Another Quarter, Another Cut To Ontario’s GDP Growth Forecast
Major financial institutions have downgraded their 2008 Ontario GDP growth forecasts for the fifth straight quarter and the average 2008 GDP growth forecast for Ontario has fallen to 2.0 per cent, from the 2.5 per cent forecast three months prior.
The recent upward pressure on the Canadian dollar, which according to CIBC, is already “hyper-elevated,” slowing U.S. growth, intensification of foreign competition, and continued strength in oil and other commodity prices are the main factors contributing to a seemingly incessant descent in recent forecasts.
With every passing quarter Ontario is drifting farther away from its traditional manufacturing base. The auto sector, representing 40 per cent of Ontario’s manufacturing output, is under intense pressure to redesign poor selling models and restructure production, resulting in cuts to production lines and the jobs needed to run them.
Manufacturers, in general, are squeezed tighter and tighter by the simultaneous fall in U.S. demand and value of the U.S. dollar. According to recent posturing by the Bank of Canada, it is not certain whether or not any relief is on the horizon, as keeping the national rate of inflation in check remains the Bank of Canada’s primary concern. October’s inflation numbers, released earlier this month, were closely analyzed by the Bank of Canada ahead of its Dec. 4, 2007 meeting, at which it decided on adjusting interest rates. The core rate of inflation (inflation excluding the eight most volatile components) has declined for the last four months to come in at 1.8 per cent in October, while total inflation eased slightly on lower automobile prices to 2.4 per cent.
Despite the decrease in U.S. demand, high energy and commodity prices, the sky-high Canadian dollar and the consequential plight of Ontario’s manufacturers, the overall Ontario economy has managed to maintain modest growth due to resiliently strong growth in the services and construction sectors.
Since 2004, the construction sector recorded a 15 per cent growth in output, 64 per cent greater than that of the total economy which grew at only nine per cent over the same period. Although the construction sector only represents about five per cent of Ontario’s total annual GDP, the industry has a powerful multiplier effect because of its large domestic material content, high labour intensity and service sector spillovers. Over the same period, the service sector grew at about 13 per cent.
The Ontario economy is not expected to experience an increase in growth above the two per cent mark until at least 2009, at which point many forecasts predict the U.S. economy to re-accelerate, currency pressures to ease and new auto sector investment to go into production.
The fact that Ontario economic growth forecasts have been downgraded for the fifth consecutive quarter and that any projections for an upswing have been pushed further and further into the future may leave many manufacturers with the sense that the dim light at the end of the tunnel is in fact the headlights of the resource economy freight train coming right at them. However, a number of remaining sectors including construction are poised to experience continued growth and inevitably Ontario’s economy will see the other side of the super “Canadian dollar tunnel”. The questions is how long will it take and what will be the structure of Ontario’s economy on the other side?
