Chapter II: Economic Outlook

Introduction

Ontario’s economy has struggled over the past 15 years, with its performance slipping compared to the other provinces. Growth has also been uneven across the regions and sectors of the province. Business investment has been weak, and many workers are not fully utilizing their skills in the labour market.

Ontario also faces a number of challenges that have the potential to adversely affect the province’s growth in the short term, and dampen economic prospects and prosperity in the longer term. The business community is finding it hard to compete because of regulatory barriers, a lack of tax competitiveness and the lingering effects of uncertainty related to global trade tensions. As a result, investment has underperformed, limiting labour productivity growth. Workers too often find themselves not suitably trained for today’s job market demands, which hinders income growth and contributes to higher household debt.

As interest rates and the Canadian dollar rise and the pace of U.S. growth slows, there are several risks that could affect Ontario’s economic expansion, including high household debt, volatility in the housing market and evolving global trade discussions.

Ontario’s Recent Economic Performance

Ontario’s Lagging Economic Growth since 2003

Ontario’s economic growth has been lagging behind Canada’s since 2003, when global commodity prices began to rise. Ontario’s real gross domestic product (GDP) has grown faster than that of Canada as a whole just twice since 2003, occurring only when the external economic environment was extremely favourable for the province. This relatively slow growth has resulted in Ontario’s share of Canada’s economy declining from 40.7 per cent in 2003 to 36.5 per cent in 2014. It increased to 38.6 per cent in 2017 mainly due to the adverse impact of lower commodity prices in recent years on the nominal GDP of major resource producing provinces.

Chart 2.1: Ontario Growth Outpaced Canada in Two of the Past 15 Years
Accessible description of Chart 2.1

Significant Regional Imbalances

Despite a challenging business environment, employment has grown but has not been experienced across all regions in Ontario. Between 2003 and 2017, the Greater Toronto Area (GTA) and Central Ontario (i.e., the area around the GTA) accounted for more than 93 per cent of the 915,100 net jobs created in the province. In contrast, Eastern Ontario and Southwestern Ontario gained 84,400 and 100 net new jobs respectively, while Northern Ontario saw employment decline by 23,600 net jobs.

Average growth in GDP has also varied by region, with annual growth in the GTA of 2.3 per cent between 2003 and 2017 outpacing all other regions, including Central Ontario (+2.0 per cent), Eastern Ontario (+1.5 per cent), Southwestern Ontario (+0.9 per cent), and Northern Ontario (+0.2 per cent).1

Chart 2.2: Employment Growth by Region, 2003 to 2017
Accessible description of Chart 2.2

Some Sectors Struggling

Growth has varied considerably across sectors since the recession, with the service-producing sector growing faster and creating jobs at a greater pace than goods-producing industries. Since its peak in 2004, employment in Ontario’s manufacturing sector has declined by 337,000 jobs.

Chart 2.3: GDP Growth Has Varied by Sector, 2003 to 2017
Accessible description of Chart 2.3

Weak Business Investment

Business investment in Ontario has been lagging, limiting labour productivity growth. Business investment accounted for 8.8 per cent of provincial GDP in 2017, below the long-run average of 10.0 per cent. Since the recession, investment in non-residential structures is the only category of business investment which has exceeded its historical growth rate and is now 34.0 per cent above its pre-recession peak. Machinery and equipment investment has lagged and is now just 0.6 per cent above its pre-recession peak. Business investment in Ontario has been impacted by an increasingly competitive and uncertain global economic environment. The weakness in business investment is limiting the capacity of the economy to grow and create jobs.

Chart 2.4: Ontario Real Business Investment
Accessible description of Chart 2.4

Underutilized Skills

The benefits of recent economic growth and prosperity have not been shared among all individuals and households because many workers are unable to fully participate in the labour market. In 2017, about 864,000 workers were underutilized in Ontario. This was down from the recessionary peak of 1.1 million in 2009, but still higher than the pre-recession level of 836,000 in 2008. Over the first 10 months of 2018, there were 31,000 fewer part-time positions in Ontario.

Chart 2.5: Underutilized Labour in Ontario
Accessible description of Chart 2.5

Challenges

Ontario’s economy faces a number of challenges that can adversely affect growth in the near term, and limit the province’s prospects and prosperity over the longer term. If these trends are left unchecked, Ontario will fail to live up to its economic potential, providing fewer job opportunities and lower incomes for individuals and families, and leaving businesses struggling to compete.

Near-Term Challenges

Weak Investment Limits Capacity for Growth

Ontario’s economy is operating near its full capacity. The industrial capacity utilization rate in Ontario is estimated to have risen to 85.4 per cent in the second quarter of 2018, recovering to pre-recession levels. As the economy operates near the upper bounds of productive capacity, due to previous underinvestment, opportunities for growth are limited.

Chart 2.6: Industrial Capacity Utilization
Accessible description of Chart 2.6

Continued Trade Uncertainty

Uncertainty may continue to limit business investment and operations as the new United States‑Mexico‑Canada Agreement (USMCA) on trade proceeds through ratification processes in all three countries, and businesses begin to assess the implications of the agreement for their North American operations. Some of the provisions in the agreement could reduce the opportunities for growth in supply-managed industries.

Additional trade issues, such as existing U.S. tariffs on Canadian steel and aluminum and softwood lumber, could continue to affect those sectors. Recently imposed U.S. tariffs on steel and aluminum, and associated Canadian retaliations are contributing to higher costs for Ontario industries.

High and sustained import tariffs between China and the United States would raise prices around the world, potentially disrupting global supply chains and causing a slowdown in global trade. The detrimental effect on consumer and business confidence and on business investment could reduce global growth, including in Canada and Ontario. However, Ontario may increase its exports to the United States and other partners as a result of the escalating United States-China trade dispute. Higher tariffs on U.S. imports from China may enable Ontario exporters to increase their market share in the United States, as Chinese exports become less competitive.

It is also important that open trade and partnerships exist within Canada. Leveraging interprovincial trade and reducing trade barriers between provinces will enable Ontario to stay competitive and continue to create and protect jobs. See Chapter I, Section B: Making Ontario Open for Business for details.

Uncertainty Related to a Federal Carbon Tax on Businesses

A federal carbon tax will lead to higher fuel prices and increase costs for businesses in Ontario and across the country. This is also creating uncertainty for businesses because the federal government has yet to finalize plans for its output-based pricing system for industrial emissions. The uncertainty and higher costs created by the federal carbon tax will reduce business competitiveness, adversely affecting investment and employment. There is a further risk that the businesses most impacted by the federal carbon tax will move their operations out of the province and into jurisdictions that do not have carbon taxes, negatively impacting the Canadian economy without reducing overall global emissions.

U.S. Tax Reform Reduces Canadian Competitiveness

As outlined in Chapter I, Section B: Making Ontario Open for Business, U.S. federal tax reform has changed the competitiveness landscape by reducing corporate income tax rates, temporarily allowing immediate expensing of certain assets and making other changes that favour U.S. domestic investment.

Before the U.S. federal tax reform, Ontario had a substantial tax advantage over the United States as measured by the marginal effective tax rate (METR). The average METR for Ontario was about 45 per cent lower than in the United States. The provincial industries with the largest competitive advantage compared to the United States were communication services and forestry, where METRs were respectively around 53 per cent and 48 per cent lower than in the United States. The manufacturing METR was around 47 per cent lower.

The U.S. federal tax reform greatly reduced or eliminated Ontario’s tax advantage with the magnitude of the loss of competitiveness varying by industry. Currently the average U.S. METR is just below Ontario’s, and the industries now facing the greatest competitiveness challenges are forestry, and transportation and storage, which have METRs that are now respectively 33 per cent and 21 per cent higher than in the United States. The METR for Ontario’s manufacturing industry is now 12 per cent higher than in the United States.

In response to U.S. federal tax reform and other challenges that reduced both Ontario’s and Canada’s competitiveness, Ontario’s Minister of Finance and Minister of Economic Development, Job Creation and Trade sent a letter to the federal government formally asking that it take action to address this imbalance with initiatives such as the immediate expensing of depreciable assets. Ontario is willing to work with the federal government and other provinces on initiatives such as introducing immediate expensing, before there are further impacts on jobs, investment, and growth opportunities in Ontario and Canada. See Chapter I, Section B: Making Ontario Open for Business and Annex: Details of Tax Measures for more information on the government’s plan to support tax competitiveness.

Chart 2.7: Corporate Tax Competitiveness
Accessible description of Chart 2.7

High Household and Government Debt in a Rising Interest Rate Environment

While household and government spending have supported economic growth since the recession, they have led to elevated levels of debt. Ontario’s household debt-to-income ratio has steadily risen from 156.4 per cent in 2010 to 179.9 per cent in 2017. The government’s net debt-to-GDP ratio, a measure of debt relative to the size of the economy, has also grown over this period. See Chapter IV: Borrowing and Debt Management for details. Low borrowing rates have kept debt servicing costs manageable for both households and government in recent years. However, interest rates have started to rise, putting pressure on households with significant monthly mortgage payments and other loans.

Chart 2.8: Ontario Household Debt-to-Income Ratio
Accessible description of Chart 2.8

Long-Term Challenges

Demographic Pressures

Demographic change has a significant impact on Ontario’s long-term economic and fiscal outlook. While the provincial population is projected to continue growing at a steady pace, sustained by immigration, the average age will continue to rise. Over the next 15 years, baby boomers will retire. As a result of these large cohorts leaving the provincial workforce, growth in the working-age group (15 to 64) will slow down significantly. A slower growing labour force may restrain future economic growth, unless productivity accelerates.

Population aging, driven by increasing life expectancies and low fertility rates, is projected to accelerate as baby boomers become seniors. Over the next two decades, the number of seniors in the province will nearly double, putting pressure on the government’s capacity to deliver appropriate services and programs to this fast-growing age group. Long-term population growth and aging will also affect government spending, notably on health care and infrastructure, as well as on transfer programs and services for seniors.

Chart 2.9: Growth Rate of Working-Age Population (15 to 64)
Accessible description of Chart 2.9

Labour Productivity Underperformance

Productivity growth is a key driver of increased economic prosperity and enhanced living standards. Over the past decade, Ontario’s business sector labour productivity2 growth has slowed significantly from an annual average rate of 1.4 per cent over 1998 to 2007 to 0.8 per cent in 2008 to 2017.

Over the coming years, as the growth of Ontario’s labour force slows due to population aging, productivity growth will need to strengthen further to ensure future advances in prosperity. Ontario’s open-for-business approach will help build confidence and support private-sector investment opportunities that will raise productivity growth in the future.

Regulatory Barriers Inhibit Firm Growth

Excessive government regulations create burdensome administrative cost for businesses and impede the investment and entrepreneurship that is critical for firms to grow. Regulatory barriers can also prevent people from starting businesses, and discourage existing companies when making decisions on new locations to expand their operations. According to the survey of businesses conducted by the Canadian Federation of Independent Business in 2017, about three-fifths of small business owners in Canada felt that excessive government regulations discouraged them from growing their business, and over two-thirds of owners stated that excessive government regulations significantly reduce productivity in their business. According to the same survey, Ontario’s total cost of regulations in 2017 was the highest among the provinces, followed by Quebec’s and British Columbia’s. Reducing regulatory burden through regulatory reform has been found to increase GDP, enabling employers to respond quicker to changing economic conditions. See Chapter I, Section B: Making Ontario Open for Business for more details on the government’s plan to address the regulatory burden.

Declining Research and Development Performance

Business expenditures on research and development (R&D) declined in real terms by 17 per cent in Ontario between 2005 and 2016. The province’s intensity of business expenditures on R&D, expressed as a percentage of GDP, has also generally been trending downwards since its peak at 1.7 per cent in 2001. Between 2012 and 2016, it averaged 1.1 per cent. A drop in R&D spending suggests that companies in the province could be falling behind competitors elsewhere and may be losing their ability to compete in the introduction of innovative products to the global market. In contrast, business R&D intensity in the United States averaged 1.9 per cent between 2012 and 2016, and edged up by 0.1 percentage point over this period.

Chart 2.10: Ontario Business R&D Intensity
Accessible description of Chart 2.10

Outlook

Ontario’s economy is expected to grow over the 2018 to 2021 period, with rising employment, higher incomes, improved business investment and gains in exports. A summary of Ontario’s economic outlook is presented in Table 2.1.

Table 2.1
Summary of Ontario’s Economic Outlook
(Per Cent)
  2015 2016 2017 2018p 2019p 2020p 2021p
Real GDP Growth 2.5 2.3 2.8 2.0 1.8 1.7 1.5
Nominal GDP Growth 4.6 4.4 4.1 3.8 3.8 3.5 3.2
Employment Growth 0.7 1.1 1.8 1.5 1.2 1.0 0.8
CPI Inflation 1.2 1.8 1.7 2.5 2.1 2.0 1.6

Table 2.1 footnotes:

p = Ontario Ministry of Finance planning projection based on information up to October 22, 2018.

Sources: Statistics Canada and Ontario Ministry of Finance.

Private-Sector Forecasts

The Ministry of Finance regularly consults with private-sector economists and continually tracks their forecasts to inform the government’s planning assumptions. Private-sector economists are projecting continued growth for Ontario over the forecast horizon. On average, they are calling for real GDP growth of 2.1 per cent in 2018, 1.9 per cent in 2019, 1.8 per cent in 2020, and 1.6 per cent in 2021. For prudent fiscal planning, the Ministry of Finance’s real GDP growth projections are slightly below the average of private-sector forecasts.

Table 2.2
Private-Sector Forecasts for Ontario Real GDP Growth
(Per Cent)
  2018 2019 2020 2021
BMO Capital Markets (October) 2.2 1.8
Central 1 Credit Union (October) 2.2 1.8 1.7 1.8
CIBC World Markets (October) 2.1 1.8 1.3
The Conference Board of Canada (July) 1.8 1.9 2.3 2.0
Desjardins Group (September) 2.1 1.9 1.5 0.3
Laurentian Bank Securities (September) 1.9 1.7 1.8
National Bank of Canada (October) 2.0 1.8 1.6
RBC Financial Group (September) 2.0 1.9
Scotiabank Group (October) 2.1 2.1 1.6
Stokes Economics (July) 1.9 1.9 2.0 1.8
TD Bank Financial Group (September) 2.2 2.2 1.7
University of Toronto (October) 2.2 1.9 2.1 2.2
Private-Sector Survey Average 2.1 1.9 1.8 1.6
Ontario’s Planning Assumption 2.0 1.8 1.7 1.5

Table 2.2 footnotes:

Source: Ontario Ministry of Finance Survey of Forecasters (October 22, 2018).

Global Economic Context

Developments in the global economic environment have a strong influence on the pace of economic activity in Ontario. Forecasts for key external factors are summarized in Table 2.3. These are used as the basis for the Ministry of Finance’s forecast for economic growth in the province.

Table 2.3
Outlook for External Factors
  2015 2016 2017 2018p 2019p 2020p 2021p
World Real GDP Growth (Per Cent) 3.5 3.3 3.7 3.7 3.7 3.7 3.6
U.S. Real GDP Growth (Per Cent) 2.9 1.6 2.2 2.9 2.6 1.8 1.8
West Texas Intermediate (WTI) Crude Oil ($US per Barrel) 49 43 51 68 69 68 66
Canadian Dollar (Cents US) 78.2 75.5 77.0 77.6 78.0 78.8 79.4
Three-Month Treasury Bill Rate1 (Per Cent) 0.5 0.5 0.7 1.4 2.1 2.5 2.6
10-Year Government Bond Rate2 (Per Cent) 1.5 1.3 1.8 2.3 2.8 3.3 3.4

Table 2.3 footnotes:

[1], [2] Government of Canada interest rates.

p = Ontario Ministry of Finance planning projection based on external sources.

Sources: IMF World Economic Outlook (October 2018), United States Bureau of Economic Analysis, “Blue Chip Economic Indicators” (October 2018), U.S. Energy Information Administration, Bank of Canada, Ontario Ministry of Finance Survey of Forecasters (October 22, 2018) and Ontario Ministry of Finance.

Global economic growth is expected to be strong in 2018, driven largely by a strengthening U.S. economy. According to the International Monetary Fund (IMF), global real GDP is expected to rise by 3.7 per cent annually during 2018 to 2020, followed by a 3.6 per cent increase in 2021.

Private-sector forecasters project U.S. real GDP to rise by 2.9 per cent in 2018 and 2.6 per cent in 2019, supported by tax cuts and infrastructure spending. As this fiscal stimulus fades, real GDP is expected to rise by 1.8 per cent in both 2020 and 2021. U.S. auto sales are expected to moderate, but remain at a healthy level, supporting Ontario exporters.

Chart 2.11: World and U.S. GDP Growth
Accessible description of Chart 2.11

At the same time, a number of developments have contributed to a more negative global backdrop. Escalating trade disputes between the United States and its trade partners have elevated global uncertainty, which is impacting investment decisions. These tensions have caused prices of some producer and consumer goods to rise. Recent trade issues between the United States and China are adding to uncertainty and could disrupt trade patterns, affecting global economic growth.

Interest rates in both Canada and the United States have increased over the past year. Responding to modestly higher inflation and tighter labour markets, the U.S. Federal Reserve has increased policy rates by 2.0 percentage points since December 2015. The Bank of Canada has increased rates by 1.25 percentage points over the same period. Stronger economic growth and ongoing government borrowing in the United States have contributed to rising longer term interest rates. Near-term interest rates have risen more quickly than longer term rates recently. Should this continue and short-term rates exceed long-term rates, it potentially signals a slower pace of economic activity, based on past experience.

Chart 2.12: Interest Rates Rising but Still Low
Accessible description of Chart 2.12

Private-sector forecasters expect interest rates to rise modestly over the forecast period. The three-month Government of Canada T-bill interest rate is projected to rise from 1.4 per cent in 2018 to 2.6 per cent in 2021. Recently, the Bank of Canada signalled their policy interest rate will need to rise from the current rate of 1.75 per cent to a neutral stance, which is estimated to be between 2.5 per cent and 3.5 per cent. Long-term interest rates are expected to rise from 2.3 per cent in 2018 to 3.4 per cent in 2021.

Oil prices have risen markedly over the past year with West Texas Intermediate prices increasing by 40 per cent from $50 US per barrel in September 2017 to $70 US in September 2018. Solid growth in global demand alongside concerns about international supply disruptions, such as the reimposition of U.S. sanctions on Iran and collapsing Venezuelan oil production, have contributed to the rise in oil prices. The price environment is expected to support continued robust growth in U.S. oil production. Solid gains in North American oil supply are expected to keep pace with demand and limit price increases over the projection period.

The Canada-U.S. exchange rate has declined moderately so far in 2018, and the outlook is for modest increases in the Canadian currency. The Canadian dollar is expected to average 77.6 cents US in 2018 and rise gradually to 79.4 cents US in 2021.

Moderate Real GDP Growth Projected

The Ministry of Finance is projecting steady, moderate growth in Ontario’s economy. Real GDP is forecast to rise by 2.0 per cent in 2018, 1.8 per cent in 2019, 1.7 per cent in 2020, and 1.5 per cent in 2021. Growth is expected to be more modest over the next four years due to limited economic capacity, higher interest rates and slowing U.S. growth.

Chart 2.13: Growth Projected to Moderate
Accessible description of Chart 2.13

Growth in consumer spending is expected to remain supportive but moderate given elevated household debt loads. As interest rates rise, growth in household consumption is projected to slow to an average 1.9 per cent between 2018 and 2021. Consumer spending is also expected to shift away from interest rate sensitive items, such as motor vehicles, and towards non-durables and services. Over the next four years, a tight labour market, rising wages and government policies to reduce the cost of living will support increases in disposable incomes, allowing households to improve their overall financial positions.

Residential investment is projected to decline during the 2018 to 2019 period before recording modest gains over the outer years of the forecast. As highlighted in Chapter I, Section C: Respecting Consumers and Families, there is evidence housing construction has fallen short of meeting underlying demand. Supporting stronger residential construction would help individuals and households, benefiting overall economic growth. The recent stabilization and improvement in the resale housing market is expected to continue, tempered by rising mortgage rates.

Business investment is projected to grow, supported by Ontario’s open-for-business policies and an economy operating close to full potential. Also, the resolution of United States, Mexico and Canada trade negotiations may provide a greater degree of certainty and help lift business confidence and investment over the medium term. Non-residential business investment is expected to grow by 6.2 per cent in 2018 and average 4.3 per cent annually during 2019 to 2021. Investment in machinery and equipment is expected to increase 8.2 per cent in 2018 and by an average annual rate of 3.9 per cent in the 2019 to 2021 period.

Chart 2.14: Strong Business Investment Growth Projected
Accessible description of Chart 2.14

Ontario’s economy is highly export-oriented, with important trade linkages to other provinces and countries, which provide opportunities for businesses and support jobs for the people. The recently announced USMCA on trade will support growth in Ontario exports which are expected to average 1.9 per cent annually in the 2019 to 2021 period, after growing by 1.0 per cent in 2018. The large majority of Ontario’s international exports are goods products. Ontario’s most important international trading partner, the United States is the destination for 80 per cent of all international goods exports. Maintaining a close, productive trading relationship with the United States will help support Ontario’s exporters and boost economic growth.

Chart 2.15: United States Is Ontario’s Largest Trading Partner, 2017
Accessible description of Chart 2.15

The government is concerned about the impacts of U.S. steel and aluminum tariffs and the USMCA on Ontario’s steel, aluminum and supply-managed sectors. U.S. tariffs on steel and aluminum products have been impacting Ontario’s businesses and workers by increasing costs to industry on both sides of the border. The Province has called on the federal government to support the families and workers whose livelihoods are now at risk. See Chapter I, Section B: Making Ontario Open for Business for more details.

Labour Market

The Ministry of Finance is projecting continued growth in employment which will help keep the unemployment rate low. Employment is forecast to rise by 1.5 per cent in 2018 and average 1.0 per cent annually during 2019 to 2021. The average annual unemployment rate is expected to be 5.6 per cent in 2018 and then remain at 5.5 per cent from 2019 to 2021. Historically, lower unemployment rates have been accompanied by stronger wage growth. Wages and salaries are expected to remain relatively healthy over the forecast, rising 4.8 per cent in 2018 and by an average 4.0 per cent annually over the 2019 to 2021 period.

Prices

The Ministry of Finance is projecting Consumer Price Index (CPI) inflation to be 2.5 per cent in 2018 before moderating to 2.1 per cent in 2019 and averaging 1.8 per cent annually in 2020 and 2021. Over 2014 to 2017, Ontario CPI inflation averaged 1.8 per cent annually, faster than the average CPI inflation rate of 1.4 per cent annually across the rest of Canada. High home prices and related housing expenses have played a role in elevating the cost of living in Ontario. CPI inflation for owned accommodation averaged 2.8 per cent annually from 2014 to 2017, double the comparable inflation rate in the rest of Canada.

After rising by 9.7 per cent in 2017, Ontario resale house prices are expected to decline by 3.1 per cent in 2018. This decline largely reflects weakness earlier in the year in sales of higher priced, detached homes in the Greater Toronto Area, as well as a softer sales environment due to rising mortgage rates and changes to federal mortgage regulations. As the housing market adjusts, resale home prices are projected to rebound by 1.4 per cent in 2019, 2.0 per cent in 2020 and 3.6 per cent in 2021.

Chart 2.16: Housing Costs Elevated Ontario CPI Inflation
Accessible description of Chart 2.16

Risks to Ontario’s Economic Outlook

Rising U.S. protectionism and related uncertainty around global trade likely had an impact on the Ontario economy in 2018, negatively affecting exports and investment. The recently announced USMCA on trade will lessen uncertainty in Ontario and potentially boost economic growth by prompting higher business investment and exports. Business investment growth may be reinforced by an economy nearing capacity and strong U.S. growth, prompting firms to expand spending on structures and machinery and equipment.

Interest rates rising faster than expected could have a significant negative impact on household and government spending, given historically high levels of debt. The Bank of Canada recently noted that consumption levels are currently more sensitive to interest rate increases than in the past due to elevated debt levels. Higher interest rates will raise debt service burdens which could cause reduced spending.

Housing affordability continues to pose a challenge, though declines in house prices alongside continued gains in household income this year have helped to moderate risks. Recent volatility in Ontario’s housing market could resume, posing further risks to the economic outlook.

Table 2.4 provides current estimates of the impact of sustained changes in key external factors on the growth of Ontario’s real GDP, assuming other external factors are unchanged. The relatively wide range of the estimated impacts reflects uncertainty regarding how the economy could respond to these changes in external conditions.

Table 2.4
Impacts of Sustained Changes in Key External Factors on Ontario’s Real GDP Growth
(Percentage Point Change)
  First Year Second Year
Canadian Dollar Depreciates by Five Cents US +0.1 to +0.7 +0.2 to +0.8
Crude Oil Prices Decrease by $10 US per Barrel +0.1 to +0.3 +0.1 to +0.3
U.S. Real GDP Growth Increases by One Percentage Point +0.2 to +0.6 +0.3 to +0.7
Canadian Interest Rates Increase by One Percentage Point (0.1) to (0.5) (0.2) to (0.6)

Table 2.4 footnotes:

Source: Ontario Ministry of Finance.

Details of the Ontario Economic Outlook

Table 2.5 provides details of the Ministry of Finance’s economic outlook for the 2018 to 2021 period.

Table 2.5
The Ontario Economy, 2016 to 2021
(Per Cent Change)
  Actual
2016
Actual
2017
Projection
2018
Projection
2019
Projection
2020
Projection
2021
Real Gross Domestic Product 2.3 2.8 2.0 1.8 1.7 1.5
Household Consumption 2.7 3.9 2.1 1.9 1.9 1.9
Residential Construction 7.5 1.0 (4.0) (0.3) 1.6 0.5
Non-Residential Construction (7.9) 1.7 6.2 4.5 5.0 3.5
Machinery and Equipment (4.2) 7.9 8.2 3.5 4.5 3.7
Exports 2.7 1.8 1.0 2.1 2.1 1.7
Imports 1.3 5.1 1.7 1.9 2.0 2.0
Nominal Gross Domestic Product 4.4 4.1 3.8 3.8 3.5 3.2
Primary Household Income 1.5 4.7 4.4 3.7 3.9 3.8
Compensation of Employees 1.8 4.7 4.8 4.0 4.1 3.9
Net Operating Surplus — Corporations 15.8 1.8 0.6 3.4 3.0 4.7
Other Economic Indicators — Retail Sales 6.9 7.7 4.0 3.8 4.0 3.1
Other Economic Indicators — Housing Starts (000s) 75.0 79.1 75.0 71.1 72.0 71.4
Other Economic Indicators — Home Resales 8.7 (9.8) (11.5) 14.3 4.3 4.6
Other Economic Indicators — Home Resale Prices 15.4 9.7 (3.1) 1.4 2.0 3.6
Other Economic Indicators — Consumer Price Index 1.8 1.7 2.5 2.1 2.0 1.6
Other Economic Indicators — Employment 1.1 1.8 1.5 1.2 1.0 0.8
Other Economic Indicators — Job Creation (000s) 76 128 107 87 72 58
Other Economic Indicators — Unemployment Rate (Per Cent) 6.5 6.0 5.6 5.5 5.5 5.5
Key External Variables — U.S. Real Gross Domestic Product 1.6 2.2 2.9 2.6 1.8 1.8
Key External Variables — WTI Crude Oil ($ US per Barrel) 43 51 68 69 68 66
Key External Variables — Canadian Dollar (Cents US) 75.5 77.0 77.6 78.0 78.8 79.4
Key External Variables — Three-Month Treasury Bill Rate1 0.5 0.7 1.4 2.1 2.5 2.6
Key External Variables — 10-Year Government Bond Rate2 1.3 1.8 2.3 2.8 3.3 3.4

Table 2.5 footnotes:

[1], [2] Government of Canada interest rates (per cent).

Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Canadian Real Estate Association,
Bank of Canada, United States Bureau of Economic Analysis, “Blue Chip Economic Indicators” (October 2018), U.S. Energy Information Administration and Ontario Ministry of Finance.

Comparison to the 2018 Budget

Based on updates to private-sector forecasts, the Ministry of Finance’s planning assumption for Ontario real GDP growth is 2.0 per cent in 2018, down from 2.2 per cent projected at the time of the 2018 Budget. The change in outlook reflects relatively slow growth in the first quarter of 2018 and the uncertainty related to global trade arrangements. In addition, the outlook over the 2019 to 2021 period has moved slightly lower compared to the projections in the 2018 Budget.

Key changes since the 2018 Budget include:

  • Lower real GDP growth in 2018 with slightly lower average growth over the outlook period;
  • Lower nominal GDP growth over the outlook period, notably in 2020 and 2021, to incorporate new private-sector forecast information; and
  • Modestly lower Canadian dollar and interest rates over the outlook period.
Table 2.6
Changes in Ontario Ministry of Finance Key Economic Forecast Assumptions: 2018 Budget Compared with 2018 Ontario Economic Outlook and Fiscal Review (FES)
(Per Cent Change)
  2018p
2018
Budget
2018p
2018
FES
2019p
2018
Budget
2019p
2018
FES
2020p
2018
Budget
2020p
2018
FES
2021p
2018
Budget
2021p
2018
FES
Real Gross Domestic Product 2.2 2.0 1.8 1.8 1.9 1.7 1.7 1.5
Nominal Gross Domestic Product 4.1 3.8 3.9 3.8 4.0 3.5 3.9 3.2
Retail Sales 4.3 4.0 3.8 3.8 3.9 4.0 3.3 3.1
Housing Starts (000s) 72.4 75.0 69.5 71.1 71.7 72.0 71.5 71.4
Primary Household Income 5.3 4.4 4.3 3.7 4.0 3.9 4.1 3.8
Compensation of Employees 5.9 4.8 4.5 4.0 4.2 4.1 4.2 3.9
Net Operating Surplus — Corporations 1.5 0.6 3.5 3.4 2.8 3.0 4.1 4.7
Employment 1.7 1.5 1.1 1.2 0.9 1.0 0.8 0.8
Job Creation (000s) 121 107 77 87 62 72 60 58
Consumer Price Index 2.2 2.5 2.2 2.1 2.1 2.0 1.9 1.6
Key External Variables — U.S. Real Gross Domestic Product 2.8 2.9 2.4 2.6 2.1 1.8 2.0 1.8
Key External Variables — WTI Crude Oil ($ US per Barrel) 59 68 59 69 59 68 60 66
Key External Variables — Canadian Dollar (Cents US) 80.1 77.6 80.9 78.0 81.2 78.8 81.2 79.4
Key External Variables — Three-Month Treasury Bill Rate1 (Per Cent) 1.4 1.4 2.2 2.1 2.7 2.5 2.7 2.6
Key External Variables — 10-Year Government Bond Rate2 (Per Cent) 2.4 2.3 3.0 2.8 3.5 3.3 3.5 3.4

Table 2.6 footnotes:

[1], [2] Government of Canada interest rates.

p = Ontario Ministry of Finance planning projection.

Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, U.S. Energy Information Administration, United States Bureau of Economic Analysis, “Blue Chip Economic Indicators” (October 2018) and Ontario Ministry of Finance.

Chart Descriptions

Chart 2.1: Ontario Growth Outpaced Canada in Two of the Past 15 Years

The bar chart illustrates the real Gross Domestic Product (GDP) growth rate for Ontario and Canada for the period 2003 to 2017. Ontario’s economic growth has lagged that of Canada in every year since 2003 with the exception of 2015 and 2016.

Return to Chart 2.1

Chart 2.2: Employment Growth by Region, 2003 to 2017

The bar chart illustrates the number of total net new jobs created between 2003 and 2017 across the five Ontario regions (GTA, Central, Eastern, Southwestern, and Northern Ontario). Between 2003 and 2017, the GTA gained 648,500 net new jobs, followed by Central Ontario (205,700 net new jobs), Eastern Ontario (84,400 net new jobs), and Southwestern Ontario (100 net new jobs). Northern Ontario was the only region that saw a decline in employment between 2003 and 2017, falling by 23,600 net jobs.

Return to Chart 2.2

Chart 2.3: GDP Growth Has Varied by Sector, 2003 to 2017

The horizontal bar chart depicts the average annual growth rate in Ontario’s real Gross Domestic Product (GDP) by sector over the 2003 to 2017 period. Output in the service-producing industries (+2.4% average annual growth rate) expanded faster than goods-producing industries (-0.1% average annual growth rate) over the period.

Within the service-producing sector, the wholesale and retail trade (+3.1%); finance and insurance (+3.0%); real estate, rental and leasing (+2.5%); health, education and public administration (+2.2%), professional and administrative (+2.1%) and other services (+1.9%) sectors all recorded growth over the period.

Within the goods-producing sector, output expanded at an average annual rate of 2.0 per cent in construction and 0.8 per cent in utilities. Primary sector output remained flat over the period (0.0%) and declined in manufacturing (-1.0%).

Return to Chart 2.3

Chart 2.4: Ontario Real Business Investment

The line chart depicts real business investment (in 2012 dollars) for the 2003 to 2017 time period, by type of investment (machinery and equipment, non-residential structures and intellectual property products).

Over the period, investment in intellectual property products remained flat. Investment in machinery and equipment increased between 2003 and 2008 but declined sharply in 2009. Since then, machinery and equipment has risen and is currently slightly above the pre-recession peak. Investment in non-residential building structures has trended upwards, rising above its pre-recession level.

Return to Chart 2.4

Chart 2.5: Underutilized Labour in Ontario

This bar chart illustrates the number of underutilized workers in Ontario from 2003 to 2017, which consists of the following four components: unemployed, underemployed, the waiting group and discouraged searchers. The chart indicates that there was a significant increase in the number of underutilized workers in 2009 due to the economic recession. Since then, the number has been steadily declining annually, but still remains above the pre-recession level.

Return to Chart 2.5

Chart 2.6: Industrial Capacity Utilization

The line chart illustrates the industrial capacity utilization rate for Ontario, on a quarterly basis, from the first quarter of 2003 to the second quarter of 2018. Ontario’s capacity utilization rate stood at 83.1 per cent in the first quarter of 2003, rising to a peak of 86.6 per cent in the first quarter of 2006. During the recession, the capacity utilization rate steadily declined, reaching a low of 73.4 per cent in the second quarter of 2009. Since the recession, the rate resumed an upward trend, reaching 84.3 per cent in the fourth quarter of 2014. Since 2014, the rate has fluctuated, before rising again to 85.4 per cent in the second quarter of 2018.

Return to Chart 2.6

Chart 2.7: Corporate Tax Competitiveness

The bar chart compares U.S. METRs on new business investment, before and after U.S. tax reform, to Ontario METRs by industry. It shows that Ontario had a large tax advantage in every industry prior to U.S. tax reform, however, the reforms have significantly reduced or eliminated that advantage. While the aggregate METRs are now about the same (with the United States at 18.9 per cent and Ontario at 19 per cent), there are industries, such as forestry, construction, manufacturing and transportation and storage, where the U.S. METR has fallen below Ontario’s METR as a result of tax reform. These METRs were estimated by Philip Bazel, Jack Mintz and Austin Thompson of the School of Public Policy, University of Calgary.

Return to Chart 2.7

Chart 2.8: Ontario Household Debt-to-Income Ratio

The line chart depicts the debt-to-income ratio for Ontario households from 2010 to 2017. The household debt-to-disposable income ratio rose steadily from 156.4 per cent in 2010 to 179.9 per cent in 2017. The ratio stood at 159.1 per cent in 2011, 163.0 per cent in 2012, 165.3 per cent in 2013, 169.5 per cent in 2014, 172.8 per cent in 2015, and 177.4 per cent in 2016.

Return to Chart 2.8

Chart 2.9: Growth Rate of Working-Age Population (15 to 64)

This bar chart provides a visualization of the historical and projected working-age population (15 to 64 years) growth rates in Ontario from 1971–72 to 2040–41. The chart indicates that the growth rate of Ontario’s working-age population is projected to remain below 1 per cent for the period between 2019–20 and 2040–41.

Return to Chart 2.9

Chart 2.10: Ontario Business R&D Intensity

The line chart illustrates business expenditures on research and development as a per cent share of gross domestic product (also known as BERD intensity) over the time period of 1997 to 2016. The first line illustrates the BERD intensity of the United States, which was 1.8 per cent in 1997 and increased to 2.0 per cent in 2016. The second line illustrates the BERD intensity of Ontario, which was 1.3 per cent in 1997 and increased to a high of 1.7 per cent in 2001, subsequently declining to 1.0 per cent in 2016. The third line illustrates the BERD intensity of Canada, which was 1.0 per cent in 1997 and declined to 0.9 per cent in 2016.

Return to Chart 2.10

Chart 2.11: World and U.S. GDP Growth

The bar chart shows annual world real gross domestic product (GDP) growth and U.S. real GDP growth. Historical growth rates are shown between 2015 and 2017 and projected growth rates are shown between 2018 and 2021. World real GDP growth is 3.5 per cent in 2015, 3.3 per cent in 2016, 3.7 per cent in 2017, 3.7 per cent in 2018, 3.7 per cent in 2019, 3.7 per cent in 2020 and 3.6 per cent in 2021. U.S. real GDP growth is 2.9 per cent in 2015, 1.6 per cent in 2016, 2.2 per cent in 2017, 2.9 per cent in 2018, 2.6 per cent in 2019, 1.8 per cent in 2020, and 1.8 per cent in 2021.

Return to Chart 2.11

Chart 2.12: Interest Rates Rising but Still Low

This line chart shows the 10-year Government of Canada bond rate and the three-month Government of Canada T-bill rate from January 1989 to September 2018. The 10-year Government of Canada bond rate has trended down from a high of over 11 per cent in early 1990 to a low of 1.0 per cent in mid-2016. Since then, the 10-year rate has gradually increased to 2.4 per cent. The three-month T-bill rate declined from a high of over 13 per cent in early 1990 to less than 0.2 per cent in early 2010. The three-month T-bill rate was close to 1.0 per cent from the end of 2010 to the end of 2014, before dipping to below 0.4 per cent in mid-2015. Since then it has gradually risen to 1.5 per cent.

Return to Chart 2.12

Chart 2.13: Growth Projected to Moderate

This bar chart shows historical annual real gross domestic product (GDP) growth for Ontario from 2007 to 2017 and projected growth from 2018 to 2021. Ontario real GDP growth is projected to moderate from 2.8 per cent in 2017 to 2.0 per cent in 2018, 1.8 per cent in 2019, 1.7 per cent in 2020, and 1.5 per cent in 2021.

Year Ontario Real GDP Growth, per cent
2007 0.8
2008 0
2009 -3.1
2010 2.9
2011 2.4
2012 1.3
2013 1.4
2014 2.5
2015 2.5
2016 2.3
2017 2.8
2018p 2.0
2019p 1.8
2020p 1.7
2021p 1.5

Return to Chart 2.13

Chart 2.14: Strong Business Investment Growth Projected

This bar chart shows growth in real business investment, which includes non-residential construction, machinery and equipment and intellectual property products. Over the 2010 to 2017 period, the average annual growth was 3.7 per cent. The Ontario Ministry of Finance projects real business investment to grow by 6.8 per cent in 2018, 3.7 per cent in 2019, 4.5 per cent in 2020, and 3.9 per cent in 2021.

Return to Chart 2.14

Chart 2.15: United States Is Ontario’s Largest Trading Partner, 2017

This pie chart shows the share of Ontario international merchandise exports by trade partner. In 2017, the United States accounted for 80.3 per cent of Ontario international merchandise exports, followed by the United Kingdom (7.3 per cent), Mexico (1.5 per cent), China (1.4 per cent) and Japan (0.8 per cent). All other countries represented 8.7 per cent of Ontario international merchandise exports in 2017.

Return to Chart 2.15

Chart 2.16: Housing Costs Elevated Ontario CPI Inflation

This bar chart shows that housing costs elevated Ontario Consumer Price Index (CPI) inflation over the 2014–17 period. Over this period, total annual Ontario CPI inflation averaged 1.8 per cent and 1.4 per cent in the rest of Canada. Over the 2014–17 period, the Ontario CPI sub-index for owned accommodation increased at annual average rate of 2.8 per cent, compared to 1.4 per cent in the rest of Canada. In Ontario, total annual CPI inflation excluding the owned accommodation sub-index averaged 1.5 per cent over the 2014–17 period, compared to 1.3 per cent in the rest of Canada.

Return to Chart 2.16

Footnotes

  • [1] Stokes Economics, “Ontario Regional Economic Outlook September 2018,” and Ontario Ministry of Finance.
  • [2] Labour productivity is defined as real output per hour worked.
Updated: November 15, 2018
Published: November 15, 2018