January 16, 2014

Tailwind of stronger U.S. manufacturing should boost Ontario’s growth in 2014

Although there is clear evidence that the Ontario economy expanded in 2013, it did so at a very subdued pace. Against a background of persisting concerns about the potential impact of the European recession and given the fragile health of the U.S. economic recovery, few firms made significant additions to their staffs.

Indeed over the past twelve months, total employment in the province has increased by a paltry 24K, its smallest annual increase since 2009. Across major industrial sectors, virtually all of the jobs added over the past year were in the service sector.

Within the goods-producing sector, following a gain of 18.5K during the twelve months ending December 2012, employment in manufacturing has contracted by 31.7K over the past twelve months despite evidence of strengthening manufacturing in the United States, the province’s major trading partner.

Turning first to the domestic side of the economy, fuelled by steady employment growth, persisting low interest rates and a moderate improvement in consumer confidence, retail sales picked up strength in the second half of the year.

The above-noted fundamentals, together with heightened concern about rising mortgage rates, also contributed to an improvement in existing home sales primarily during the second half of the year.

Despite this strengthening in demand for existing homes, the pace of new residential construction retreated during the year with housing starts falling to a three year low of 60,800 units in 2013 after hitting a seven-year high of 76,742 in 2012.

The slowdown in new construction was primarily the result of a 30% y/y drop in starts of multiple units that was exacerbated by more restrictive mortgage lending regulations introduced by the federal government in mid 2012. Looking forward, despite a stronger pattern of single-family starts fuelled by sustained income growth and relatively low inventories of existing single-family units, total starts will probably remain in the range of 60,000 to 65,000 in 2014 due to an inventory-induced slowdown in construction of multiple units.

Following a pause in 2013, recent gains in corporate profits and a solid improvement in industrial capacity use suggest that business non-residential investment will steadily improve over the course of 2014.

This prospect is reinforced by the healthy gain in investor confidence indicated by the 9.6% year-over-year rise in the SP/TSX in 2013 following a gain of 4% in 2012.

In light of the fact that the U.S. accounts for 82% of the province’s total exports, it is not surprising that U.S. durable goods orders lead the province’s exports by an average of three to six months. This implies that the uptrend in U.S. orders over the past eight months will cause Ontario’s exports to strengthen in the first half of 2014.

This stronger pattern of external demand together with sustained growth of domestic demand should cause Ontario’s real GDP to grow in the range of 2.4% to 2.9% following growth of 1.3% in each of the past two years.

John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.

Ontario exports vs U.S. durable goods orders

Data Sources: Statistics Canada, U.S. Census Bureau/Chart: Reed Construction Data, CanaData.

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