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Update on Ontario — after a strong handoff from 2017, expect a solid 2018

John Clinkard
Update on Ontario — after a strong handoff from 2017, expect a solid 2018

This update on the Ontario economy consists of two parts. First, we focus on the province’s current and near-term economic health as reflected by recent labour force data, consumer confidence, retail sales and business investment. The second part briefly highlights some of the risks facing the province as it moves into the next decade.

Regarding Ontario’s current economic health, over the past year employers in the province have been on a hiring spree, adding a total of 176,300 jobs (a fifteen-year high).

Moreover, the vast majority of these jobs are full-time (158,000) and most (115,300) are in the private sector. Despite strong growth of the province’s labour force due in part to an unprecedented net inflow of 184,000 migrants from outside the province (over the four quarters through Q3/2017), the unemployment rate in Ontario fell to 5.5% in December, its lowest value since July of 2000.

Fuelled by the combination of low interest rates and strong growth of hiring in the province, retail sales were the major driver of domestic demand in 2017.

Two indicators suggest consumers will continue to underpin growth in the short term. First, the job market in the province is still quite strong. According to Statistics Canada’s Q3/2017 Job Vacancy report, the job vacancy rate in the province remained at 3%, its highest level since the second quarter of 2015. Second, consumer confidence, reflected by the Conference Board in Canada’s Index of Consumer Confidence, jumped sharply in December to its highest level since March of 2015, due to increased optimism regarding job prospects and future finances.

Following a very strong first quarter in 2017, housing demand (reflected by sales of existing homes) dropped sharply after the April 20th introduction of the provincial government’s “Fair Housing Plan”, which imposed a 15% foreign buyer tax on properties within the Greater Golden Horseshoe and extended rent controls to all private rental units in the province built after 1991.

However, despite this slowdown in home sales, housing starts in the second half of 2017 were up by 5.8% y/y. As noted in Snapshot #1, we expect that the impact of the Superintendent of Financial Institution’s stricter lending criteria, which took effect on January 1, will depress both existing home sales and housing starts in the first half of 2018. This prospect is reinforced by the 13% y/y-drop in residential building permits in the second half of 2017 vis-à-vis the comparable period in 2016. After posting a gain of 80.1k in 2017, we expect housing starts in the province to total in the range of 65k to 70k units this year and 70k to 75k in 2019.

The total value of non-residential building approvals rose by 18% in the second half of 2017 after posting virtually no change in 2016. This strengthening in ICI investment plans heading into 2018 appears to be driven primarily by government-financed spending on infrastructure projects such as the West Park Health Centre in Toronto. While the outlook for business investment for the country as a whole indicated by the Bank of Canada’s Winter 2017-18 Business Outlook Survey is quite upbeat, the prospects for business non-residential construction in Ontario are less sanguine. According to the Business Development Bank of Canada (BDC)’s Outlook for 2018, businesses are planning to scale back their investment plans in the province somewhat following a slight (1%) estimated increase in 2017.

Given that we expect infrastructure investment to outweigh business spending, it appears that non-residental investment will make a slight positive contribution to provincial growth over the next 12 to 18 months.

Even though the United States (the market for 82% of Ontario’s exports) grew by an estimated 2.3% in 2017 and sales of motor vehicles in the U.S. topped 17 million for the second consecutive year, the total value of Ontario’s U.S. bound exports shrank by 4.2% year to date in November.

Moreover, this drop in the province’s foreign sales was almost totally the result of an 8.7% year-to-date drop in exports of motor vehicles and parts. Looking forward, slower growth of US auto sales will likely depress motor vehicle manufacturing in the province and cause a further deterioration in the province’s total exports.

Given the above-noted slowdown in foreign sales and despite the recent pattern of strong full-time jobs growth, positive consumer confidence and improving business investment, we expect the Ontario economy to grow in the range of 1.7% to 2.3% in 2018 and by 1.5% to 2.0% in 2019, following an estimated gain of 2.9% in 2017.

As always, the Ontario economy is facing a number of risks both in the short term and over the longer time. These include the prospect that export growth will be further limited by the sharp escalation of labour costs stemming from the recently announced 33% increase in the province’s minimum wage between July of 2014 and January of 2019.

Also, the province’s competitive situation both within Canada and internationally will continue to be eroded by high energy costs, among the highest on the continent, and also by a cap-and-trade tax that weighs heavily on the province’s manufacturing sector.

Finally, the status of Canada’s Free Trade Agreement with the U.S. and Mexico is uncertain. While we do not expect that it will be completely abrogated, it could pose a threat to already challenged investor confidence and business investment in the province in the near term.

Real* Gross Domestic Product (GDP) Growth — Ontario vs Canada

Real Gross Domestic Product (GDP) Growth — Ontario vs Canada Chart
* “Real” is after adjustment for inflation.
Data Sources: Actuals — Statistics Canada; Forecasts — CanaData/Chart: ConstructConnect — CanaData.

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