Ontario poised to shed 'laggard' image, bank...
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Sep 17, 2014  |  Vote 0    0

Ontario poised to shed 'laggard' image, bank predicts

Ontario stands to be the biggest beneficiary of the U.S. recovery, with higher exports, stronger government revenues and eventually more employment, CIBC chief economist predicts


Ontario is poised to be the single biggest beneficiary from the combination of sturdy U.S. growth and a weaker Canadian dollar, a report by CIBC economists predicts.

That could translate into healthier government revenues, stronger government bonds, more private sector investment and eventually more jobs, CIBC chief economist Avery Shenfeld said in an interview

“It’s been quite clear that the tide that used to be turning against Ontario is now actually beginning to give it a bit of a lift,” Shenfeld said Wednesday.

The report predicts Ontario’s economy will grow by 2.8 per cent in 2015, second only to Alberta. The following year, 2016, real gross domestic product would grow a slightly slower 2.4 per cent, but still above the national average.

A stronger economy could pump an additional $4 billion to $5 billion into the provincial government’s coffers over the next two years, the report predicts.

“This will give the government a bit of breathing room,” he said.

That, in turn, would support Ontario government bonds and avoid a possible credit rating downgrade that would make borrowing more expensive for the government, Shenfeld said.

“It means, for the average person — we haven’t seen it yet but — we do expect to see a bit of an improvement in employment prospects in Ontario,” Shenfeld said. “And the government may not have to be as draconian in some areas of spending as they would have been if the economy didn’t get growing again.”

CIBC is the second major bank in a week to comment on Ontario’s improving prospects.

A long-awaited turnaround in exports and rebound in residential investment have put the province on track for “accelerated growth in 2014,” RBC chief economist Craig Wright wrote in a provincial outlook published Sept. 11.

CIBC’s forecast is based both on signs the U.S. economy is recovering and the Canadian dollar will continue to fall relative to the U.S. dollar.

With Ontario’s economy historically closely tied to the U.S., the province is poised to benefit from America’s recovery, the report said.

Manufacturing shipments, retail sales, wholesale trade, housing starts and existing home sales are all trending higher, the report notes.

However, after years of plant closures, Ontario will require help rebuilding its plant capacity and winning the battle for new facilities, the report also advises.

With that in mind, the economists call on the Bank of Canada to “significantly lag” the U.S. Federal Reserve in rate hikes next year, allowing the Canadian dollar to fall to 85 cents U.S.

The central bank’s trend-setting interest rate is at 1 per cent, versus the U.S. Fed’s near zero rate.

The Canadian dollar is currently worth about 91 cents U.S.

A lower Canadian dollar would attract more foreign investment and help Ontario rebuild its lost manufacturing capacity by making the province more competitive with other lower-cost jurisdictions, the report notes.

Lower federal/provincial corporate tax rates, the shift to a harmonized sales tax and the province’s $2.5 billion fund to court direct investment should also help, the report also says.

As manufacturers invest more in technology, it reduces the impact of labour costs, Shenfeld also said, citing the recent rebound in U.S. manufacturing as an example.

Earlier this week, the OECD lowered its forecast for Canada’s growth this year.

CIBC is forecasting 2.3 per cent growth for Ontario in 2014, matching the national average.

“This particularly story isn’t about Ontario doing particularly brilliantly,”

Shenfeld said. “But it’s about Ontario finally get back to the national average. That we’ve been a perennial laggard, it’s nice for Ontario to be very average.”

Ontario’s economy has been underperforming since 2002, well before the financial crisis and Great Recession of 2008/2009.

Toronto Star

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