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Stronger U.S. growth should help drive Ontario faster in 2016 and 2017

Stronger U.S. growth should help drive Ontario faster in 2016 and 2017

Following a weak start, Ontario’s economic engine picked up speed heading into the second half of 2015.

This improvement in demand was driven mainly by an acceleration in exports fuelled to a large extent by a mid-year strengthening of economic activity in the U.S., the market for 82% of the province’s exports,and also by the very pronounced 22% decline in the value of the Canadian dollar vs the U.S. dollar since the beginning of 2014.

Across major products, the largest contributor to this gain in total exports was a 17.7% increase in foreign sales of motor vehicles and parts. This improvement was accompanied by gains in foreign sales of consumer goods (+26.6%), machinery and equipment (+23.2%), forestry products (+18.9% and electrical products (+18.6).

As a direct result of this strengthening in merchandise exports, output of goods-producing industries in the province accelerated by 6.6% SAAR in the third quarter following a slight gain of 1.6% in Q1 and a-2.3% decline in Q2.

At first glance, the 80,700 rise in provincial employment during 2015 appears quite solid after a gain of 37,700 in 2014. Even better, a closer look at the composition of the jobs added during the year reveals that full-time employment increased by a very strong 142,500, the largest annual increase since 1999.

Further, most (81,900) of the jobs added were in the private sector and, together with a 52,500 increase in self-employment, they more than offset a 53,800 drop in public sector payrolls. The fact that the very strong rise in full-time hiring in the province was accompanied by a 53,200 decline in Canada’s three resource dependent provinces (Alberta, Saskatchewan and Newfoundland) suggests that stronger growth in the manufacturing heart of the country is more than offsetting the low-oil-price-induced slowdown in the country’s energy dependent provinces.

Fuelled by the strong growth of full-time employment, a concomitant improvement in consumer confidence, solid gains in real disposable incomes (due in part to lower energy costs) and low borrowing costs, retail sales increased by 4.4% year to date, more than twice the rate of increase for the country as a whole.

Driven by the above-noted strong pattern of full-time hiring, a steady strengthening in total net migration and the effect of near record low interest rates, sales of existing homes in Ontario increased by 9.6%y/y in 2015, their largest annual gain in fourteen years. Given the very strong gain in full time employment, the prospect for a larger inflow of interprovincial migration, sustained international immigration and persisting low interest rates, we expect both home sales and housing starts to remain strong throughout 2016.

Looking ahead, there are signs that the softening in consumer confidence triggered by weakening energy prices late in 2015 and extending into early 2016 may dampen consumer spending in the first quarter.However, this drag on growth should be more than offset by stronger exports fuelled by sustained growth of U.S. demand for the province’s manufactured goods in general and for its transportation equipment in particular.

In addition, the stronger pattern of manufacturing activity bolsters the outlook for business investment in the province that should be augmented by increased spending on infrastructure proposed by the federal Liberals in their election platform. After expanding by 2.7% in 2014 and by an estimated 2.1% in 2015, we expect that Ontario will grow by 2.4%in 2016 and by 2.6% in 2017. 

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