and hospitals. It helped students attend college and university, retrained laid-off workers and gave Ontario businesses tools to create jobs.

The Global Economic Environment

Ontario’s economic outlook is heavily influenced by global economic and financial conditions, particularly demand for Ontario’s products, oil prices, the value of the Canadian dollar and interest rates. Average private-sector forecasts for these factors are summarized in the table below.

TABLE 6.    External Variables
Average Private-Sector Forecast
  2009 2010 2011 2012 2013 2014
World Real GDP Growth (Per Cent) (0.6a) 5.0 4.4 4.5 4.6 4.6
U.S. Real GDP Growth (Per Cent) (2.6a) 2.8a 3.1 3.3 3.2 3.1
Crude Oil1
West Texas Intermediate 61.8a 79.4a 99.7 102.2 100.6 100.1
Brent 61.7a 79.6a 109.4 109.1 106.7 105.3
Canadian Dollar (Cents US) 87.6a 97.1a 100.0 99.7 99.3 98.1
Three-Month Treasury Bill Rate2
(Per Cent)
0.3a 0.6a 1.4 2.6 3.7 4.2
10-Year Government Bond Rate2
(Per Cent)
3.3a 3.2a 3.5 4.1 4.7 4.9
a = actual.
1 Based on crude oil futures contracts over the two-week period ending March 4, 2011.
2 Government of Canada interest rates.
Sources: U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (March 2011), IMF World Economic Outlook (January 2011 and October 2010), New York Mercantile Exchange and Ontario Ministry of Finance Survey of Forecasts (March 2011).

The United States is Ontario’s most important export market, accounting for about 80 per cent of the province’s international exports in 2010. Recent indicators point to strengthening growth in the U.S. economy. Real GDP advanced 0.7 per cent in the fourth quarter of 2010, following growth of 0.6 per cent in the third quarter. Increased spending by U.S. consumers and an improvement in the U.S. trade balance have supported the recent improvement in overall GDP growth.

After expanding by 2.8 per cent in 2010, U.S. real GDP growth is expected to accelerate to 3.1 per cent in 2011 and 3.3 per cent in 2012. Continued momentum in industrial production and business investment will lead the U.S. recovery while gradual improvements in U.S. household debt levels will support increased consumer spending. The improved outlook reflects the U.S. federal government’s recent decision to extend tax cuts as well as additional monetary stimulus from the Federal Reserve.

Chart 9: Bar Graph: U.S. Economic Recovery to Continue

The auto industry is a key part of Ontario’s economy and its performance is tied to U.S. demand. In 2010, U.S. auto sales increased 11 per cent to 11.6 million vehicles, recovering from a recent low of 10.4 million units in 2009. Auto sales are expected to strengthen to 13.2 million units in 2011 and to continue improving steadily to 14.9 million units by 2014.

Chart 10: Bar Graph: U.S. Light Motor Vehicle Sales to Rise

Despite this brighter outlook, significant challenges remain for the U.S. economy. The U.S. job recovery has been weak and could lead to stalled economic growth and U.S. demand for Ontario products. As well, the U.S. housing market remains fragile and will likely continue to represent a risk to U.S. growth. Despite improvements in the U.S. current account deficit in recent years, continued reductions are necessary to avoid potentially destabilizing swings in international capital flows and exchange rates. Finally, the timing and pace of fiscal consolidation in the United States could also restrain future growth.

Oil prices have increased by almost 130 per cent since February 2009. The strengthening global economic recovery has increased the demand for oil, putting upward pressure on prices. Recently, political instability in oil-producing nations in North Africa and the Middle East has pushed prices higher and increased uncertainty as to their future path. Higher oil prices raise costs for consumers and businesses and can lower spending on other goods and services. As Canada is a significant oil producer, high oil prices have been strengthening the Canadian dollar as well. However, Ontario imports essentially all of the crude oil and a significant share of the refined petroleum products used in the province. The imports come both from other provinces and other countries.

As the global economy continues to recover, oil prices are expected to continue to rise. Based on the average West Texas Intermediate (WTI) crude oil futures contract,2 the price of oil is projected to be $99.7 US per barrel in 2011, rise to an average of $102.2 US per barrel in 2012, and stabilize at around $100 US per barrel in 2013 and 2014. Based on futures contracts for the Brent crude oil benchmark,3 the average price is projected to be $109.4 US per barrel in 2011, $109.1 US per barrel in 2012, and average $106.0 US per barrel in 2013 and 2014.

Chart 11: Line Graph: Continued High Oil Prices Expected

The Canadian dollar has appreciated steadily relative to the U.S. dollar since September 2010, reaching parity in December 2010. This strength can be attributed to rising commodity prices as well as higher interest rates compared with the United States. In addition, Canada’s strong economy, solid fiscal position and sound financial system have supported the rising value of the Canadian dollar. Private-sector forecasters expect the exchange rate to average close to parity over the next four years.

Chart 12: Line Graph: 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.

Canadian interest rates have trended higher in recent months, but remain at low levels by historical comparison. 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 13: Line Graph: Interest Rates to Rise

As the pace of the economic recovery strengthens, the Bank is expected to resume increasing interest rates to more historically normal levels. Private-sector economists expect the interest rate on three-month treasury bills to average 1.4 per cent this year and to rise to 4.2 per cent by 2014. The yield on 10-year Government of Canada bonds is expected to rise from 3.5 per cent this year to 4.9 per cent by 2014.

Interest rates affect consumer spending and business investment as well as the projected expense for interest on the Province’s debt (see Chapter IV: Borrowing and Debt Management).

Risks to the Ontario Economic Outlook

Table 7 provides 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 range of the impacts reflects the challenges inherent with forecasts of economic growth in an uncertain environment.

TABLE 7.     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.

The significant increase in household debt relative to income over the past several years also represents a risk for Canada’s economic recovery. The rise in household debt has coincided with a downward trend in personal saving rates. A sudden or significant change in economic conditions, such as sharply higher interest rates, could place some households in a vulnerable financial position.

Outlook for Continued Ontario Economic Growth

The Ministry of Finance is projecting continued solid growth in Ontario’s economy over the next four years, supported by gains in household spending, strong growth in business capital investment and a gradual strengthening of Ontario’s trade balance. Private-sector economists are unanimous in forecasting continued solid economic growth for Ontario in 2011 and over the next several years.

Chart 14: Bar Graph: Ontario Real GDP Growth

Strong growth in the United States is expected to underpin rising global demand for Ontario exports. Auto sales in the United States are expected to rise, boosting demand for Ontario manufactured vehicles and parts. Ontario’s trade with the rest of the world will benefit from increased global demand, particularly from emerging markets, for commodities, industrial goods, and machinery and equipment. Real exports are forecast to increase by 4.9 per cent in 2011 and continue to rise at a solid pace through 2014.

Chart 15: Bar Graph: Ontario Real Exports to Rise

In recent years, Ontario has seen a significant evolution in both the composition and destination of its exports. Between 2005 and 2010, Ontario’s international exports declined by 15 per cent but exports to other provinces rose by over 15 per cent. Over the same period, merchandise exports to the United States declined by 28 per cent while exports to countries other than the United States grew by over 54 per cent. Similarly, exports of services — including financial services, professional, scientific and computer services (including business consulting), and transportation — jumped by over 18 per cent, while exports of goods declined by 14 per cent. This increasing diversification in the composition of Ontario’s exports is expected to continue through the forecast period.

Chart 16: Bar Graph: Ontario Exports Shifting to New Markets

Improving business conditions are expected to support a strong continued rebound in corporate profits, which are projected to rise by 12.2 per cent in 2011 and by an average of 6.8 per cent annually between 2012 and 2014.

The rebound in corporate profits, coupled with rising global demand and increased tax competitiveness due to Ontario’s Tax Plan for Jobs and Growth, which includes the Harmonized Sales Tax (HST) (see Chapter III: Tax and Pension Systems for Ontario’s Future), will support strengthening business investment over the forecast horizon. Real business investment in machinery and equipment jumped by over 10 per cent in the third quarter of 2010, the strongest quarterly gain since 1998. Investment in machinery and equipment is expected to continue growing at a solid rate, rising by an average of 7.1 per cent annually between 2011 and 2014.

Chart 17: Bar Graph: Solid Rebound in Machinery and Equipment Investment

Employment is projected to increase by 1.7 per cent in 2011 and strengthen to an average growth rate of 1.8 per cent annually over the 2012 to 2014 period, resulting in nearly 500,000 more jobs in 2014 compared to 2010. The unemployment rate is expected to average 8.2 per cent in 2011 and decline steadily to 6.7 per cent by 2014.

Chart 18: Bar Graph: Half a Million Jobs Expected

Strengthening employment will support solid gains in labour income. Labour income is projected to rise by 4.3 per cent in 2011 and then average 4.7 per cent over the 2012 to 2014 period. Personal income is projected to grow by 4.2 per cent in 2011 and average 4.5 per cent over 2012 to 2014. Personal income growth will outstrip the projected 2.1 per cent average annual growth in consumer prices over the 2011 to 2014 period.

Rising employment and increasing incomes will spur growth in household spending. Real consumer spending is projected to increase by 2.7 per cent in 2011, with retail sales growing by 4.1 per cent. Over the medium term, real consumer spending is expected to grow by an average of 2.6 per cent annually from 2012 to 2014, while retail sales grow by an average of 4.1 per cent.

Private-sector forecasters expect Ontario’s Consumer Price Index (CPI) inflation rate to be 2.3 per cent in 2011, down slightly from 2.5 per cent in 2010. It is projected to average 2.0 per cent from 2012 to 2014, the mid-point of the Bank of Canada’s range for Canadian CPI inflation.

According to private-sector forecasters, home resales are expected to slow in 2011 from last year’s very strong pace but are projected to begin to recover by 2013. House price increases are expected to be more moderate, increasing by an average of one per cent between 2011 and 2014. Population growth will continue to sustain demand for new homes, with housing starts projected to reach 68,600 units by 2014.

Chart 19: Bar Graph: Housing Starts to Strengthen

Details of the Ontario Economic Outlook

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

TABLE 8.    The Ontario Economy, 2009 to 2014
(Per Cent Change)
  Actual Projection
  2009 2010 2011 2012 2013 2014
Real Gross Domestic Product (3.6) 2.8e 2.4 2.7 2.7 2.6
Personal Consumption 0.1 3.1e 2.7 2.5 2.8 2.5
Residential Construction (8.1) 9.9e (0.6) 2.6 3.5 2.8
Non-residential Construction (18.4) 5.4e 8.9 5.6 5.4 4.2
Machinery and Equipment (19.0) 10.1e 10.8 5.2 6.5 6.1
Exports (13.2) 11.2e 4.9 5.4 4.6 3.6
Imports (10.8) 15.1e 4.2 4.5 3.8 3.4
Nominal Gross Domestic Product (1.1) 6.1e 4.6 5.1 4.8 4.6
Other Economic Indicators            
Retail Sales (2.5) 5.0 4.1 4.3 4.0 3.9
Housing Starts (000s) 50.4 60.4 58.6 63.8 66.5 68.6
Personal Income (0.2) 4.0e 4.2 4.4 4.6 4.5
Labour Income (1.0) 4.0e 4.3 4.7 4.8 4.6
Corporate Profits (13.6) 15.1e 12.2 9.2 5.9 5.2
Consumer Price Index 0.4 2.5 2.3 2.1 2.0 2.0
Employment (2.5) 1.7 1.7 1.8 1.8 1.7
Job Creation (000s) (164) 108 116 118 126 120
Unemployment Rate (Per Cent) 9.0 8.7 8.2 7.7 7.1 6.7
Key External Variables            
WTI Crude Oil ($ US per Barrel) 61.8 79.4 99.7 102.2 100.6 100.1
U.S. Real Gross Domestic Product (2.6) 2.8 3.1 3.3 3.2 3.1
Canadian Dollar (Cents US) 87.6 97.1 100.0 99.7 99.3 98.1
3-month Treasury Bill Rate* 0.3 0.6 1.4 2.6 3.7 4.2
10-year Government Bond Rate* 3.3 3.2 3.5 4.1 4.7 4.9
e = estimate.
* Government of Canada interest rates (per cent).
Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, New York Mercantile Exchange, U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (March 2011) and Ontario Ministry of Finance.

Private-Sector Forecasts

The Ministry of Finance tracks private-sector forecasts to inform the government’s planning assumptions. Private-sector forecasters are projecting, on average, that Ontario real GDP will grow by 2.6 per cent in 2011, 2.8 per cent in 2012, 2.8 per cent in 2013 and 2.7 per cent in 2014.

TABLE 9.    Private-Sector Forecasts for Ontario Real GDP Growth
(Per Cent)
  2011 2012 2013 2014
BMO Capital Markets (March) 2.9 2.6
Central 1 Credit Union (February) 2.8 2.6 2.3 2.9
Centre for Spatial Economics (January) 2.9 3.3 2.4 1.9
CIBC World Markets (February) 2.3 2.7
Conference Board of Canada (February) 2.1 2.7 3.5 2.9
Desjardins Group (March/December) 2.6 2.5 2.5 2.5
IHS Global Insight (January) 2.6 2.9 2.9 2.8
RBC Financial Group (March) 3.1 3.1
Scotiabank Group (March) 2.8 2.3
TD Bank Financial Group (March) 2.9 2.4
University of Toronto (February) 2.1 3.2 3.4 3.3
Private-Sector Survey Average 2.6 2.8 2.8 2.7
Ontario's Planning Assumption 2.4 2.7 2.7 2.6
Sources: Ontario Ministry of Finance Survey of Forecasts (March 2011) and Ontario Ministry of Finance.

The Ministry of Finance consults extensively with private-sector economists to ensure reasonable and accountable economic projections. The Minister of Finance met with private-sector economists in the process of preparing the 2011 Budget. Additionally, the Ontario Economic Forecast Council, established as part of the Fiscal Transparency and Accountability Act, 2004, reviewed the Ministry of Finance’s economic assumptions in March 2011. The Economic Forecast Council is composed of Peter Dungan, Policy and Economic Analysis Program, University of Toronto; Glen Hodgson, The Conference Board of Canada; and Ernie Stokes, The Centre for Spatial Economics. All council members found the assumptions to be reasonable.

Comparison to the 2010 Ontario Budget

TABLE 10.    Changes in Key Economic Forecast Assumptions 2011 Budget Compared to 2010 Budget
(Per Cent Change)
  2010 2011 2012
Actual 2010
Real Gross Domestic Product 2.7 2.8e 3.2 2.4 3.2 2.7
Nominal Gross Domestic Product 4.4 6.1e 5.0 4.6 5.3 5.1
Retail Sales 3.9 5.0 4.6 4.1 4.7 4.3
Housing Starts (000s) 58.0 60.4 60.0 58.6 70.0 63.8
Personal Income 3.3 4.0e 4.3 4.2 4.8 4.4
Labour Income 2.7 4.0e 4.6 4.3 5.2 4.7
Corporate Profits 31.0 15.1e 10.5 12.2 9.0 9.2
Employment 1.1 1.7 2.1 1.7 2.3 1.8
Job Creation (000s) 73 108 139 116 155 118
Key External Variables            
WTI Crude Oil ($ US per Barrel) 82.1 79.4 85.7 99.7 86.9 102.2
U.S. Real Gross Domestic Product 3.1 2.8 3.0 3.1 3.4 3.3
Canadian Dollar (Cents US) 96.0 97.1 97.5 100.0 98.0 99.7
3-month Treasury Bill Rate* (Per Cent) 0.6 0.6 2.2 1.4 3.5 2.6
10-year Government Bond Rate* (Per Cent) 3.7 3.2 4.2 3.5 4.8 4.1
e = Ontario Ministry of Finance estimate.
* Government of Canada interest rates.
Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, New York Mercantile Exchange, U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators (March 2011) and Ontario Ministry of Finance.


1 Based on information available to March 4, 2011.
2 For planning purposes, the Ontario Ministry of Finance forecast is based on the average crude oil futures contract over the two-week period ending March 4, 2011.
3 In 2010, 20 to 25 per cent of Ontario’s crude oil supply was estimated to be priced off the Brent crude oil benchmark, with the balance priced off the North American WTI crude oil benchmark.