Ontario Out Of Recession, But Road Back To Balanced Budget Will Be Tough

The Ontario economy has pulled out of recession as the auto sector is rebounding and domestic demand, led by housing, is gaining strength, according to the Provincial Outlook report by BMO Capital Markets Economics. But the recession left a deep dent in Ontario’s economy, and a number of factors will likely temper growth in the coming years: a strong loonie, sluggish U.S. consumer demand and fiscal restraint. Growth this year is expected to reach 3.4 per cent before slowing to a below-average 2.9 per cent in 2011.

“The auto sector did the most damage to the Ontario economy in 2009, with production falling as much as 60 per cent below prior-year levels,” said Robert Kavcic, Economist, BMO Capital Markets. “However, production has since bounced back, and recent announcements like the $245 million investment by GM in St. Catharines, a third shift at GM in Oshawa and a second shift at Honda in Alliston, are encouraging. Still, the recovery in the broad manufacturing and export sectors will remain tepid as the loonie hovers at strong levels; real net exports were negative in the last two quarters of 2009.”

The trouble in manufacturing has lifted Ontario’s unemployment rate to 8.9% in May, above the national rate and now also above those in Quebec, New Brunswick and Nova Scotia. Still, while the goods sector remains depressed, service-sector employment has recovered to record levels and will remain a key support.

Domestic demand in Ontario has firmed and will drive growth in 2010. Retail sales have bounced more than 10 per cent from their recession low, while the red-hot housing market is starting to cool.

The government of Ontario is projecting a $19.7 billion deficit in fiscal 2010/11, and has begun to plant the seeds of future spending restraint. The deficit clocks in at 3.3 per cent of GDP, and will be followed by another six years of red ink before returning to balance in fiscal 2017/18. “This represents by far the longest and deepest stretch of deficits among the Canadian provinces,” noted Mr. Kavcic.