U.S. Economic Downturn:  Ontario’s Building Burden

Major financial institutions have downgraded their Ontario GDP growth forecasts for the third straight quarter. The average 2007 GDP growth forecast for Ontario has fallen to 1.8 per cent, the lowest of all the provinces in Canada.

Following U.S. demand, intensification of foreign competition and a strong Canadian dollar continue to be the main factors contributing to a seemingly incessant descent in recent forecasts.

Though it is still too early to assess the full impact of the recent credit crunch caused by falling U.S. house prices and the subsequent collapse of the U.S. sub-prime mortgage market on the broader economy, the effect is widely expected to further dampen growth prospects for the remainder of 2007 and 2008.

Export dependant Ontario has carried the greatest burden of the recent U.S. economic slowdown compared to other provinces, as the export-sensitive manufacturing sector continues to act as the province’s economic anchor. Some 180,000 jobs have been lost from the manufacturing sector over the last two years and 100,000 in the greater Toronto area alone since mid-2002.

The province’s domestic auto sector is being hit especially hard. Auto and auto parts manufacturing, by far the largest single exporter, accounts for approximately 20 per cent of Ontario’s GDP. This year Chrysler has already cut 2000 jobs in Ontario and GM recently announced planned cuts of 1200 jobs in Oshawa by the end of the year, on top of the 3900 jobs GM slashed in 2005.

However, the provinces auto sector manufacturers are not sitting idly by. The ‘big three’ are actively restructuring their operations to stem their loss of market share and pumping over $5 billion into modernization projects. A number of these projects involve flexible manufacturing upgrades, which will allow auto manufacturers to build multiple vehicle platforms at the same plant.

Moreover, although the auto sector is flagging, it is by no means the only game in town. Ontario’s mining sector, is currently riding a wave of high global demand, and steel and other primary metal production continues in Hamilton, Sault Ste. Marie and Sudbury. Meanwhile, Toronto has been supported by a surge in financial services and a boom in the local housing market that has spread benefits throughout the province’s economy.

Despite the slowdown in manufacturing, public and private non-residential construction should expand moderately in 2007 and 2008. In addition to the revitalization in the auto and broader manufacturing sector, several large mining developments and numerous new office towers are currently underway.

Furthermore, if the recent record level values of ICI building permits are any indication, non-residential investment will be significant over the short to mid-term. Public investment also looks strong through 2010 as the provincial government undertakes several large-scale infrastructure projects through the Re-New Ontario plan in health care, education and urban transportation.