: Ontario's Long-Term Report on the Economy
Chapter 2: Long-Term Ontario Economic Projection


The demographic projections outlined in the previous chapter indicate a significant challenge for future Ontario economic growth. Slower population growth and an aging population would, alone, suggest a future with slower economic growth than in the past. That is why capital investment and productivity growth will be even more important in the future.

The Ontario government has implemented significant measures to enhance future growth in the capital stock as well as productivity. The tax package announced in the 2009 Budget significantly lowers the marginal effective tax rate (METR)1 on new capital investment and is expected to result in a considerably higher rate of investment spending and a larger capital stock (see Chapter 4: Modernizing Ontario’s Tax System for Jobs and Growth).

Ontario government enhancing capital investment and productivity

As well, government investments in infrastructure will not only support the economy while it recovers from the global recession but will also boost Ontario’s productive capacity in the future, as outlined in Chapter 5: Addressing Ontario’s Infrastructure Gap. Initiatives to preserve the automobile manufacturing sector and to attract investment in the broader economy will boost future capital stock and prosperity in the Ontario economy, and the education, training and innovation-enhancing policies outlined in Chapter 6: Towards a Prosperous and Sustainable Future will support future productivity growth.

The long-term economic projection in this report suggests that the impact of demographic factors is essentially offset by growth in capital investment and productivity.

Table 1
Ontario Key Economic Variables
Projection (Average)
  1982–09* 2010–14 2015–19 2020–24 2025–30 2010–30
Real GDP Growth 2.6 3.1 2.6 2.4 2.3 2.6
Labour-Force Growth 1.6 1.3 0.8 0.7 0.7 0.9
Real Capital Stock Growth 1.8 1.8 3.1 2.5 2.6 2.5
Real GDP per Capita Growth 1.1 1.9 1.4 1.2 1.1 1.4
*Data for 2009 are Ontario Ministry of Finance's estimates except for labour-force growth.
Sources: Ontario Ministry of Finance and Statistics Canada

Developing long-term economic projections

This chapter provides a projection of Ontario’s macroeconomic growth over the 2010 to 2030 period. The projection is based on a set of reasonable assumptions about factors that determine Ontario’s economic potential and presents the consequences of these assumptions for economic growth. The Ministry of Finance’s macroeconomic model was used to develop these long-term economic projections. The results are broadly consistent with prevailing private-sector forecasts for Ontario.

This long-term projection does not attempt to predict cyclical fluctuations in the economy that will likely occur. Rather, it shows what the economy would be like when growth is averaged out over the long term. The projection focuses on commonly accepted factors that will affect the future growth of the economy, but does not attempt to explore the impact of individual extreme positive or negative events that could occur at some point in the future.

The first section looks at the fundamental determinants of long-term economic capacity, which are the supply of labour, the stock of capital and productivity. There is then a discussion of the key external factors that affect the economic projection, including the performance of the economy in other jurisdictions, commodity prices, the Canadian dollar exchange rate and interest rates. This is followed by more details of the long-term economic projection for Ontario. The final section examines risks to the economic projection and perspectives for long-term economic growth from other jurisdictions.

Ontario’s Growing Economic Capacity

Future growth in Ontario’s economic capacity, or potential output, will largely be determined by the supply of labour, the stock of capital and productivity growth.

The demographic projections outlined in Chapter 1: Demographic Trends and Projections indicate that the working-age population (ages 15 to 64) will grow at a slower pace in the future than in the past. This implies that the labour supply can be expected to grow more slowly in the future.

Taken alone and compared to the historical average, the projected slower growth in labour supply over the next 20 years would lead to nearly one percentage point slower real gross domestic product (GDP) growth in the future.

Tax measures boost business investment

The capital stock is expected to advance at a relatively faster pace in the future than in the past due largely to stronger business investment spending enhanced by the tax measures announced in the 2009 Budget. Government infrastructure investments will also support increased efficiency in the economy over the long term.2

Chart 1, bar graph: Capital Stock Offsets Slower Labour Growth - Ontario Real GDP Growth

The growth in the capital stock is expected to largely offset the impact of slowing labour-force growth. In the future, Ontario’s real GDP is expected to advance at a pace comparable to the past, using consistent assumptions on productivity growth.

Labour Supply

Slower labour-supply growth

Total supply of labour available in the economy depends on the population eligible to work and their willingness to work (i.e., labour-force participation). The population eligible to work is based largely on the demographic projections presented in Chapter 1. It is projected that there will be a declining rate of growth for the core working-age population (ages 15 to 64), which will push down its share of total population from 69.4 per cent in 2009 to 61.5 per cent by 2030. This reflects relatively low birthrates in Ontario in the 1980s and 1990s, and the passage of baby boomers into the 65 and over age group.

Chart 2, bar graph: Ontario Labour-Force Growth

The overall labour-force participation rate is expected to fall in the future as a growing proportion of the total population grows older and has weaker labour-force attachment. This decline is expected to be partially offset by an increase in the participation rate of older workers.

Increasing labour-force participation of women to continue

The two most significant trends currently affecting the total labour-force participation rate in Ontario are the increased participation rate of women aged 25 to 54 and the modest decline in the participation rate of males in the same age group. For these working-age females, the expectation is for the participation rate to increase from about 82 per cent currently to about 88 per cent in 2030, gradually closing the gap with their male counterparts. Higher educational attainment and the increasing share of single women are among the factors driving this trend. At the same time, the increased participation rate of women has been accompanied by a trend for men to take more time out of the workforce or to retire early. In recent years, the declining trend in working-age males has begun to level off and no further substantial decline is expected.

Labour-force participation to increase as economy improves

For youth, the participation rate for both males and females is expected to rise modestly from recent lows as the economy improves. By 2014, the participation rate for those aged 15 to 24 should level off as the returns to education increase. For individuals over age 65, modest increases in their level of participation are expected to continue as people live longer, healthier lives.

Chart 3, line graph: Female Labour-Force Participation Rates by Age Chart 4, line graph: Male Labour-Force Participation Rates by Age

Capital Stock

Tax cuts for new investment

The growth of the stock of capital available in the economy is determined by the pace of new investment spending. The large reduction in Ontario’s marginal effective tax rate on capital investment is expected to lead to a significant increase in new investment in plant and equipment. The government is also contributing to the increase in the Province’s physical stock of capital through substantial infrastructure investments, which will support private-sector investment and further enhance efficiency in the economy.

Chart 5, bar graph: Capital Stock

Productivity Growth

Productivity key to improving standard of living

Productivity describes the relationship between the physical inputs into production (such as capital, labour, energy and natural resources) and output. Productivity growth is the key factor that will determine the degree of improvement in Ontario living standards. Higher productivity means that workers will be producing more output and earning more income for each hour they work.3

Innovation, capital investment and education key to productivity growth

The key drivers of productivity growth are technological change, investment, and skills and knowledge. Government policy measures (outlined in Chapter 6) to encourage innovation, investment and education will all contribute to future productivity growth.

Tax measures to increase investment and productivity

The long-term projection assumes that total factor productivity (TFP) will grow by an average of 1.0 per cent per year over the next 20 years, as it has over the past three decades. There is good cause to believe that TFP growth could be stronger than assumed in this projection. The tax measures announced in the 2009 Budget are expected to increase investment and productive capacity over the medium to longer term. This suggests that future productivity growth will likely be at a faster pace than historical averages.

Factors that improve living standards may not always raise measured output. For example, global measures to combat climate change will likely result in investments and production arrangements that will improve Ontarians’ standard of living but not necessarily be captured in output measures.

External Factors that Affect the Ontario Economy

The performance of the Ontario economy is strongly influenced by external developments such as economic growth in other jurisdictions, commodity prices, the Canadian dollar exchange rate and interest rates. The assumptions about these key external factors that underlie this long-term economic projection are broadly consistent with prevailing private-sector views.

Table 2
Assumptions Overview: Key External Factors
Components Assumptions
Global Economy Global real growth to average 3.2 per cent in the 2010–30 period.
U.S. Economy Real growth to average 2.6 per cent in the U.S. over the next two decades, compared to 2.8 per cent historically.
Rest of Canada Long-term real growth to average 2.3 per cent in the rest of Canada, compared to 2.4 per cent historically.
Oil Prices Oil prices to approach $130 per barrel (nominal U.S. dollars) by 2030. Projection adopts cautious assumption of rising real oil prices.
Canadian Dollar Canadian dollar to remain in the 90 cents US to parity band through 2030.
Inflation Inflation to remain near two per cent over the long term, consistent with the Bank of Canada's target range.
Interest Rates Nominal interest rates rise from recent lows, but remain below the historical average.

World Economic Growth

Greater links to global economy

In a rapidly globalizing economy, the pace of growth around the world is becoming increasingly important to Ontario as it further expands its trade and financial market linkages with the United States and globally. As experienced over the years, and especially during the recent downturn, developments in the global economy can have a significant impact on Ontario.

According to IHS Global Insight’s projection, world real GDP will advance at an average pace of 3.2 per cent over the 2010–30 period. Meanwhile, emerging economies such as Brazil, Russia, India and China (BRIC countries) are projected to grow more rapidly over the long term, averaging 6.3 per cent annually.4

Table 3
World Output Shares — Selected Countries
Nominal GDP Shares 1990
% share
% share
% share
World 100.0 100.0 100.0
G7 Countries 60.9 52.1 34.9
United States 24.6 23.6 16.8
Japan 13.0 8.7 4.2
BRIC Countries* 6.6 15.8 33.7
China 1.6 8.4 24.3
*BRIC countries are Brazil, Russia, India and China.
Sources: IHS Global Insight World Overview, November 2009 and International Monetary Fund,
World Economic Outlook, October 2009.

IHS Global Insight expects the G7 countries’ share of global production to continue declining in the long term. The U.S. economy’s share of world GDP is forecast to decrease from just under a quarter this year to only 16.8 per cent by 2030. Burgeoning expansion in China will see its share of world output expand to over 24 per cent by 2030, as it overtakes the United States and becomes the largest economy in the world.

According to the Conference Board of Canada, “One of the most important global trends is the sagging long-term growth potential of Japan and many industrial countries in Western Europe. Economic growth potential — sustainable annual economic growth that does not feed inflation — has dipped to two per cent or lower annually for many industrial countries… Demographics are a fundamental factor in this slowing growth potential. The growth rate of the labour force is a core factor in determining any country’s long-term growth potential, so an aging population has a direct impact on a given country or region’s ability to sustain economic growth.”5

U.S. Economic Growth

U.S. will remain primary trading partner

Growth in the U.S. economy is critically important for Ontario as it is the largest destination for the province’s exports. While Ontario’s trade with non-U.S. jurisdictions is expected to continue to increase, the United States will remain the most important destination for Ontario goods and services in the long term.

Ontario’s economic projection assumes that U.S. real economic growth will average 2.6 per cent annually over the next 20 years. Though the United States is expected to remain Ontario’s primary trading partner, growth in demand from other international markets, such as China and other BRIC countries, will help diversify Ontario’s international trade.

Economic Growth in the Rest of Canada

Exports to other provinces remain strong

Other Canadian provinces will continue to be important destinations for Ontario exports. In 2008, about one-third of Ontario exports went to other provinces. This projection assumes real economic growth in the rest of Canada will average 2.3 per cent per year from 2010 to 2030. Following a period of relatively brisk growth in the near term as the other provinces emerge from recession, real growth in the rest of the country is expected to ease to just over two per cent by 2030.

Chart 6, bar graph: Rest of Canada Real GDP

Commodity Prices

A growing global economy over the long term can be expected to drive up commodity prices, including the price of oil.

Oil price predictions vary widely

Recently, oil has experienced some of the most dramatic price swings on record, with prices falling from a record high of $145 US per barrel in July 2008 to below $34 US per barrel in February 2009. Views about future trends vary dramatically. Some argue that the world is running out of oil and that demand from newly industrializing countries will push the price back up to $100 per barrel, as early as the end of 2010. Others point to past experience and argue that demand is inelastic in the short run, but that high prices eventually elicit substitution and conservation, as well as new sources of supply.

Ontario’s economic growth projection assumes that world oil prices will approach $130 per barrel (nominal) by 2030. In real terms (deflated by U.S. GDP inflation), the long-term projection adopts a cautious assumption of rising real oil prices, to nearly $84 US (2005$) per barrel by 2030, well above the historical average value.

Other key commodity prices are also expected to rise. Natural gas prices are expected to more than double from $4 US per mmBTU (nominal) in 2009 to almost $10 US by 2030.

Chart 7, line graph: Crude Oil Price — Nominal vs. Real

Oil and gas prices affect growth

Higher oil and gas prices have a negative impact on Ontario’s economy in the short term since the province consumes but does not produce oil or natural gas. U.S. demand for Ontario’s exports also tends to decline with high oil prices since the U.S. economy is also a net consumer of oil. These negative impacts are somewhat mitigated since Canada as a whole is a net exporter of oil, and Ontario exports services and manufactured goods to the rest of Canada, the demand for which rises as a result of stronger growth in the rest of Canada. As households and businesses switch to more fuel-efficient alternatives due to higher energy prices, the negative impact on the economy subsides in the longer term.

Canadian Dollar

The Canada–U.S. exchange rate is particularly important for Ontario as the United States is the destination for over 80 per cent of Ontario’s international merchandise exports, and the source of some 60 per cent of Ontario’s imports.

Canadian dollar to appreciate

The Canadian dollar has recently been trading above 95 cents US, close to where it was before the U.S. dollar plunged in early October 2008 when the financial crisis peaked. Private-sector forecasters project the Canadian dollar will average 96.5 cents US in 2010, rising to 98.5 cents US in 2012.

The Canadian dollar’s expected appreciation reflects rising commodity prices, rising deficits in the United States and the U.S. dollar’s depreciation against most major currencies.

Chart 8, line graph: Canadian Dollar

Over the long term, the Canadian dollar is expected to remain within a band ranging from 90 cents US to parity with the U.S. dollar. It is quite possible that, in the future, the exchange rate may cross the upper or lower bound of this range for brief periods, but over time it would be expected to return to this band. This is consistent with assumptions about stronger economic growth in the United States than in Canada over the next 20 years and the impact of unwinding the large U.S. current account deficit.


Inflation to remain stable

The rate of consumer price index (CPI) inflation is expected to remain near the mid-point of the Bank of Canada’s one to three per cent inflation target range over the 2010 to 2030 period. The Bank of Canada’s policy of inflation targeting is widely supported. This report assumes that monetary policy will ensure inflationary expectations remain well anchored near two per cent annually.

Chart 9, line graph: Ontario CPI Inflation Rate

Interest Rates

Historical low interest rates to rise

Interest rates have reached historically low levels recently as central banks around the world, including the Bank of Canada, have been providing monetary stimulus in the face of the global economic recession.

Short-term interest rates are expected to remain low in the near term, but gradually move up to the five per cent range in nominal terms over the medium term. The 10-year Government of Canada bond rate is expected to rise from the current 3.2 per cent average for 2009, to 5.8 per cent in the long term.

Although interest rates are expected to rise from what are currently very low levels, inflation expectations anchored at around two per cent should keep the rise in nominal borrowing rates to well below the double-digit levels experienced in the 1980s and early 1990s.

Long-Term Ontario Economic Projection

Average real GDP growth remains steady

Expanding productive capacity and global demand are expected to result in average real GDP growth of 2.6 per cent in Ontario over the 2010 to 2030 period, comparable to the average 2.6 per cent real growth observed in the past three decades. Growth is expected to be relatively strong over the 2010–14 period, averaging 3.1 per cent, as the economy recovers from the recent recession. Over the medium to long term, GDP growth is expected to moderate towards sustainable potential growth rates.

Chart 11, bar graph: Ontario Real GDP

Despite slower expected increases in the labour supply, strong growth in capital investment and productivity growth will support long-term growth in the Ontario economy. Slower growth in labour supply will also translate into reduced employment growth. However, real disposable income per capita will grow over the medium to long term.

Chart 12, line graph: Real GDP Per Capita

Structural Evolution of the Ontario Economy

The Ontario economy has been undergoing structural changes in response to domestic and external forces. While external factors such as increasing globalization resulting from trade and investment liberalization are important, domestic factors such as changing consumption patterns, reflecting demographic shifts, and the growing relative importance of high-productivity and high-skills sectors also play a critical role. These broad structural trends influence the allocation of resources and future performance of the economy.

Composition of the Domestic Economy

Trade important to economic growth

International trade will remain an important factor for Ontario’s economic prosperity. Continued expansion in the world economy and the expected increase in demand for goods and services from emerging economies will support growth in international trade.

During the 1990s, trade liberalization policies leading to agreements such as the North American Free Trade Agreement translated into a rise in Ontario’s trade as a share of GDP. However, since the early 2000s higher commodity prices and a rising dollar have contributed to a decline in imports and exports, as a share of GDP.

In recent years, economic growth has come increasingly from the domestic sector. Strong employment growth, rising incomes and low interest rates have resulted in strong growth in final domestic demand, especially in consumer spending.

The flipside of this development is that exports and imports have declined as a share of the economy, from peaks in 2000 of 73 per cent and 62 per cent respectively of nominal GDP, to about 56 per cent for both in 2008. Over the long term, these shares are projected to continue on a moderate decline to about 47 per cent for exports and 44 per cent for imports by 2030.

Chart 13, line graph: Relative Share of Exports and Imports

Ontario International Trade

Reduced reliance on exports to the U.S.

Globalization and intense export competition are challenging Ontario’s market share in the United States. Ontario has been losing market share in the United States — as is evident in the trend decline in Ontario exports’ share of U.S. imports. However, since 2002, there has been a steady increase in Ontario exports’ share of imports to international jurisdictions other than the United States (i.e., the rest of the world [ROW]).

  • Ontario’s real exports to the United States as a share of U.S. imports have declined from around 12 per cent in the mid-1990s to about nine per cent in 2008.
  • Ontario’s real exports to the ROW as a share of ROW imports have risen from around 0.2 per cent in the mid-1990s to about 0.35 per cent in 2008. Although Ontario’s 0.35 per cent ROW market share seems low, it represents some $50 billion or about 15 per cent of Ontario’s total international exports.

Real exports expected to increase

Economic growth in the rest of Canada, the United States and worldwide is expected to support growth in Ontario exports. Ontario real exports are projected to increase by an average 3.0 per cent per year over the next 20 years.

The share of Ontario’s real exports sent to other countries has been in the 70 per cent range for the past decade. However, the share of Ontario exports shipped to the United States declined from 66 per cent in 1998 to 54 per cent in 2008 and will continue decreasing to nearly 40 per cent by 2030. The share of exports shipped to other Canadian provinces has remained near 30 per cent since 1998 and is expected to stay in that range through 2030.

Share of exports to rest of world expected to almost double

Exports to the ROW are expected to continue to grow as a share of Ontario exports. By 2030, over a quarter of Ontario real exports are expected to be destined for countries other than the United States, almost doubling their current 15 per cent share.

Chart 14, line graph: Ontario Real Export Shares

Output and Trade in Goods and Services

Services to gain growing share of Ontario’s exports

The Ontario economy’s trade in services has been outpacing its trade in goods. Between 1997 and 2008, Ontario’s exports of services grew by over 80 per cent, compared to a 22 per cent increase in goods exports. As a result, services now account for almost 30 per cent of Ontario’s total exports, up from about 22 per cent in 1998. This trend is expected to continue.

Corresponding to the changes in the composition of domestic demand and exports, economic production has also evolved with a marked shift from goods-producing to service-producing industries. In 2008, the service sector accounted for 74 per cent of real GDP in Ontario, up from 65 per cent in 1988. These trends are expected to continue over the long term, with services accounting for 79 per cent of GDP in 2030 while the share of goods will decline from 26 per cent in 2008 to 21 per cent in 2030.

Chart 15, line graph: Goods - and Service-Producing Industries

More Ontario workers in service industries

The same structural shift towards the service sector is also evident in Ontario’s labour market where employment has shifted from goods-producing to service-producing industries. In 2009, the service sector employed 79 per cent of Ontario’s workforce, up from 69 per cent in 1988.

Within the service sector, the “business, building and other support services” and “professional, scientific and technical services” industries reported the strongest employment gains, each growing by four per cent per year on average since 1988.

Chart 16, line graph: Goods vs. Service Employment

Growth in high-skilled jobs exceeds other employment

The shifting composition of demand and output has also had an important influence on the demand for labour. Growth in employment in high-skilled occupations (requiring postsecondary education or management skills) has far exceeded growth in employment for workers with lower skill levels.

Employment in high-skilled occupations increased by an average annual rate of 1.9 per cent between 1987 and 2008, while employment in low-skilled occupations grew by just 1.0 per cent (Chart 17). These trends are expected to continue in the long term, leading to an increasing share of employment in high-skilled occupations.

Chart 17, line graph: Ontario Employment Growth in High-Skilled and Low-Skilled Occupations

Climate Change and Cap-and-Trade Regulation

Targets for reducing GHG emissions

In August 2007, the Ontario government introduced its Climate Change Action Plan (CCAP), which provides a framework for actions to reduce Ontario’s total greenhouse gas (GHG) emissions. The plan includes ambitious but achievable targets for reducing GHG emissions in Ontario:

  • by 2014, six per cent below 1990 levels;
  • by 2020, 15 per cent below 1990 levels; and
  • by 2050, 80 per cent below 1990 levels.
Chart 18, bar graph: Growth in Real Output and GHG Emissions

Moving to a low-carbon economy

Historically, Ontario’s GHG emissions have grown alongside real economic output, albeit at a slower pace. Ontario’s CCAP, which contains more than 70 government initiatives to reduce GHG emissions and enable a transition to a low-carbon economy, will break the historic emissions-output link.

The CCAP continues to move forward. On December 3, 2009, legislation was passed that will allow the implementation of a cap-and-trade system in Ontario that can link to emerging North American and international systems.

Capping GHG emissions to help mitigate climate change will permanently raise the price of carbon and send a market signal to shift away from carbon-intensive activities. The effects are expected to be most apparent in energy-intensive sectors of the economy. It will be important to monitor and manage these impacts as the economy transitions to a low-carbon future.

Benefits of early action outweigh costs

Evidence from leading studies finds that the benefits of strong, early action to mitigate climate change considerably outweigh the costs. Tackling climate change helps ensure sustainable economic growth for the longer term. Measures to reduce emissions are an investment — a cost incurred today to mitigate the consequences of unabated climate change in the future. Investing in these early initiatives will keep costs manageable and open up a wide range of opportunities for growth and development.6

Risks to the Economic Projection

Projections based on reasonable assumptions

The current projections are based on a set of assumptions and economic outcomes that are unlikely to materialize exactly as assumed. There are risks that could delay the return of the Ontario economy to its long-term growth path, but there are also upside risks that could lead to stronger long-term growth.

Economic growth — worldwide and particularly in the United States — could be stronger than expected, leading to a potentially quicker return to historical growth trends for Ontario’s economy.

Ontario’s exports destined for countries other than the United States have been growing in recent years and could expand more rapidly in the future, increasing Ontario’s share of their markets.

Stronger investment would boost productivity growth

Productivity growth could be considerably higher than in the past due to stronger investment sparked by supportive government policies such as Ontario’s tax cuts for business and infrastructure investments.

More rapid innovation and early adoption of new technologies could not only increase the productivity of Ontario industries beyond what is projected in this report, but also turn them into leaders in emerging sectors, further enhancing GDP and income growth.

Global imbalances due to large and unsustainable current account imbalances will continue to pose risks over the medium to long term. To resolve these imbalances, net exporting countries (particularly China) that have enjoyed large surpluses in the past will have to rely more on domestic demand while net importing countries (especially the United States) will have to focus more on supplying external demand.7 It is likely that the U.S. current account balance will improve as the U.S. dollar weakens relative to the currencies of most major trade partners. However, trade imbalances could re-emerge, particularly if China maintains its fixed exchange rate with the U.S. dollar. The long-term adjustment to a more sustainable current account balance could involve sharp adjustments and a longer period of sub-par growth.

U.S. economic growth key for Ontario

Growth in the U.S. economy is a crucial factor in Ontario growth prospects. Sub-par growth in the U.S. economy could lead to a weaker recovery in Ontario. A significant risk to the future expected growth of the U.S. economy is a slowing in the growth of the labour supply. The impact of population growth slowing and baby boomers retiring could be offset by higher rates of immigration. If this fails to happen, U.S. growth potential will be lower than expected.

Higher energy prices are a drag on the Ontario economy, raising costs for both consumers and business. Much higher energy prices would likely also mean a higher Canadian dollar, impacting negatively Ontario’s trade competitiveness and reducing net export growth.

Other Perspectives on Long-Term Economic Growth

Projections in line with private-sector forecasts

The economic projections in this document are broadly in line with the available private-sector forecasts for Ontario’s long-term economic growth (see Table 4 below).

Table 4
Comparison of Ministry of Finance Projections to Other Forecasts
2010 to 2030, Average Annual Growth (Per Cent)
Ontario Forecasts Real GDP Labour
Population Real Capital Stock
Conference Board 2.7 1.1 1.4 3.0
University of Toronto Institute for Policy Analysis 2.6 0.8 1.1 3.3
Informetrica Ltd. 3.0 0.9 1.0
Centre for Spatial Economics 2.0 0.4 0.8 1.5
Average 2.6 0.8 1.1 3.1
Ontario Ministry of Finance 2.6 0.9 1.2 2.5

Over the longer term, all countries in the Organisation for Economic Co-operation and Development (OECD) are expected to experience a similar downward trend in the growth rate of the labour force and hence challenges for sustained rates of real economic growth as a result of declining fertility rates and aging populations. Each country faces slightly different demographic factors depending on immigration policies, age structure of the existing population and differing fertility rates. The demographic assumptions largely determine the long-term forecasts for employment growth.

According to a recent report by TD Bank on Canada’s potential growth, “The longer-term ‘cruising speed’ of the economy is set to slow from about three per cent per year on average over the past two decades to about two per cent per year in 2009–2019. Much of the slowdown will be front-end loaded on the next few years, partly reflecting the legacy of the recent recession. However, potential growth will remain much slower beyond 2012 relative to its pre-2008 pace. Even adjusting for a trend slowdown in population growth over the next decade, gains in real GDP per capita — a proxy for living standards — are projected to rise by an annual average of about 1 per cent through 2019, half the two per cent pace chalked up over the previous two decades.”8

Other forecasts on long-term outlook show similar trends

The University of Toronto also released a report on the long-term outlook for the Canadian economy, stating, “In the longer term, the projection shows GDP growth entering a declining trend together with potential growth (largely due to lower labour force growth), but there are nonetheless small and steady gains made in real incomes. The longer-term projection shows a greater contribution from non-housing investment spending due in part to a more investment-friendly tax system (sales tax harmonization and lower corporate rates) which contributes to annual labour productivity growth of 1.6 per cent.”9

The Conference Board of Canada produced a long-term economic forecast for Canada, noting, “Slower population growth and the effects of an aging population will restrain labour force growth and heavily influence income and spending patterns. With the oldest members of the large baby-boom cohort now in their early 60s, the labour market is on the verge of a massive wave of retirement that will only accelerate over the next 20 years. Even if the most optimistic immigration assumptions prove accurate, this will still result in a sharp slowing in labour force growth — which, in turn, will weaken growth in GDP. However, despite the negative effect of demographic trends on the economy, growth will remain in the two per cent range due to heavy investment in machinery and equipment and technology, and by firms utilizing more highly skilled workers and more innovative production processes.”10

Table 5
Comparison of Canadian Private-Sector Projections
2010 to 2030, Average Annual Growth (Per Cent)
Canadian Forecasts Real GDP Labour
Population Real Capital
Conference Board 2.2 0.7 1.0 2.9
Global Insight 2.4 0.8 1.0 1.1
University of Toronto Institute for Policy Analysis 2.4 0.7 1.1 3.6
Informetrica Ltd. 2.0 0.6 0.8
Centre for Spatial Economics 2.0 0.5 0.9 1.6
Average 2.2 0.7 1.0 2.3

In its 2009 Long Term Fiscal Statement, the New Zealand government stated: “Population ageing is likely to cause a slowdown in economic growth because of the shift to a relatively smaller working-age population.”11

Likewise, in Australia, “Annual population growth is projected to slow to around 0.8 per cent over the next 40 years. This is largely due to the falls in fertility rates starting in the 1970s — the effects of fertility on population are manifest for a long time — which are only partly offset by increases in life expectancy. As a consequence, annual average real GDP growth is projected to slow to 2.4 per cent.” 12

Table 6
Ontario Key Economic Variables (History)
Average Growth Rates Actual (Average)
  1982–89 1990–94 1995–99 2000–04 2005–09 1982–2009
Real Gross Domestic Product 3.9 0.4 4.3 2.9 0.6 2.6
Personal Consumption 3.9 0.8 3.4 3.5 2.6 3.0
Goods 3.5 (0.2) 3.9 3.3 2.2 2.6
Services 4.3 1.8 3.0 3.7 2.9 3.3
Residential Construction 7.3 (8.2) 3.4 6.5 (1.6) 1.9
Non-Residential Construction 6.3 (11.6) 7.9 (2.6) (1.6) 0.1
Machinery and Equipment 7.9 (0.2) 11.1 1.8 (0.1) 4.4
Exports 4.9 3.8 7.9 2.1 (3.7) 3.1
Imports 6.1 3.1 7.4 2.8 (1.9) 3.7
Nominal Gross Domestic Product 9.9 2.2 5.6 4.8 2.0 5.4
Other Economic Indicators            
Retail Sales* 5.5 4.3 3.2
Housing Starts (000s) 73.3 52.6 50.8 79.7 68.7 65.9
Personal Income 9.7 2.6 4.3 4.5 3.6 5.4
Labour Market            
Participation Rate (per cent) 68.6 67.6 65.8 67.8 67.8 67.6
Labour Force 2.2 0.3 1.6 2.4 1.2 1.6
Employment 2.4 (0.7) 2.4 2.3 0.7 1.5
Unemployment Rate (per cent) 7.5 9.4 7.9 6.6 7.0 7.7
Real GDP per Capita 2.2 (1.0) 3.0 1.4 (0.4) 1.1
Real GDP per Employee 1.5 1.1 1.9 0.6 0.0 1.1
Consumer Price Index 5.7 2.4 1.8 2.5 1.6 3.1
*Retail sales prior to 1991 unavailable.
Table 7
Ontario Key Economic Variables (Projections)
Average Growth Rates Projection (Average)
  2010–14 2015–19 2020–24 2025–30 2010–30
Real Gross Domestic Product 3.1 2.6 2.4 2.3 2.6
Personal Consumption 2.5 2.8 2.2 2.1 2.4
Goods 2.5 2.1 1.8 1.8 2.1
Services 2.5 3.3 2.4 2.3 2.6
Residential Construction 3.5 1.6 2.1 1.4 2.1
Non-Residential Construction 7.9 1.3 2.2 2.6 3.4
Machinery and Equipment 9.9 2.2 3.0 3.1 4.4
Exports 3.8 2.9 2.8 2.7 3.0
Imports 4.6 2.8 2.7 2.7 3.2
Nominal Gross Domestic Product 5.0 4.5 4.7 4.6 4.7
Other Economic Indicators          
Retail Sales 4.0 4.6 4.2 4.2 4.3
Housing Starts (000s) 65.0 75.7 78.9 83.7 76.2
Personal Income 4.2 4.6 4.6 4.7 4.5
Labour Market          
Participation Rate* (per cent) 67.0 66.4 65.1 62.7 65.4
Labour Force 1.3 0.8 0.7 0.7 0.9
Employment 1.9 1.0 0.8 0.7 1.1
Unemployment Rate* (per cent) 8.0 5.2 5.2 5.0 5.8
Real GDP per Capita 1.9 1.4 1.2 1.1 1.4
Real GDP per Employee 1.1 1.6 1.6 1.6 1.5
Consumer Price Index 1.7 1.9 2.0 2.1 1.9
*The 2025–30 column shows only the end of period for the participation and unemployment rates.
Table 8
Ontario Key Economic Assumptions (History)
  Actual (Average)
  1982–89 1990–94 1995–99 2000–04 2005–09 1982–2009
Rest-of-Canada Real GDP 2.5 1.8 3.2 3.0 1.6 2.4
Rest-of-Canada GDP Deflator 3.9 2.1 1.3 3.1 2.7 2.8
U.S. Real GDP

3.5 2.4 4.0 2.6 1.1 2.8
U.S. GDP Deflator 3.6 2.8 1.7 2.2 1.2 0.9
Exchange Rate (Cents per US$) 78 81 70 69 89 78
90-Day Treasury Bill Rate (%) 10.3 7.7 4.8 3.4 2.7 6.2
10-Year Government of Canada Bond Rate (%) 10.5 8.8 6.4 5.2 3.9 7.2
U.S. 90-Day Treasury Bill Rate (%) 7.8 4.7 5.0 2.6 2.8 4.9
10-Year U.S. Government Bond Rate (%)

10.1 7.3 6.1 4.8 4.1 6.9
U.S. WTI Oil Price (US$ per Barrel) 20 19 31 71 35*
U.S. Natural Gas Rate (US$ per mm BTU) 1.8 2.2 4.7 7.4 4.0*
*Historical Average 1990–2009.
Table 9
Ontario Key Economic Assumptions (Projections)
  Projection (Average)
  2010–14 2015–19 2020–24 2025–30 2010–2030
Rest-of-Canada Real GDP 2.9 2.2 2.1 2.1 2.3
Rest-of-Canada GDP Deflator 2.2 1.9 1.9 1.9 2.0
U.S. Real GDP 2.8 2.6 2.7 2.5 2.6
U.S. GDP Deflator

1.5 1.8 1.7 1.7 1.7
Exchange Rate (Cents per US$) 96 98 99 99 98
90-Day Treasury Bill Rate (%) 2.9 4.6 5.0 5.0 4.4
10-Year Government of Canada Bond Rate (%) 4.6 5.5 5.8 5.8 5.4
U.S. 90-Day Treasury Bill Rate (%) 2.6 4.5 4.7 4.7 4.2
10-Year U.S. Government Bond Rate (%)

4.4 5.3 5.5 5.5 5.2
U.S. WTI Oil Price (US$ per Barrel) 83 94 107 123 103
U.S. Natural Gas Rate (US$ per mm BTU) 6.4 7.6 8.5 9.5 8.1

1 The METR is a comprehensive measure of the tax that applies to an incremental dollar of income from new capital investment (see Chapter 4).

2 Ontario government infrastructure investments and their corresponding long-run benefits for economic growth are outlined in Chapter 5.

3 In this document, and unless otherwise noted, “productivity” refers to “total factor productivity” (TFP, or multi-factor productivity), which measures the change in real output per unit of combined production inputs (labour, materials and capital). While labour productivity measures real output per unit of labour input, TFP looks at a combination of production inputs and is generally thought of as being a more comprehensive measure of general technological progress and efficiency.

4 IHS Global Insight, November 2009.

5 The Conference Board of Canada, “Canadian Outlook Long-Term Forecast 2009: Economic Forecast” June 2009, page ii.

6 For a comprehensive discussion of the benefits of early action, see the Stern Review: The Economics of Climate Change, HM Treasury, October 2006.

7 IMF World Economic Outlook, October 2009.

8 “A New Normal: Canada’s Potential Growth During Recovery and Beyond,” TD Economics, November 2009, p.1.

9 University of Toronto, “Long Term Outlook for the Canadian Economy: National Projection Through 2040,” PEAP Policy Study 2009-4, October 2009, p. i.

10 The Conference Board of Canada, “Canadian Outlook Long-Term Forecast 2009: Economic Forecast, June 2009,” p. ii.

11     New Zealand Treasury, “Challenges and Choices: New Zealand's Long-term Fiscal Statement,” October 2009, p. 10.

12 Australian Treasury, “Intergenerational Report,” April 2007, p. 31.

Table of Contents