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October 12, 2012
TORONTO, ON, Oct. 12, 12/ Troy Media/ – Ontario’s moderate growth performance will continue through 2014 before transitioning to above 3 per cent growth in 2016 and 2017.
Improved global economic growth, particularly in the U.S., as well as some domestic developments contribute to higher growth later in this five-year forecast The government sector will become a lesser drag on growth after 2015 while investment spending ramps up as does consumer spending, though more moderately.
In the near term, provincial economic growth will hover around 2 per cent annually, held down by sluggish consumer outlays and contracting government spending. The expansion in residential investment will slow, as will exports, following the strong auto sector rebound.
The bright spot in an otherwise modest demand environment will be business investment spending. Modest employment growth prevails in 2013 and 2014 leaving the unemployment rate around 7 per cent and labour income growth less than 4 per cent.
Population growth mirrors the labour market and broader economic conditions with an increasing net outflow to other provinces.
Slowing housing sales this year extend into 2013 causing fewer housing starts. Housing activity will be range-bound for the next two years despite low mortgage rates. More upside movement to housing sales, prices and starts is foreseen after 2015.
Inflation will remain moderate in 2013 though bump up from 2012 due to higher food and energy prices. No material rise in underlying inflation will occur until the economy is operating with much less excess capacity.
Real Gross Domestic Product (GDP), expenditure based, growth slows to 1.9 per cent in 2013 from an estimated 2.1 per cent in 2012. Ontario’s economy remains in a below-average growth mode in 2014 at 2.2 per cent, before gaining momentum in 2015 to 2017.
Real GDP growth in 2016 and 2017 is forecast to rise to 3.2 per cent and 3.3 per cent, respectively, on higher economic growth in the U.S. and the rest of Canada. Current-dollar GDP growth remains modest at 4.1 per cent in 2013, down from an estimated 4.2 per cent in 2012.
Below-average growth in the real economy plus low price inflation keeps nominal GDP growth below 5 per cent in 2014. Nominal GDP growth approaches 6 per cent towards the end of the five-year forecast.
Ontario’s economic recovery is in its fourth year and is in a growth slowdown phase similar to the U.S. and global economies. This slowdown likely extends through the rest of 2012 and well into 2013. Thereafter, the U.S. and global economies are expected to transition to a gradually higher growth phase, though one held down by a struggling European economy.
An outright global economic recession would pull Ontario into one as well, and while such an outcome cannot be dismissed entirely, it is a low probability. A more likely alternative scenario is an extended period of sub-par growth with low inflation, bordering on deflation, caused by further debt deleveraging in government and household finances.
The economy will be characterized by high unemployment, low interest rates and subdued spending.
The unemployment rate is forecast to remain high and decline slowly during 2013 and 2014, averaging 7.5 per cent and 7.0 per cent, respectively, compared to 7.8 per cent so far this year. By 2017, the unemployment rate is forecast to decline to 5.6 per cent its lowest rate since 1989.
Stronger economic growth contributes to the lower unemployment rate in 2017, along with the growing influence from aging demographics. The labour force participation rate edges up to 66.5 per cent in 2013, but is well off its previous high at 68.5 per cent in 2003.
Demographics notwithstanding, the participation rate is expected to rise to 67.8 per cent in 2017 since some workers need to generate income rather than retire and more employment opportunities will draw in more workers. Employment growth so far in 2012 is running only 0.6 per cent ahead of last year, the smallest increase since 1993.
The economic slowdown underway does not bode well for any material pickup in the near term. Job growth is expected to improve each year during the forecast but remain below average until 2016. Under these conditions, upward pressure on wages will be minimal, and in aggregate, below the inflation rate until later in the five-year forecast. This pattern was observed in the recovery from the 1990-92 recession as well.
Low population growth since the early 2000s will prevail through the forecast with increasingly negative net interprovincial migration through 2015 due to faster economic growth in Western Canada. Immigration is expected to hold around 100,000 persons annually.
Relatively low population growth has a direct impact on economic growth through spending, mainly consumer and residential, as well as on labour market conditions. If population growth were 1.5 per cent annually during 2013-2017 rather than around 1.0 per cent, real GDP would be about 2 per cent higher in 2017, implying about a 0.4 per cent average annual GDP growth impact.
The housing market is softening and will likely remain soft for a few months into 2013. No crash is expected, however.
These mild market correction phases occur frequently and last about six to 12 months, occasionally longer, with a decline in the monthly price from of about 5 per cent but rarely more than 10 per cent.
Supply (MLS new listings) coming onto the market and supply on the market (active listings) declines during these phases setting the conditions for a mild price decline and an eventual cessation. How long this adjustment phase lasts and whether it morphs into a recession depends on sales.
No doubt, the latest round of mortgage insurance tightening hurt sales as did the drop in consumer confidence, but unless the U.S. or global economies fall into recession or a negative shock event occurs, no housing recession is likely. High prices and poor affordability alone are not sufficient to cause a recession.
Slower sales will cause housing starts to decline in 2013 following a notable increase in 2012. Most of the decline in starts will be in multi-unit dwellings primarily in Metro Toronto. This will be a temporary supply adjustment.
The longer term forecast is for the housing market to firm modestly in 2014 gaining moderate momentum through to 2017. Housing prices will be range-bound for the next two or three years but are on a long term uptrend due to supply-demand fundamental pressures.
For example, supply factors (developable land availability and cost, construction and development costs) affect prices as much as demand factors. Increased density is a result of rising land costs and will need to intensify in order to accommodate future population growth, projected to increase by more than three million people by 2041 in Metro Toronto.
Inflation, as measured by the Consumer Price Index, will ease to 1.5 per cent in 2012 following a 3.1 per cent surge in 2011 due to rising energy and food prices. The underlying inflation rate remains well contained since there is considerable excess capacity in the economy and no cost-push inflation from higher wages. However, consumer price inflation pressure begins to rise above 2 per cent mainly on higher commodity prices.
Economy-wide inflation, as measured by the GDP implicit price index, eases to 2.0 per cent this year from an estimated 2.3 per cent gain in 2011. This price index expands at rates comparable to the past decade, signifying modest domestic pricing pressure, little from export prices, and some relief from import prices.
Total income increases 4.2 per cent in 2012, following an estimated 4.4 per cent gain in 2011. Similar growth rates prevail in 2013 through 2015. Income growth rises to above 5 per cent annually in 2016 and 2017.
Personal income growth is mainly driven by labour income; however, low interest rates on deposits and investments offset some of those gains. Interest and investment income declines in 2013 and 2014 before reversing when higher interest rates prevail in 2015.
Personal disposable income (personal income after taxes and other government fees) will rise 2.7 per cent in 2012 following an estimated 2.3 per cent gain in 2011. Disposable income growth will remain low in 2013 and 2014.
Corporate profits before taxes this year will increase less than 9 per cent after an estimated near 12 per cent increase in 2011. Profits are forecast to increase at a double-digit pace in 2013 and 2014 before slowing to below 10 per cent annually when labour income expands at a faster pace in 2016 and 2017.
Total spending in the economy rises 4.1 per cent in current dollars and 1.9 per cent in 2002 dollars during 2013, following estimated growth in 2012 at 4.2 per cent and 2.1 per cent, and 2.1 per cent in 2002 dollars.
The last two years in this forecast will see a cyclical upturn to above 3 per cent real GDP growth. Domestic spending is the main growth driver, led by investment spending with modest support from consumers and residential investment.
Government spending on current goods and services and on fixed capital declines in 2012 through 2014. Government spending restraint lasts for the entire forecast period. The large trade deficit will remain.
Consumer spending advances at a modest pace largely in line with income and population growth. Low interest rates spur faster spending on durable goods than on other consumer spending though not beyond historical norms. Current dollar retail sales will increase at a weak 2.5 per cent pace in 2012 and edge up to 3.7 per cent in 2013. Lacklustre growth in the following two years will give way to more robust 5 per cent gains in the last two forecast years.
Residential investment spending makes a significant contribution to overall growth during 2012 on the strength of a large surge in new apartment construction. The expected supply adjustment during 2013 will cool apartment construction spending into 2015.
Other components of residential spending are more stable from year to year, especially renovations. Another change in 2013 will be a small decline in the total acquisition costs component, reflecting the expected decline in housing sales. Residential investment will play a smaller and more normal role in the economy compared to the first three years after the recession.
Total business investment spending is expected to increase at a faster pace in 2013, following a much reduced pace in 2012 and led by a near 12 per cent jump in non-residential construction. Spending on machinery and equipment investment grows at a moderate pace each year in the forecast.
Investment spending is ultimately driven by final demand for goods and services and profit prospects. Under the modest-to-moderate domestic demand growth forecast, combined with a challenging trade environment, investment spending will respond accordingly. Industries seen generating much of the growth in investment are manufacturing, transportation/warehousing, and utilities.
Ontario’s trade deficit, which emerged in 2008 and grew to more than 5 per cent of GDP in 2010, remains the largest drag on overall growth. No material improvement in the trade deficit is expected through to 2017 since the growth in exports is generally matched by imports. International trade is the source of the trade deficit while interprovincial trade generates fairly stable annual surpluses due to the export of a variety of services, including finance and insurance, transportation, and business/computer services and manufactured goods.
Industry GDP growth slows slightly to 1.7 per cent in 2013 from an estimated 2.1 per cent in 2012 and from Statistics Canada’s initial estimate of 2.0 per cent for 2011. Growth is forecast to rise to 2.6 per cent in 2015, 3.2 per cent in 2016, and 3.3 per cent in 2017. The rebound in auto exports and production during 2012 will not be repeated in 2013 when there is no growth offset from other industries.
A low contribution to growth from export-oriented industries in 2013 and 2014 leaves overall growth determined by modest-to-moderately growing domestic industries. However, after 2014 export growth will pick up with the cyclical upturn in the U.S., as well as in the rest of Canada, causing export industries to outpace domestic industries. Industries with a greater exposure to interprovincial exports fare better than those with an international exposure.
Manufacturing’s resurgence during 2012 was led by the auto sector’s roughly 20 per cent rebound following depressed production in 2011 due to the Japanese tsunami. Production in 2013 and beyond will be more closely aligned with sales. The recovery in U.S. new vehicle sales will slow in 2013 and 2014 following a good cyclical bounce since the recession. Sales are forecast to increase but at a slower pace.
From 2015 to 2017, sales above 15 million units are expected and could breach 17 million units.
New labour-management contracts with the Big Three North American automakers have been negotiated thereby avoiding a shutdown or production disruption. The four-year deals ensure stability for the industry and workers allowing key actors to shift their focus to the industry’s longer term challenges and prospects.
A number of developments will affect the auto industry in the near future. General Motors will expand its Canadian Engineering Centre in Oshawa and spend US$850 million on Research and development through to 2016. Toyota announced investment in its two Ontario plants to increase its production capacity. GM announced that it will reduce costs by shutting down its consolidated plant in Oshawa by June 2013 and shifting production to its flex plant, which can produce more than one model. Future investments and government policy initiatives will focus on new models and new technologies.
Forestry and related manufacturing are poised to expand with U.S. housing starts, rising each year and climbing above one million units in 2015. While the demand for pulp and paper products also increases with recovery in the U.S., the market for newsprint in the U.S. is not growing due to technological changes, though it is growing outside of North America.
The metals outlook is generally favourable with prices tracking the global economy and precious metals prices more often influenced by geo-political events and market risk perceptions. The consensus gold price forecast calls for easing after 2013 though the futures market is pricing in higher gold prices to the end of 2014. Copper, nickel, zinc, and lead prices generally are viewed more favourably by the consensus since the demand of the emerging markets and a U.S. industrial revival should increase the demand for these metals.
One example of the province’s increasingly active mining sector is Detour Gold Corps.’s open-pit mine northeast of Cochrane, which has a targeted production date of early 2013 with annual production of 650,000 ounces over 16 years. The $1.2-billion construction project will create more than 1,000 direct jobs and an estimated 500 people will be employed during operations.
Other mine prospects are in the pipeline and some may materialize during the forecast. The Ring of Fire, one of the largest chromite deposits in the world, offers considerable long-term potential for the mining industry.
In the services-export industries notably transportation-warehousing, finance-insurance-real estate, business-professional-technical-computer-administrative, and wholesale trade exports are more provincially than internationally oriented and generate a growing trade surplus.
With Western Canada’s economies expected to grow faster than the national average, Ontario’s services export sector stands to benefit. Of the top five growth industries during 2013 through 2017, most have considerable exposure to interprovincial markets.
Transportation and warehousing services, business-professional-technical-computer-administrative, and finance-insurance-real estate will outpace overall growth. At the other end of the growth spectrum, public administration services will have the weakest performance and are forecast to generate less output than in 2011.
Government deficit cutting measures play out for most of the next five years though spending will probably increase in the last year or two of this forecast.
Other than auto parts manufacturing, the remaining industries in this grouping are heavily domestic-oriented. The accommodation and food services sector has an export component but it is relatively small estimated at around 12 per cent of its gross output. Tourism activity is trending higher since the recession but until the U.S. economy is on a stronger footing growth will be modest. Other main domestic industries – retail trade, construction, and health – will track around the economy’s overall growth rate of about 11.7 per cent between 2013 and 2017.
External economic conditions
The global economy’s slowdown in 2012 due to Europe’s recession and the consequent growth downshift in the emerging economies, along with a weak U.S. recovery, will extend into 2013.
Crisis containment initiatives in the Eurozone, stimulative policy measures in the emerging economies, and aggressive monetary actions by the U.S Federal Reserve System and the European Central Bank will avoid a recession and set the stage for moderate growth during 2013.
Beyond 2013, the U.S. economy will be the main source of higher growth for the global economy since there is considerable pent-up demand that will materialize under improving conditions and generate above-potential growth rates. Faster growth in China and other emerging economies, as well as Europe exiting its recession, will lift global growth but not to the same extent as the U.S. resurgence.
The U.S. economy has been operating at well below potential since the 2008-09 recession, leaving the largest output gap since the Depression. Signs of some improvement in housing and auto demand are indicative of what is forthcoming.
Headwinds and pitfalls abound, not only for the U.S. economy, but elsewhere, especially in Europe. In the U.S., the looming fiscal cliff and a new debt ceiling in 2013 top the list, while Europe’s sovereign debt crisis is the greatest risk to the global economy. Patchwork measures have avoided a Eurozone breakup and financial crisis, but more are needed in the next few years to achieve stability and preserve the euro intact. Market sentiment shifts will accompany every potential pitfall and decision point.
Commodity prices will rise at a more robust pace later in the forecast period. The current soft patch in economic growth has taken some steam out of cyclical commodities such as copper and oil. When the global economy returns to above 4 per cent growth, which is largely dependent on a stronger U.S. economy, commodity prices will turn higher. Canada’s economy will largely follow the U.S. growth profile and commodity prices.
Real GDP growth is put at 2.0 per cent in 2012 and 2013. When the U.S. economy grows with more vigour after 2013, Canada’s economic growth will rise above 3 per cent, though less than in the U.S.
Interest rates will remain low and rise moderately later in the five-year forecast. The first Bank of Canada rate increase is expected later in 2013 or early 2014, though the futures market is not pricing in an increase until the first half of 2014. It hinges on the path of the overall economy and inflation, as well as any disruptions in financial markets.
The Canadian dollar will likely hover around parity with the USD with an upward bias later in the forecast when domestic interest rates rise and commodity prices firm up. Under these circumstances, the Canadian dollar will trend higher against the euro and Japanese yen as well.
Volatility is a hallmark of foreign exchange markets and this forecast should be viewed as an underlying trend projection. This macroeconomic forecast scenario is considered the most likely but others are possible since any policy misstep or unexpected event could derail it.
The next most likely scenario is a weaker U.S. economy and a longer period of sub-par global growth with less robust commodity prices and lower domestic interest rates. A recession scenario is another possibility, but this is difficult to accurately predict, though such forecasts exist and centre on the U.S. or euro breakup.
Also of importance for Ontario is the economic performance of the rest of Canada, since Ontario sends about one-third of its exports to other provinces. Service exports have grown much faster than goods exports since in the past two decades. Exports to Western Canada, where provincial economies are the strongest, will be the main source of growth.
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