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

INTRODUCTION

This chapter provides a projection of Ontario’s long-term macroeconomic outlook to 2035. The projection is based on a set of reasonable assumptions that together determine the path of the Ontario economy’s potential output — the highest level of production that can be sustained without creating inflationary pressures. This long-term projection does not attempt to predict the recurring cycles of strong or weak economic growth that will likely occur over the next 20 years. Rather, it shows the average or expected trends for the economy over the next two decades.

The projection shows an economy that will grow somewhat more slowly than in the past, primarily as a result of slower growth in the working-age population. This moderation in the growth of available workers will be a significant challenge, but can be met by enhancing the productive capacity of the labour force through innovation, enhanced management practices, skills training and increases in investment.

The Ontario government has created a plan to spur economic growth, create jobs and strengthen services that help families. That plan is based on three core priorities:

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.

  • Investing in people;
  • Investing in modern infrastructure; and
  • Creating a dynamic and innovative business climate.
Table 2.1 Ontario's Long-Term Economic Outlook
  Actual (Average) Projection (Average)
Average Growth (Per Cent) 1982–2013 2014–17 2018–22 2023–27 2028–32 2033–35 2014–35
Real GDP 2.6 2.5 2.1 1.9 2.1 2.1 2.1
Nominal GDP 5.3 4.2 4.1 3.8 4.0 4.1 4.0
Labour Force 1.5 1.0 0.9 0.7 0.8 1.0 0.9
Labour Productivity 1.2 1.0 1.1 1.1 1.2 1.1 1.1
Employment 1.5 1.4 1.0 0.8 0.8 1.0 1.0
Unemployment              
Rate 7.7 6.7 5.7 5.3 5.1 5.1 5.6
Consumer Price Inflation 3.0 1.9 2.0 2.0 2.0 2.0 2.0
Note: Projections for the 2014–17 period are the government's current planning assumptions.
Sources:
Statistics Canada and Ontario Ministry of Finance.

This chapter begins by discussing the global economy and the external environment (e.g., commodity prices, the exchange rate and interest rates) that shape the backdrop of the long-term economic projection. Section 2 reviews the components of Ontario’s potential economic output: labour supply, productivity and availability of capital, both public and private. Section 3 provides details of the Ontario economic outlook. As future growth in productivity is so critical to the long-term prosperity of the province, Section 4 explores the impact of different labour productivity assumptions on the long-term economic outlook. The final section reviews some of the long-term risks to the economic projection.

1. The Global Economy and the External Environment

Ontario is part of an integrated global economy. Strong trade and financial market links to the rest of Canada, the United States and the global economy provide access to low-cost capital, large export markets for Ontario products, and a range of imports and investment opportunities. These linkages can also lead to both positive and negative effects (e.g., the 2008–09 global financial crisis). This section reviews some of the key external assumptions that underlie this long-term economic projection.

Table 2.2 Assumptions Overview: Key External Factors
Components Assumptions
Global Economy Global real GDP growth to average 3.1 per cent annually over the 2014–35 period. Growth in China is expected to slow from about 10 per cent a year historically to 6.5 per cent annually over the 2014–35 period.
U.S. Economy Real GDP growth to average 2.4 per cent annually during the 2014–35 period, compared to 2.8 per cent historically.
Oil Prices Oil prices to approach $175 per barrel (nominal U.S. dollars) by 2035. Projection assumes increasing long-term real prices.
Canadian Dollar Canadian dollar to remain in the 90 to 100 cents US range through 2035.
Rest of Canada Real GDP growth to average 2.2 per cent annually during the 2014–35 period.
Interest Rates Interest rates to rise from recent historical lows as inflation returns to about two per cent on average.

It is beyond the scope of projections of this nature to quantify the risks of global political disruptions, extreme weather due to climate change, major health emergencies such as pandemics, disruptive technologies or an increase in international conflicts. Any of these factors, in addition to other unforeseen risks, could significantly impact the long-term outlook for the Ontario economy.

World Economic Growth

This projection assumes that long-term global real growth will average 3.1 per cent annually. Among the major advanced economies there is a contrast between some regions, including most importantly the United States, which are expected to grow fairly robustly, especially in the near term, and others, most notably Europe and Japan, which are expected to post only modest growth in the long term. Emerging markets are generally expected to continue their strong rates of economic growth, albeit at a more moderate pace than over the last decade.1

Over the medium term, emerging market economies are expected to reduce their reliance on investment- and export-led growth, shifting more to domestic consumption as the wealth of their population increases. On the other hand, advanced economies are expected to continue to consolidate government spending and limit domestic consumption, relying more on exports to drive their growth. The uncertain pace of this global rebalancing is a significant risk to the world economic outlook.

United States

The United States is expected to remain Ontario’s largest trading partner, even as Ontario continues to diversify its trade towards the relatively fast-growing emerging market economies.

The U.S. economy is expected to grow relatively robustly in the medium term before trending lower to its long-term potential. Over the 2014 to 2035 period, the U.S. economy is expected to grow 2.4 per cent per year on average. As Ontario’s major export market, this will help support the province’s long-term economic growth.

The United States is well positioned for long-term growth, mostly as a result of strong productivity growth. According to the U.S. Congressional Budget Office (CBO), long-term U.S. potential economic growth is expected to average about 2.2 per cent per year, supported by solid labour productivity growth of 1.7 per cent per year on average.2 The U.S. labour force is expected to grow at a 0.5 per cent average annual pace during this period, lower than the average 0.8 per cent pace recorded between 2002 and 2013. This slower pace of labour force growth is mainly due to the retirement of baby boomers lowering the aggregate participation rate and a plateauing in the participation rate of women.

Europe, Asia and Emerging Markets

Europe is emerging from the recent recession but continues to face long-term challenges including high unemployment and fiscal imbalances. In addition, the Eurozone financial system remains fragile and vulnerable to future disruptions. This projection assumes that real growth in the European Union will average 1.6 per cent annually between 2014 and 2035.

Long-term economic growth in Japan is expected to be the slowest among major advanced economies, averaging only 0.7 per cent per year between 2014 and 2035. This reflects a pronounced aging of its population, offshoring of high-productivity manufacturing and the ongoing drag from high levels of public-sector debt.

Emerging market economies will represent an increasingly critical component of the global economy. China’s share of global output is expected to grow from 15 per cent in 2013 to 27 per cent by 2035. Over this same period, the U.S. share of the global economy is expected to decline from 19 per cent to 15 per cent.3

The rising global share of emerging market economies underscores the importance of current trade policies and investments in Ontario’s export sector to promote greater trade diversification. In particular, greater integration into global value chains (GVCs)4 will be an essential element in Ontario businesses’ ability to profit from this trend. Ontario’s diverse economy is well positioned to take advantage of this shift in the global economy through increased exports of goods and services from sectors such as agri-food, infrastructure, life sciences, information and communications technology, education, advanced manufacturing and financial services.5

Growth in emerging markets, particularly China, is expected to outpace that of advanced economies as these economies continue to converge to developed countries’ levels of productivity and consumption. However, an aging population, rising unit labour costs and limits to export-led growth will likely result in a slowing of the current rapid pace of economic expansion. This projection assumes that emerging economies will continue to grow at a brisk, although more moderate, long-term pace. China’s growth, in particular, is expected to slow to 6.5 per cent per year on average relative to the 9.6 per cent average annual growth recorded between 1997 and 2013.

Energy and Commodity Markets

Energy and commodity prices play an important role in long-term economic projections. Prices for raw materials such as agriculture, metals and forestry products are important determinants of income for Ontario producers. Energy products, particularly oil and natural gas, are a significant expenditure for both consumers and industry. In 2010, fossil fuels and related products directly represented 4.4 per cent of total Ontario business costs.

Over the long term, continued growth in the world economy, increased urbanization, rising incomes in the developing world, and expanded use of biofuels should combine to support a long-run increase in both the production and price of agricultural products.

Growing demand for natural gas for heating and electricity generation combined with the development of shale gas will influence the long-term path of natural gas prices. These are projected to increase from $3.7 US per thousand cubic feet in 2013 to $7.1 US per thousand cubic feet by 2035. This annual rate of increase is faster than economy-wide price inflation.

Over the long term, oil prices in real terms are expected to rise modestly as the resource becomes increasingly costly to extract. However, new energy-efficient technologies will partially temper this price increase. This projection assumes nominal West Texas Intermediate (WTI) crude oil prices will rise to $175 US a barrel by 2035. Implicit in this projection is the assumption that resource-rich provinces will benefit from rising prices by accessing new international markets for their oil production.

The Bank of Canada commodity price index shows the increasing importance of crude oil over the past 40 years relative to other commodities, in terms of the value of Canada’s total commodity production. This shift largely reflects the increase in oil prices since 2002.

As a net importer of oil, the Ontario economy tends to be hurt by higher oil prices as they raise costs for business and households. Moreover, rising real oil prices tend to boost the exchange rate of the Canadian dollar, with adverse effects on Ontario’s net international trade. Offsetting these negative effects is increased demand for Ontario-made manufactured goods and services from oil-exporting provinces. Ontario has also reduced its energy intensity over time, in part as a response to higher prices, a trend expected to continue in the future.

The United States is currently producing more crude oil than at any other time over the last 25 years, largely as a result of new methods to extract the resource from shale formations. This has led many in the energy industry to project that the United States will eventually become a net energy exporter after years of relying on imports to satisfy domestic demand. However, others have argued that production from some of these shale formations appears to be declining at a much faster rate than conventional oil recovery. This has resulted in considerable uncertainty about long-term U.S. energy production and the impact of changes in energy prices on the U.S. economy.

Global Inflation and Interest Rates

Central bank policy interest rates are close to historic lows in advanced economies. Over the next few years, inflation is expected to gradually rise as improving growth in advanced economies slowly closes the output gap opened by the 2008–09 global financial crisis. Over the long term, this projection assumes that monetary policy will ensure inflationary expectations in Canada remain well anchored near two per cent annually.

As global economic growth continues and inflation rises, policy interest rates are expected to gradually rise to levels consistent with the “normal” level of real interest rates prevailing over the long term. This will take longer for some countries such as Japan and certain members of the Eurozone, reflecting the slower pace of their recoveries.

However, there is also a risk, not explicitly considered in this projection, that interest rates could remain low for a prolonged period. Proponents of this view argue that declining population growth and lower returns from new technologies will reduce demand for new investment and create an excess of savings globally.

Canadian Dollar

Over the long term, the Canadian dollar is expected to remain mainly within a range of about 90 to 100 cents US. Although the Canadian dollar has fallen below 90 cents US recently, the expected rise in commodity prices should act to return the dollar to within this range.

A lower Canadian dollar acts to increase the price of imported consumer products and also business inputs such as machinery and equipment. On the other hand, a lower Canadian currency can help exporters compete in foreign markets.

For the purposes of this long-term outlook, it is assumed that the Canadian dollar will rise slowly over the projection to just below parity by 2035. This appreciation is consistent with commodity prices continuing to rise modestly in real terms and a small but persistent yield premium for Canadian government debt relative to U.S. treasuries.

The Canada/U.S. exchange rate remains a critical part of the economic projection since the United States will continue to be a major destination for Ontario exports. As of 2013, the United States was the destination for 78 per cent of Ontario’s total merchandise exports and the source of 56 per cent of Ontario’s merchandise imports.

The appreciation of the Canadian dollar since 2002 resulted in a deterioration of Ontario’s cost competitiveness, particularly in manufacturing. Improving competitiveness is one of the most significant challenges facing the Ontario economy over the next 20 years. The exchange rate is expected to remain at the relatively high levels experienced over the last several years. Consequently, Ontario’s competitiveness challenges will need to be addressed through raising productivity growth.

Rest of Canada

The rest of Canada will continue to be a vital market for Ontario goods and services.6 This projection assumes a recovery in global growth led by the United States, as well as relatively strong commodity prices, both of which should support growth in the rest of Canada.

Real economic growth in the rest of Canada is expected to average 2.2 per cent per year from 2014 to 2035, slightly higher than Ontario’s projected long-term economic growth rate. This is primarily as a result of the beneficial impact of higher oil and natural gas prices on other provincial economies.

2. Ontario’s Potential Economic Output

Economists refer to growth in “potential output” as essentially the speed limit at which the economy can grow in the long term without increasing the rate of inflation. The main building blocks of growth in long-term potential output are the growth in the labour supply (which depends on growth in the working-age population and the evolution of the unemployment and labour force participation rates); the growth in private and public capital (e.g., machinery, equipment, plants and public infrastructure); and the efficiency with which workers use capital to produce output (that is, worker productivity).

Population and Labour Supply

As outlined in Chapter 1: Population and Labour Force Trends and Projections, one of the most important long-term economic challenges for Ontario is the slowing growth of the working-age population.

A gradual decline in the overall labour force participation rate, largely as a result of slower growth in the working-age population for most of the forecast horizon, results in a significantly slower rate of growth in the labour force than Ontario has experienced in the past. However, a small increase in the growth rate of the working-age population towards the end of the next decade begins to reverse this trend. In addition, the projection assumes a steady decline in the long-term trend value for the unemployment rate through the middle of the next decade.7

Capital and Investment

The availability of capital, both private and public, and its composition are important factors in determining potential economic output. Growth in the private capital stock is based on the pace of new investment, which is driven mainly by expected after-tax returns.

Ontario and Canada’s financial markets are well regulated and foster safe, stable and attractive investment opportunities. The government remains committed to modernizing securities laws and the regulatory framework to ensure sound and efficient markets.

Attracting business investments also depends, in part, on maintaining, renewing and developing public infrastructure. The Province has already made — and is continuing to make — significant infrastructure investments to support economic growth. Businesses expect continued investment in public infrastructure, particularly in transportation, to help maintain current networks in a state of good repair and to expand them to meet future needs.

Productivity

The rate of productivity growth is a key component in determining Ontario’s
long-term potential economic output. The importance of strong productivity growth in the future is even more pronounced, given the expected decline in the growth of the labour force.

Ontario’s business-sector productivity growth has been weak over the last decade, averaging annual growth of only 0.4 per cent between 2001 and 2011, down from 1.3 per cent between 1985 and 2000. The causes of this slowdown are further explored in Chapter 5: Productivity in Ontario: Challenges and Opportunities.

Ontario’s productivity is projected to grow by 1.1 per cent on average annually between 2014 and 2035, two-tenths lower than the 1985–2000 historical average. Productivity growth will be driven by innovation, adoption of best practices, development of new products and the diversification of Ontario exports to fast-growing emerging economies. Long-term Ontario labour productivity growth will also benefit from ongoing private investments, public investments in infrastructure, education, skills training and new trade agreements.

Given the inherent uncertainty of productivity projections, the implications of both lower and higher rates of productivity growth for the economy are explored through scenarios later in this chapter.

Public Infrastructure’s Role in Productivity Growth

Public infrastructure investment plays an important role in long-term productivity growth and competitiveness. It enables the concentration of economic resources and provides larger markets for output and employment. For example, efficient transportation systems help firms get their products and services to market faster, access talented employees and increase productivity. At the same time, social infrastructure such as hospitals and schools increases the health status and educational attainment of residents, which in turn contribute to enhanced employment opportunities.

Between 1945 and the early 1970s, Ontario experienced rapid growth in its economy and population, triggering the investments that make up the core of Ontario’s current infrastructure. In the early 1970s, public infrastructure investments as a percentage of gross domestic product (GDP) began to fall sharply and remained low until the early 2000s, when investment as a percentage of GDP began to return to historical levels (Chart 2.8).

Since 2003, the Province has invested nearly $100 billion in public infrastructure to reverse the underinvestment that had accumulated over previous decades. Investing in public infrastructure offers long-term benefits to Ontario’s economy and helps to increase private-sector productivity and competitiveness.

Many studies on the infrastructure-productivity link conclude that public infrastructure reduces the cost of production in the private sector. As the private sector has more public infrastructure investment to work with, output is produced at a lower private cost, resulting in productivity improvements. For example, a 2009 Statistics Canada study estimated that, on average, 50 per cent of Canada’s multifactor productivity growth, representing 10 per cent of labour productivity growth overall, in the private sector between 1962 and 2006 was the result of growth in public infrastructure.8

3. Details of the Ontario Economic Outlook

The Ministry of Finance is projecting long-term average annual real gross domestic product (GDP) growth of 2.1 per cent between 2014 and 2035 in Ontario, slower than the 2.6 per cent average growth from 1982 to 2013. Ontario economic growth is forecast to rebound in the medium term before trending towards a sustainable long-term potential growth rate of 2.1 per cent annually.

This deceleration is the result of slower growth in the source population and a declining participation rate, offset by a declining unemployment rate. Growth in labour productivity is expected to remain a key component of long-term economic growth.

Over the projection period, a rebound in the growth of net trade is expected to partially offset weaker growth in household and government spending, and business investment. Final consumption expenditures are expected to grow by 2.0 per cent in the long term, in line with the rise in real incomes. Gross fixed capital formation is expected to grow 2.4 per cent per year between 2014 and 2035, driven by both public- and private-sector investment.

International and interprovincial trade will remain important sources of economic growth for the Ontario economy. Globalization and the rising importance of global value chains (GVCs) will continue to change the nature of international trade. An increasing share of goods and services exports is integrated into the production of other goods and services, as opposed to being sold directly to final consumers. These exports will increasingly include knowledge-intensive, innovative Ontario products that are incorporated into higher value-added products.

Within global value chains, emerging market economies will increase their role as the world’s major manufacturing assembly location. In the next 20 years, emerging economies are also expected to be one of the world’s fastest-growing consumer markets. The rapid growth of higher-income consumers, who will demand more high-quality goods and services, will be an important driving factor in world manufacturing and a major contributor to regional economic growth.9 This growth will open opportunities for Ontario companies to increase their participation in global value chains.

Economic growth in the rest of Canada and the United States will also support rising growth in Ontario exports. An improvement in Ontario productivity will help to mitigate the impact of a stronger Canadian dollar on Ontario’s cost competitiveness. Ontario real exports are projected to increase by an average of 2.6 per cent per year over the next 20 years.

Ontario Trade Missions

The government is supporting trade missions to key markets worldwide to promote the Ontario economy as an internationally competitive source of products and innovative solutions, a strategic location for investment, and a leading partner for collaborative research and innovation in priority sectors. Markets include Asia, the European Union, Russia, the Middle East, Latin America and the United States. Recently, Ontario led trade missions to Paris, Stuttgart, Tokyo, San Francisco and Israel.

The Province is also helping Ontario firms capitalize on export opportunities through International Marketing Centres (IMCs) that help cultivate global business connections. These include a new IMC opening in São Paulo, Brazil. The Brazilian economy promises to generate strong demand in areas where Ontario has expertise, including infrastructure development, information technology, agri-food, mining, and financial services. Ontario also has IMCs in New York, San Francisco, Mexico City, London, Paris, Munich, Beijing, Shanghai, Tokyo and New Delhi, including a satellite office in Mumbai.

Continued, albeit more moderate, economic growth will support gains in real GDP per capita.

Real GDP per capita grew from $31,700 in 1981 to $46,000 in 2013. The Ministry of Finance projects real GDP per capita will further grow to $57,600 by 2035.

The pace of long-term economic growth will support continued gains in the job market. Employment growth in Ontario is expected to average 1.0 per cent per year between 2014 and 2035, and the unemployment rate is expected to trend down to 5.1 per cent.

4. Alternative Growth Scenarios

In this section, two alternative scenarios of high and low growth are developed based on alternative paths for labour productivity growth. These alternative scenarios highlight the critical importance of productivity growth to the long-term prosperity of Ontario.

In the base-case projection, long-term labour productivity grows at an average annual rate of 1.1 per cent between 2019 and 2035, slightly lower than the pace of growth between 1985 and 2000, but stronger than the pace of productivity growth over the past decade.

High-Growth Scenario

In this scenario, higher investments by government and business and higher returns from new technologies lead to labour productivity growth that is 0.3 percentage points stronger on average than in the base case over the 2019 to 2035 period.10 The pace of industrial restructuring is also assumed to be more rapid than in the base case, facilitating the transition of workers and capital to new emerging industries (see Chapter 3: The Changing Shape of Ontario’s Economy).

Stronger business investment occurs in part because of a robust private-sector response to Ontario’s competitive tax environment. New investment opportunities are also created by new trade agreements. As well, unit labour costs are expected to rise in Asia, which allows Ontario to benefit from the “on-shoring” of capital-intensive manufacturing both directly and through links to North American global value chains. Future investment would also benefit from Ontario’s strong and stable financial sector, and the government’s commitment to modernize securities laws and regulations.

Higher productivity in this scenario would also be supported by the robust pace of investments in infrastructure, which research has linked to higher rates of economic and productivity growth. For example, a 2013 Conference Board of Canada report studying Ontario’s recent and planned infrastructure investments (2006 to 2014) found that each $100 million (inflation-adjusted) investment boosts real GDP by $114 million in the near term. The report estimated that the impact of these investments alone increases the real productive capacity of the province by 1.2 to 3.0 per cent in 2014.11

Stronger investment leading to higher productivity would allow Ontario to expand its trade globally. Stronger exports, including to fast-growing emerging market economies, would in turn lead to stronger productivity and even more exports.

Finally, stronger economic growth would make Ontario a more attractive destination for immigrants from other countries and provinces. This would lead to a faster pace of underlying population growth and higher growth in the labour force, a key determinant of long-term potential output.

Low-Growth Scenario

The rate of productivity growth in Ontario has been relatively weak over the last decade. Between 2001 and 2011, Ontario business sector labour productivity increased by just 0.4 per cent a year on average. In this low growth scenario, labour productivity is assumed to grow at an average annual pace of 0.8 per cent a year between 2019 and 2035, or 0.3 percentage points a year more slowly than the reference case. Given recent historical experience, there is a risk that productivity growth could be even lower.

If Ontario does not make important private and public investments, future growth in labour productivity is likely to be lower than expected. This includes investments in information and communications technologies, advanced manufacturing processes and sustainable resource extraction, as well as public-sector investments in infrastructure, health and education.

Weaker private-sector investment could be the result of conditions largely outside Ontario businesses’ control, such as weak growth in the province’s major trading partners, diminishing returns to technological innovations (especially in resources and fossil fuels) or economic and geopolitical uncertainty, including the risk of a future global financial crisis.

Lower productivity growth would likely result in Ontario not reversing the loss of competitiveness that occurred as a result of the appreciation of the Canadian dollar since 2002 and the emergence of low-cost global manufacturing. Without a significant improvement in Ontario’s relative cost competitiveness, Ontario’s exports, output, employment, wage rates and other income would all be lower.

Weaker economic growth would also result in Ontario attracting fewer workers from both other countries and the rest of Canada.

Impact of Alternative Productivity Growth Assumptions

By the end of the forecast horizon, Ontario real GDP is projected to be $993 billion (2007 prices). Under the high-productivity scenario, real GDP is expected to grow to $1,071 billion (7.9 per cent above the reference case), while under the low-productivity scenario, real GDP would grow to $920 billion (7.3 per cent below the reference case). These alternative scenarios illustrate that small changes in the annual growth rate of productivity can result in considerable differences in the size of the economy over the long term and, by implication, growth in household incomes and spending as well as government revenues and program spending.

5. Risks to the Outlook

The long-term projection outlined in this chapter is based on a set of reasonable assumptions and likely economic outcomes. However, each of these assumptions could be different depending on the global economic environment. As a result, the actual long-term path for the Ontario economy could well be either stronger or weaker than this base-case projection. As noted earlier, it is not possible to quantify the risks of possible unforeseen events that could significantly impact the long-term outlook for the Ontario economy. This section highlights three key risks to the projection: technological change, emerging market competition and rising income inequality.

Technological Change

Although the apparent pace of technological change accelerated with the introduction of the internet, smartphones and biotechnology, the gains from these advances have not resulted in an acceleration of economic growth. Moreover, there is a risk that even if Ontario achieves faster growth as a result of new technologies, it will primarily be labour saving (e.g., robotics), resulting in less demand for employment.

Consequently, a significant risk to Ontario’s future economic growth depends on whether the apparent slowdown in returns to technological change is permanent or temporary. It also remains to be seen whether Ontario, Canada and other advanced economies can fully catch up to the United States in terms of productivity growth. A significant catch-up in the future would represent a large upside opportunity for Ontario’s economic projection.

Emerging Market Competition

As the developed world endures a prolonged period of relatively slow economic growth, emerging market economies in Asia, Africa, South America and the Middle East continue to expand at a relatively rapid pace. This presents Ontario with an opportunity to diversify its exports to take advantage of these rapidly growing markets. Ontario will also continue to benefit from a wealth of relatively low-cost imported products.

However, there is a risk that Ontario might not be able to fully benefit from the growth of emerging market economies, particularly if it fails to offer the goods and services these countries want, at a competitive cost. Failure to take advantage of these opportunities may also be beyond Ontario’s control. For example, there is a risk that many companies could be locked out of fast-growing emerging markets, due to licensing and foreign ownership rules.

Rising Income Inequality

Recent economic studies have suggested that rising income inequality may have a negative impact on economic growth. Rising income inequality is primarily a reflection of rapid gains in labour market earnings at the top of the income distribution. Technological change, globalization and changing social norms are believed to have contributed to the rise of income inequality. In Ontario, income inequality has remained largely unchanged over the past decade and its future path is uncertain. Attention to the effects of income inequality is important because, at some point, increased inequality can contribute to social instability, impacting economic growth. At the same time, policies to reduce inequality, although well intended, may unintentionally lessen incentives to invest, harming productivity and growth.

Appendix I: Climate Change

Climate change threatens the natural and built environment as well as the long-term sustainability of Ontario’s economy. The burning of fossil fuels for energy, heat, transportation, agricultural activity, disposing of waste in landfills and industrial activity, all contribute to climate change. In Ontario, climate change is having many impacts, including greater stress on infrastructure from extreme weather events; increased demand on emergency services; longer growing seasons for the agricultural sector; and lower lake levels. The Insurance Bureau of Canada links extreme weather events to climate change and estimates that these weather events cost Canadian insurers $1.6 billion in 2011,12 with early estimates for 2013 at $3.2 billion.

In Ontario, across Canada and around the world, jurisdictions are developing and implementing policies and programs to reduce greenhouse gas (GHG) emissions. Governments are also focusing on sustainable development to help industries remain competitive in the emerging low‐carbon economy.
The Ontario government introduced its Climate Change Action Plan (CCAP) in 2007, providing a framework for actions to reduce Ontario’s total GHG emissions and support a sustainable, clean, low-carbon economy. Specifically, the plan includes targets for reducing GHG emissions in Ontario:

  • 6 per cent below 1990 levels by 2014;
  • 15 per cent below 1990 levels by 2020; and
  • 80 per cent below 1990 levels by 2050.

The CCAP is updated through regular reports describing the Province’s progress on existing and new initiatives.

Current estimates of emission reductions suggest that Ontario is about 90 per cent of the way towards meeting its 2014 targets and 60 per cent to its 2020 targets. A significant part of Ontario’s success in reducing emissions can be attributed to the elimination of coal-fired electricity and investment in clean energy sources. Ontario’s elimination of coal-fired electricity generation is the single largest greenhouse-gas reduction measure implemented in North America to date.

The Province is making significant progress in several key areas, including developing cleaner sources of energy, expanding public transit, encouraging sustainable development and protecting green space.

Ontario continues to develop a provincial GHG emission-reduction program and build a clean economy that attracts investments, supports job creation and protects the environment. It is currently consulting on a greener diesel mandate. It also plans to be the first Canadian province to sell green bonds to help finance infrastructure projects with environmental benefits across the province. Investing in infrastructure is an economic priority that will help make the province more competitive and productive, while improving quality of life.

In 2011, the government introduced Climate Ready: Ontario’s Adaptation Strategy and Action Plan. Some of the goals of Climate Ready are to reduce loss of life, property and resources; avoid unsustainable investment; and take advantage of economic opportunities. Climate Ready outlines a framework for action across key sectors. Actions include undertaking infrastructure vulnerability assessments; strengthening the winter road network; integrating business risk-management approaches into agricultural practices; and developing guidance for storm-water management.

Taking early action to reduce the emissions of GHGs will lower the overall cost of abatement and help Ontario achieve environmentally sustainable, long-term economic growth. Climate change-related investments and supporting policies can help mitigate the impact on competitiveness, while creating business opportunities in the green economy.

Appendix II: Ontario’s Long-Term Energy Plan

Providing long-term clean, reliable and affordable power is part of the government’s economic plan for jobs and growth.

Investments to Modernize Ontario’s Electricity System

Since 2003, more than 10,000 kilometres of transmission and distribution lines have been upgraded in the province and over $11 billion has been invested in transmission and distribution networks by Hydro One alone, including the Bruce-to-Milton transmission reinforcement project. As well, about 12,000 megawatts (MW) of new and refurbished generating capacity have been added, representing investments of over $21 billion. Today, Ontario is a world leader in energy technology, innovation and smart grid solutions.

Achieving Balance

In December 2013, Ontario released an updated Long-Term Energy Plan (LTEP) and announced the Conservation First policy focusing on rate mitigation over major investments in generation or transmission to curb costs for ratepayers. This will mean pursuing lower-cost options to meet energy needs when and where they are needed and other initiatives to reduce the cost increases in electricity now and in the future. Compared to the previous plan, the 2013 LTEP is expected to reduce projected cost increases by a cumulative $16 billion in the near term (2013–17), and $70 billion by 2030.

Conserving energy not only saves money for families and businesses, but it also lowers demand on the electricity system and helps reduce GHG emissions. The Province expects to offset most of the growth in electricity demand to 2032 using programs and improved codes and standards.

  • Ontario will expand Demand Response programs to help achieve a 10 per cent reduction in peak demand by 2025. This is equivalent to approximately 2,400 MW under today’s forecast conditions — or twice the average demand of Hamilton and Kitchener combined.
  • The government will work to make new financing tools available to consumers, starting in 2015. This will allow consumers to save money on their energy bill and pay off conservation investments over time as they receive the benefits.

Nuclear refurbishments at both Darlington and Bruce Generating Stations are also planned to begin in 2016. The phasing-in of wind, solar and bioenergy projects will bring 10,700 MW online by 2021. By 2025, about half of Ontario’s installed generating capacity will come from renewable sources. 

Table 2.3 Ontario Key Economic Variables (Base Case)
Average Growth (Per Cent) (History) (Projection)
  1982–2013 2014–17 2018–22 2023–27 2028–32 2033–35 2014–35
Real Gross Domestic Product 2.6 2.5 2.1 1.9 2.1 2.1 2.1
Final Consumption Expenditure 2.7 1.7 2.1 1.8 2.0 2.1 2.0
Gross Fixed Capital Formation 3.3 2.1 2.8 2.3 2.3 2.5 2.4
Exports 3.3 3.5 2.7 2.2 2.3 2.5 2.6
Imports 4.0 2.5 2.7 2.2 2.3 2.5 2.4
Nominal Gross Domestic Product 5.3 4.2 4.1 3.8 4.0 4.1 4.0
Other Economic Indicators              
Housing Starts (000s) 66.1 63.5 71.2 73.9 73.7 71.8 71.1
Primary Household Income 5.1 4.3 4.4 3.8 4.1 4.0 4.1
Labour Market              
Participation Rate 67.5 66.2 65.8 64.8 63.7 63.4 64.8
Labour Force 1.5 1.0 0.9 0.7 0.8 1.0 0.9
Employment 1.5 1.4 1.0 0.8 0.8 1.0 1.0
Unemployment Rate 7.7 6.7 5.7 5.3 5.1 5.1 5.6
Productivity              
Real GDP per Hour 1.2 1.0 1.1 1.1 1.2 1.1 1.1
Prices              
Consumer Price Index 3.0 1.9 2.0 2.0 2.0 2.0 2.0
Note: Projections for the 2014–17 period are the government's current planning assumptions.
Table 2.4 Ontario Key Economic Assumptions (Base Case Projections)
  Projection (Average)
  2014–17 2018–22 2023–27 2028–32 2033–35
Rest-of-Canada Real GDP (Per Cent Change) 2.5 2.2 2.2 2.1 2.1
Rest-of-Canada GDP Deflator (Per Cent Change) 1.9 2.0 2.0 2.0 2.0
U.S. Real GDP (Per Cent Change) 2.9 2.4 2.2 2.2 2.2
U.S. GDP Deflator (Per Cent Change) 1.9 2.0 2.0 2.0 2.0
Canadian Dollar (Cents US) 93 94 96 97 99
90-Day Treasury Bill Rate (Per Cent) 2.1 4.1 4.2 4.2 4.2
10-Year Government of Canada Bond Rate (Per Cent) 3.7 5.1 5.2 5.2 5.2
U.S. 90-Day Treasury Bill Rate (Per Cent) 1.5 3.9 4.1 4.1 4.1
10-Year U.S. Government Bond Rate (Per Cent) 3.9 5.0 5.1 5.1 5.1
U.S. WTI Oil Price (US$ per Barrel) 97 108 127 149 170
U.S. Natural Gas Rate (US$ per mm BTU) 4.1 4.4 5.2 6.1 6.9
Note: Projections for the 2014–17 period are the government's current planning assumptions.
Table 2.5 Ontario Key Economic Variables (High Productivity)
Average Growth (Per Cent) (History) (Projection)
  1982–2013 2014–17 2018–22 2023–27 2028–32 2033–35 2014–35
Real Gross Domestic Product 2.6 2.5 2.4 2.3 2.5 2.7 2.5
Final Consumption Expenditure 2.7 1.7 2.4 2.0 2.3 2.4 2.2
Gross Fixed Capital Formation 3.3 2.1 3.7 3.0 2.9 3.3 3.0
Exports 3.3 3.5 3.0 2.7 2.8 3.0 3.0
Imports 4.0 2.5 3.0 2.4 2.6 2.8 2.6
Nominal Gross Domestic Product 5.3 4.2 4.6 4.3 4.5 4.6 4.4
Other Economic Indicators              
Housing Starts (000s) 66.1 63.5 73.1 79.7 81.0 79.8 75.6
Primary Household Income 5.1 4.3 4.9 4.2 4.5 4.5 4.5
Labour Market              
Participation Rate 67.5 66.2 65.8 64.9 63.9 63.7 65.0
Labour Force 1.5 1.0 1.0 0.9 1.0 1.1 1.0
Employment 1.5 1.4 1.1 0.9 1.0 1.2 1.1
Unemployment Rate 7.7 6.7 5.5 5.3 5.0 5.1 5.5
Productivity              
Real GDP per Hour 1.2 1.0 1.3 1.4 1.6 1.4 1.4
Prices              
Consumer Price Index 3.0 1.9 2.2 2.0 2.0 2.0 2.0
Table 2.6 Ontario Key Economic Variables (Low Productivity)
Average Growth (Per Cent) (History) (Projection)
  1982–2013 2014–17 2018–22 2023–27 2028–32 2033–35 2014–35
Real Gross Domestic Product 2.6 2.5 1.8 1.4 1.6 1.6 1.8
Final Consumption Expenditure 2.7 1.7 1.9 1.6 1.8 1.9 1.8
Gross Fixed Capital Formation 3.3 2.1 1.9 1.7 1.8 1.8 1.9
Exports 3.3 3.5 2.5 1.7 1.8 1.9 2.2
Imports 4.0 2.5 2.4 1.9 2.1 2.3 2.2
Nominal Gross Domestic Product 5.3 4.2 3.6 3.3 3.5 3.6 3.6
Other Economic Indicators              
Housing Starts (000s) 66.1 63.5 69.4 68.1 66.5 64.0 66.6
Primary Household Income 5.1 4.3 3.8 3.4 3.6 3.6 3.7
Labour Market              
Participation Rate 67.5 66.2 65.8 64.7 63.5 63.1 64.7
Labour Force 1.5 1.0 0.8 0.6 0.7 0.8 0.8
Employment 1.5 1.4 0.9 0.7 0.7 0.9 0.9
Unemployment Rate 7.7 6.7 5.9 5.2 5.1 5.1 5.6
Productivity              
Real GDP per Hour 1.2 1.0 0.9 0.8 0.9 0.7 0.9
Prices              
Consumer Price Index 3.0 1.9 1.9 2.0 2.0 2.0 2.0

1 Assumptions for the world economy and regions are from Oxford Economics. U.S. assumptions are from Blue Chip Economic Indicators and the U.S. Congressional Budget Office. Canadian assumptions are from the Ontario Ministry of Finance.

2 For a discussion of why Ontario and Canadian productivity have lagged U.S. productivity historically, see Chapter 5: Productivity in Ontario: Challenges and Opportunities.

3 Oxford Economics: Global Economic Databank.

4 GVCs are an “unbundling” of the production process into activities (e.g., R&D, design and assembly) performed in various parts of the world. Each adds value to the goods or services being produced.

5 “Advantage Ontario,” Jobs and Prosperity Council, (2012).

6 The “rest of Canada” refers to Canadian provinces other than Ontario.

7 The trend value of the unemployment rate refers to the unemployment rate consistent with stable inflation.

8 W. Gu and R. MacDonald, “The Impact of Public Infrastructure on Canadian Multifactor Productivity Estimates,” (Cat. No. 15-206-X), Statistics Canada, (2009).

9 H. Kharas, “The Emerging Middle Class in Developing Countries,” OECD Development Centre Working Paper 285, (2010): 28.

10 The alternative scenarios begin in 2019 to recognize the greater uncertainty beyond the government’s current planning assumptions.

11 P. Antunes and J. Palladini, “The Economic Impact of Ontario’s Infrastructure Investment Program,” Conference Board of Canada, (April 2013).

12 Institute for Catastrophic Loss Reduction, “Telling the Weather Story,” prepared by the Insurance Bureau of Canada, (June 2012).

Description of graphics

Chart 2.1: Projected Real GDP Growth: 2014 to 2035

This map of the globe chart shows average annual projected real gross domestic product growth rates for selected countries between 2014 and 2035. The growth rates are as follows: World 3.1%, Canada 2.2%, United States 2.4%, Ontario 2.1%, Mexico 3.1%, Brazil 3.1%, Argentina 2.5%, European Union 1.6%, Germany 1.2%, United Kingdom 2.4%, France 1.3%, Italy 0.8%, Turkey 4.0%, South Africa 3.0%, Saudi Arabia 3.5%, Russia 2.8%, India 5.5%, China 6.5%, Japan 0.7%, South Korea 2.7%, Indonesia 5.2%, Australia 2.5%.

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Chart 2.2: U.S. Real GDP

This line chart shows the reference case projection for U.S. real gross domestic product between 2001 and 2035 as well as a high and low scenario based on the average of Blue Chip Economic Indicators’ bottom and top 10% long-term forecasters. Between 1982 and 2013, U.S. real gross domestic product grew by 2.8%. Over the 2014 to 2035 period, U.S. real gross domestic product is projected to grow by 2.4% annually in the reference case, 2.8% in the high scenario and 2.0% in the low scenario.

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Chart 2.3: Proportion of Global GDP

Two pie charts compare selected countries’ real gross domestic product shares of world output in PPP exchange rate adjusted dollars in 2013 and 2035. In 2013, the real share of world gross domestic product was 19% for the United States, 15% for China, 6% for India, 5% for Japan, 13% for the Eurozone and 41% for other countries. In 2035, the real share of world gross domestic product is expected to be 15% for the United States, 27% for China, 9% for India, 3% for Japan, 8% for the Eurozone and 39% for other countries.

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Chart 2.4: Bank of Canada Commodity Price Index

This stacked line graph shows the relative value shares of crude oil, natural gas, metals, agriculture, forestry and other goods in Canadian commodity production. Since 1972, the share of total Canadian commodity production of crude oil increased from 13% to 50%, natural gas increased from 3% to 9%, metals declined from 21% to 15%, agriculture declined from 30% to 14%, forestry declined from 30% to 9%, and other commodities held steady at 3%.

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Chart 2.5: Global Central Bank Policy Interest Rates

This line chart compares global central bank policy interest rates for Canada, Japan, the United States and the Eurozone. All four central banks have lowered their policy rates to historic lows in response to the 2008–09 global financial crisis. The Japanese central bank had already been maintaining an ultra-low policy interest rate since the late 1990s. Canada and the United States are expected to increase their policy interest rates fairly rapidly towards the end of this decade to about 4.5% and keep them at this level through 2035. The Eurozone is expected to take until 2023 for their rate to rise to 4.0%. Finally, Japan is expected to slowly raise its policy interest rate to 2.3% by 2021.

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Chart 2.6: Canadian Dollar

This line chart shows the Canadian-U.S. exchange rate expressed in cents US. The Canadian exchange rate has declined from about parity with the United States in 1972 to a low of 64 cents US in 2002 before rebounding to parity again in 2011. The Ministry of Finance forecasts the Canadian dollar exchange rate will fall to 91 cents US in 2014, rebounding to 94 cents US by 2017 and climbing to 99 cents US by 2035. A shaded region between 90 cents US and parity denotes the range in which the Ministry of Finance projects the dollar will remain.

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Chart 2.7: Ontario Labour Force Growth

This bar chart shows average annual growth rates of Ontario’s labour force between 1982 and 2035.Ontario’s labour force grew on average 1.5% between 1982 and 2013. The Ontario Ministry of Finance projects Ontario’s labour force will grow at an annual rate of 1.0% between 2014 and 2017, 0.9% between 2018 and 2022, 0.7% between 2023 and 2027, 0.8% between 2028 and 2032, and 1.0% between 2033 and 2035.

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Chart 2.8: Public Infrastructure Investment in Ontario — All Contributors

This line chart shows total investment in public infrastructure in Ontario by all contributors as a percentage of GDP, from 1961 to 2012. Contributors include the federal, provincial and municipal governments, as well as broader public sector organizations. The line steadily declines from a high of 5.8% in 1963 to 3.0% in 1979. During the 1980s and 1990s, the line is mostly constant, fluctuating between 2.7% and 3.7%. A steady increase begins in 2001 to a peak of 5.4% in 2010, before settling at 4.8% in 2012.

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Chart 2.9: Growth in Ontario Real GDP: Supply Factors

Growth in real gross domestic product is projected to slow from 2.6% per year between 1982 and 2013 to 2.1% per year between 2014 and 2035.  Between these same time periods, average annual growth in source population is projected to slow from 1.6% to 1.1%, the average annual change in the participation rate is projected to decline from -0.1% to -0.2%, the average annual change in unemployment moves from -0.1% to 0.1% and the average annual growth in labour productivity is projected to slow from 1.2% to 1.1%.

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Chart 2.10: Ontario’s Real GDP Growth

Growth in real gross domestic product is projected to slow from 2.6% per year between 1982 and 2013 to 2.1% per year between 2014 and 2035. Between these same time periods, average annual growth in final consumption expenditure is projected to slow from 2.7% to 2.0%, the average annual change in gross fixed capital is projected to slow from 3.3% to 2.4%, and the average annual change in exports is projected to slow from 3.3% to 2.6%, and the average annual change in imports slowing from 4.0% to 2.4%.

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Chart 2.11: Ontario Real GDP Per Capita

This line chart shows the level of Ontario real gross domestic product per capita between 1981 and 2035 in constant 2007 dollars. Real gross domestic product per capita grew from $31,700 in 1981 to $46,000 in 2013. The Ministry of Finance projects real gross domestic product per capita will further grow to $57,600 by 2035.

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Chart 2.12: Ontario Employment

This bar chart shows the level of employment and the unemployment rate in Ontario between 2008 and 2035. The level of employment in Ontario was 6,695 and the unemployment rate averaged 7.9% between 2008 and 2013. The Ministry of Finance projects the level of employment to grow to 7,113 between 2014 and 2017, 7,490 between 2018 and 2022, 7,825 between 2023 and 2027, 8,131 between 2028 and 2032, and 8,435 between 2033 and 2035. The Ministry of Finance projects the unemployment rate to average 6.7% between 2014 and 2017, 5.7% between 2018 and 2022, 5.3% between 2023 and 2027 and 5.1% between 2028 and 2035.

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Chart 2.13: Impact of High and Low Productivity Growth

This line chart shows the impact of the high and low productivity scenarios on the level of Ontario real gross domestic product between 2007 and 2035. By 2035, Ontario’s real gross domestic product is projected to be $993 billion (2007 prices). Under the high-productivity scenario, real gross domestic product is expected to grow to $1,071 billion (2007 prices) while under the low-productivity scenario, real gross domestic product would grow to $920 billion (2007 prices).

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