Ontario slowly making up lost ground

PROVINCIAL ECONOMIC OUTLOOK

AFTER A SIGNIFICANT real GDP contraction estimated at 3.3 percent this year, we expect a rebound of 2.7 percent next year, as Ontario resets from depressed levels of output, particularly in its durable goods industries. With the US and other trading partners picking up further gradual momentum in 2011, Ontario’s real GDP growth should ramp up to 3.1 percent.  Whereas Canada’s largest provincial economy underperformed the rest of the country in 2008-09, we anticipate a slight outperformance in 2010-11 as it begins to make up some of the ground lost during the recession. As of second quarter in 2009, Ontario’s real GDP was 5.0 percent lower than its pre-recession peak. The same measure was 3.3 percent lower for Canada as a whole.

Impact of the Dollar
While the strong tilt of the Ontario economy towards US exports and a rebound on that external front argue in favour of this outperformance, it will initially be muted by a high Canadian dollar. The currency should remain near or above parity with the US dollar for most of 2010, and remain above $0.90 US throughout our forecast horizon. Furthermore, because intermediate and final goods imports could well outpace exports in 2010, we will likely have to wait until 2011 before net exports contribute positively to overall growth.  Further upside to commodity prices in general appears limited in the coming quarters in view of current excessive global stocks for oil, agricultural commodities and various metals.  In fact, prices for crops in particular could suffer near-term setbacks. However, the outlook for a further trend weakening of the US dollar is likely to provide some offsetting support to prices.

Domestic Spending
A good part of the strength in imports will be linked to the improving outlook for domestic spending.  With global financial fears easing, consumer confidence has revived, translating into a firming in retail sales.  As of September, employment in the province had already shown signs of stabilization and led Canada with a net job creation in the third quarter, 2009 at nearly 40,000.  This is not to say that the employment market is out of the woods.  We still expect firms to remain cautious in their hiring in 2010, leading to only modest positive net job creation.  What’s more, the unemployment rate is projected to remain relatively high.  Still, the outlook for moderate gains in personal incomes, combined with still-low interest rates (i.e. the Bank of Canada is expected to keep rates at an ultra-low 0.25 percent until the fourth quarter of next year), should fuel a respectable gain in consumer spending over the forecast period.

Housing and Equipment Trends
While not expected to boom by any means, other ingredients in the recovery include residential investment, which should contribute modestly in 2010 before ramping up in 2011. A gradual uptrend in housing starts and renovations, well supported by existing home sales and values, should unfold over the next two years. Private non-residential investment could lag behind but should eventually resume its growth in the second half of 2010.

Investment in machinery and equipment should also improve slightly in 2010 after an estimated 15 to 20 percent drop in 2009. Also, as a result of fiscal stimulus spending gaining more traction in 2010-11, government capital expenditures should contribute more than usual through to 2011.

The ground lost in Ontario both in terms of output and employment has been large, but Canada’s economic hub will be on the gradual mend in 2010-11.  As the investment and export drags wane, the domestic consumer should be allowed to show some of its mettle once again. •

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TD Bank Financial Group