Ontario Economic Update - March 2017
Our new format of economic updates for Ontario covers several broad categories: economic growth, labour market indicators, housing market, consumer and business indicators, inflation, and international trade. We provide a brief analysis of each area followed by summary tables with the most recent economic data for Ontario and other regions.
In the third quarter (Q3) of 2016, Ontario’s economy grew 0.7 percent from the previous quarter. This is slightly lower than the 0.8 percent growth that was forecast in our previous economic update. Highlights include sustained growth in household consumption expenditure (0.5 percent since Q2) and recovery in exports of goods and services. Exports, in particular, recovered moderately by growing 0.8 percent in Q3 after they fell by 2.7 percent in the previous period. Production by industry in Ontario (C$2007) rose 0.5 percent from Q2, with both goods-and service-producing industries growing at the same pace.
Labour market indicators
Ontario gained 4,600 net new jobs in February. This marks seven consecutive months of positive changes in total employment for Ontario. Despite this net gain being driven primarily by an increase in part-time employment in the previous six months, full-time employment rose by 53,200 in February and part-time employment dropped by 48,600 (Exhibit 1).
In February, Canada’s unemployment reached its lowest point since January 2015 (6.6 percent), and Ontario’s unemployment rate fell to 6.2 percent. On March 1st, 2017, the Bank of Canada announced that it would keep its key interest rate at 0.5 percent, citing concerns surrounding “subdued growth in wages and hours worked.” These concerns hold true for Ontario as well. Despite strong gains in employment, Ontario is experiencing declining real average hourly wage growth (Exhibit 2). Between January 2010 and January 2017, real average hourly wage declined by 0.9 percent.
The housing market
Ontario’s housing market shows no sign of slowing down. The New Housing Price Index (NHPI) measures changes in prices of new single homes, semi-detached homes, and townhomes in 27 Census Metropolitan Areas (CMAs). Canada's total price index rose by 0.1 percent in January. Ontario's price increase of 0.3 percent was a large contributor to this; in particular the 0.2 percent rise in Toronto’s prices. The monthly price index for Ontario has grown continuously since January 2015. The MLS Home Price Index (HPI) paints a similar picture for apartments in the Greater Toronto Area. The apartment HPI in Toronto grew by 2 percent in January, its largest monthly growth since July 2009. In contrast, British Columbia has seen its NHPI remain steady in the latter half of 2016 and the Greater Vancouver apartment HPI has experienced similar results.
The upward trajectory of housing starts (number of new housing units on which construction has begun in a particular period) indicates limited signs of cooling in Ontario’s housing market.
The six-month moving average of housing starts in Ontario reflects a growing trend. Excluding Ontario from Canadian housing starts figures, the Canadian trend appears to be stable (Exhibit 3).
The Ontario government has been reluctant to administer a tax on foreign home buyers and is now re-examining the tax policy. BMO’s chief economist, Douglas Porter, makes the case that the prices in the Greater Vancouver area began declining once the non-resident tax was implemented. The Institute is doubtful that Ontario’s current policies can deal with housing price inflation. The land transfer tax refund and freeze on property tax for apartment buildings do not seem to have tackled housing price inflation.
Consumer and business indicators
Retail trade sales are a good leading indicator of economic health. Retail sales in Ontario shrank 0.9 percent in December 2016 after 3 consecutive periods of month-to-month growth. Canadian figures also declined in the same period. Only Alberta and Saskatchewan experienced positive changes. Considerable gains in October and November 2016 helped Ontario register a 1.8 percent retail sales growth in Q4 (Exhibit 4). Despite the blip in December, Ontario’s Q4 retail performance could allude to strong consumption expenditure in the national accounts. Manufacturing sales grew in the last two months of 2016 and Q4 sales grew by 0.9 percent. Yet, growth was meager relative to increases seen in other provinces. For instance, in British Columbia, quarterly manufacturing sales grew throughout 2016.
Since import and export levels can be subject to seasonal variation, year-over-year percentage changes can help us better analyze Ontario’s trade numbers. Ontario experienced a 3.4 percent increase in the total value of merchandise domestic exports in November 2016 relative to 2015. This was followed by substantial declines in December 2016 and January 2017 (-9.8 percent and -8.2 percent changes, respectively). The Canadian-US dollar exchange rate between has remained between 0.74 and 0.78 over the past year. The stability in the exchange rate after considerable depreciation between 2013 and 2016 has contributed to subdued export growth. Ontario fares worse off in terms of Q4 export performance relative to British Columbia, Alberta, Québec, and Canada; all four of these regions experienced positive year-over-year growth in exports value.
In their January 2017 Monetary Policy Report, the Bank of Canada indicated that they expected the recent appreciation of the Canadian dollar to continue to place a drag on export performance going forward. The report also cautioned against the negative effects that potential corporate tax cuts and protectionist trade measures in the US could have on export growth. This is especially relevant for Ontario as its exports to the Great Lakes states alone accounted for 44.2 percent of its total export value in 2015. In the wake of uncertainty on trade policy and looming talks around NAFTA, Premier Kathleen Wynne began chairing the Committee on Ontario-US Economic and Trade Relations last month.
- Ontario’s economy continues to grow, but lags behind 'stand-out' performers like British Columbia.
- Labour market indicators seem promising but slow wage growth suggests that the economy is not as healthy as it seems.
- Ontario’s housing market remains hot and poses a significant threat to the economy.
- A stable exchange rate and policy uncertainty are expected to stifle export growth.
Written by Saad Usmani