March 19, 2013
Ontario’s Outlook is Relatively Rosy, but Some Worries Nag Nevertheless
Over the last decade, Ontario’s economy has generally avoided the national spotlight. The bigger news items have featured job creation and population explosions in the resource-rich regions of the West and East.
Alberta, Saskatchewan and even Newfoundland and Labrador have been benefitting from increased raw material sales to the emerging world on the far side of the Pacific Rim and elsewhere overseas.
The emphasis may be shifting back to the centre. At the present time, commodity prices are mainly flat and below their previous peaks, while industry in Ontario and Quebec has been benefitting from its close ties to the U.S. economy.
The population of Ontario at 13.5 million accounts for nearly 40% of the nation’s total, which has recently risen above 35.0 million.
Ontario is adding about 130,000 people per year, which is the equivalent of another city the size of Peterborough. A great deal of infrastructure construction is needed to support such a large advance in the province’s demographic profile.
No wonder there’s an emphasis on transit projects in the region. Toronto has ongoing and upcoming subway and light-rail lines. An extension of the Spadina subway line to Vaughan will also serve students at York University.
An Eglinton LRT system is in the works and Toronto’s populist mayor, Rob Ford, wants to proceed with a subway extension along Sheppard Avenue to the Scarborough Town Centre. So far, he’s been stymied in his ambitions.
Highway work will also continue to be important in the province. More “406” construction is planned in the Niagara Region and Highway 404 is being extended north of Bradford.
Ottawa also has a major light-rail transit project planned. The Confederation line will run 12.5 kilometres east to west across the city and under the downtown core.
The availability of vacant office space in downtown Toronto has tightened to a surprising degree since the recession. More American-based firms such as Google and Coca-Cola are hiring additional workers.
A similar phenomenon is occurring in retail markets. Major U.S. shopkeepers are coming to Canada and setting up operations. Target has the highest profile, now that it’s taken over many former Zellers outlets previously owned by the Hudson’s Bay Company. Target’s commercials are starting to show up with regularity in the media.
The Toronto construction scene is benefitting from a solid base provided by the Pan Am and Parapan Am Games to be hosted in 2015. The construction of venues – from arenas, swimming and biking complexes and living quarters for the athletes – is mostly underway.
Hamilton is building a new Ivor Wynne Stadium for the Tiger Cats in the CFL, but the new facility will also serve to host soccer matches when visitors from both North and South America come to town in 2015.
The 401 highway corridor in southwestern Ontario, especially around Kitchener-Waterloo, will perk up thanks partly to the apparent revival of BlackBerry (formerly Research in Motion or RIM), since the successful launch of its new Z10 smart-phone. Â
Windsor is seeing an improved auto sector, plus it can look forward to construction of a second bridge over the river separating it from Detroit, at a cost of a billion dollars plus. This will relieve bottlenecks at the current Ambassador Bridge where the volume of cargo traffic is the greatest among all the border crossings between Canada and the U.S.
Despite a generally optimistic outlook for Ontario, there are several worries.
The most obvious fault line is the high-rise residential market in Toronto. Condo construction is not likely to maintain its strength of the past several years. In 2012, nearly a third of all multi-unit starts in the country were located in Toronto.
In 2012, Ontario new home starts, measured according to units, rose by 14% with single-detached housing at -5% and multiples registering an increase of +26%.
Toronto, which accounts for more than 50% of all new home starts in the province, recorded a total percentage change of +21%, made up of singles at -5% and multiples at +31%.
Toronto in 2012 set a new all-time peak for residential ground-breakings at 48,000 units.
Ontario’s home starts in 2013 are projected to drop to 64,000 units from 77,000 the year before.
The slowdown will have ripple effects on other key sectors. A great deal of retail and manufacturing activity is tied to both new and existing housing. Many individuals and families derive their weekend entertainment from browsing for renovation supplies, furniture and appliances, plus home entertainment packages, at local shopping malls.
Also, a smaller mortgage market will lower bank revenue. Standard & Poor’s and Moody’s have lowered the debt ratings of several of Canada’s largest banks – most with head offices in Toronto – as a result of speculation that they will struggle to maintain profits in the year or two ahead.
A revenue-challenged banking sector may well have negative implications for office space demand.
Ontario’s auto sector has recovered along with strong vehicle purchases south of the border. But Mexico is now supplying far more cars to the U.S. than Ontario. Also, Michigan has chosen to adopt “right to work” legislation that will reduce the influence of unions. The labor sector in Ontario will be under pressure to help the industry stay competitive.
The final outstanding problem for the province relates to its finances. The annual deficit is a jaw-dropping $14 billion and the accumulated debt is close to $250 billion. Many of the largest projects in the last several years have been in the institutional construction category, which features schools and hospitals.
There are indications the province especially wants to keep expanding health care facilities, but the province’s ability to finance such work is under a cloud. This presents a strong argument for embracing public-private partnerships plus other alternative financing possibilities.
The political framework at Queen’s Park is also up in the air due to the precarious position of the ruling Conservatives and their new leader, Kathleen Wynne. The New Democrats and Liberals can pull the plug on the government and force an election at their discretion.
Ontario’s “real” (i.e., inflation-adjusted) gross domestic product (GDP) growth in 2012 will probably be recorded as close to +1.5% when the number is finally posted by Statistics Canada. That will be a little down from 2011’s +1.8%.
The 2013 growth rate is likely to be almost a repeat of last year, which will bring it level with the national average. Many forecasters are revising the total Canada outlook to show a decline from +1.8% in 2012 to +1.5% in 2013.
Much will depend on how well the U.S. performs. The American economy, thanks largely to an improving housing market, both in terms of starts and prices, is beginning to stretch its legs.
But again there is a worry. The fear is that the U.S. recovery may be chopped off at the knees by “sequestration” (i.e., across-the-board spending cuts) and further bickering in Washington.