Summer 2016: Quarterly economic update
Over the past year, the Institute has provided updates on Ontario’s economy in its Quarterly Reports. Starting this quarter, the Institute will provide updates on the economy in the blog section of our website, while the Quarterly Report will continue to feature the Quarterly Report Card and policy updates, published in a downloadable format here.
In 2016 Q1, Ontario’s economy grew by 0.8 percent, just above Canada’s rate of 0.6 percent. Unfortunately, recent data show the Canadian economy contracting in the second quarter of this year, and Ontario’s provincial economy is forecasted to have shrunk as well. There are a couple of factors likely driving a poor second quarter performance. While the wildfires took their toll out west (contributing to Canada’s contraction), exports are down from last quarter (although they are up year-over-year from 2015 Q2). The drop in exports may be explained, at least in part, by an appreciated Canadian dollar, from 72.7 to 77.6 cents US, and slow growth in the US economy.
Over the past three quarters, Ontario’s economy has enjoyed quarter-over-quarter growth of about 0.8 to 0.9 percent, and save for Q2, this trend is expected to continue throughout the remainder of this year.
Following a period of relatively low inflation, Ontario saw prices rise by 1.3 percent in Q2. However, there is no need to sound the alarm. Over half of total consumer price index (CPI) inflation can simply be attributed to recovering oil prices, the average price at the pump bounced back from 91.2 cents in Q1 to 103.8 cents in Q2. Most of the remainder of CPI inflation can be attributed to small but regular price increases in shelter and clothing.
Due to seasonal effects, housing price inflation is typically quite high in the second quarter of the year, but not usually to this degree. The national housing price average increased by 6.3 percent (27.7 percent annualized). Price increases this quarter in the Greater Toronto Area were again just above the national average at 7.4 percent, while in Ottawa increases were well below the average at only 2 percent (not shown). Prices in Alberta continue to fall while prices in Montreal remain quite stable. Once again, Vancouver stands apart for its rampant housing inflation, at 11.1 percent (52.5 percent annualized).
On August 1st, to cool the hot Vancouver market, British Columbia introduced a 15 percent tax on foreign buyers in Metro Vancouver. As an immediate reaction to the policy, the number of home sales have dropped by 22.8 percent from July and prices have fallen. However, some are questioning the new legislation, arguing that it may be in violation of NAFTA or even the Charter of Rights and Freedoms—for discrimination based on nationality. Many have proposed other, less discriminatory policies as alternatives to the tax, such as residency requirements or taxes on vacant properties in order to cool the market.
And why does all this matter for Ontario? Because such a policy could come to Ontario. Finance Minister Sousa is looking “very closely” at British Columbia’s tax, and may be considering a similar policy for Ontario. The Governments of Canada, Ontario, British Columbia, and the cities of Toronto and Vancouver have formed a working group to explore ways to address overheated housing markets.
Job growth and unemployment
In Canada, from Q1 to Q2, the unemployment rate fell from 7.2 to 6.9 percent. In this time, Ontario was able to shed 0.1 percentage points off its own rate, from 6.8 to 6.7 percent, maintaining its position below the Canadian average.
Although Ontario’s unemployment rate continues to fall, the picture isn’t so bright. Nearly all of the 15,200 jobs created were in part-time positions; while British Columbia and Québec created 29,167 and 19,200 full-time jobs, respectively. In Ontario, the service sector enjoyed the addition of 30,300 jobs, while the goods-producing sector lost 15,000 jobs. Unfortunately for Alberta, for the third quarter in a row, the province has lost over 19,000 full-time jobs. However, while the last two quarters’ losses in Alberta were partially offset by significant increases in part-time jobs, this quarter enjoyed the creation of only 2,567 part-time jobs.
Export levels can be subject to seasonal variation. For this reason, the Institute evaluates this quarter’s export performance against that of 2015 Q2.
Although exports levels have fallen from last quarter, they are still 5.8 percent higher than 2015 Q2. Just like the last quarter, the main driver of growth comes from the province’s automotive manufacturing industry. At first, Ontario’s 5.8 percent growth may not appear too impressive, but this must be evaluated against a 4.8 percent contraction for Canada as a whole. British Columbia and Québec exhibited small contractions, while Alberta’s exports shrunk by 21.1 percent.
In the previous two quarters, export growth was extremely strong, in large part due to a weak Canadian dollar. In 2016 Q2, the re-strengthening of the Canadian dollar, which averaged 77.6 cents, reduced this advantage and put a damper on export growth.
Despite the second quarter being Canada’s worst since the 2009 recession, the outlook for the economy is bright. Both Ontario and Canada are expected to experience 0.7 to 1 percent real GDP growth for each of the next six consecutive quarters. As the new Canada Child Benefit begins its rollout to families, consumer spending is expected to be a major driver of economic growth.
Housing price inflation was quite high, but this may all change. Whether or not Ontario will explore a foreign buyers’ tax is likely to depend on the outcome of BC’s new policy.
Although Ontario continues to create jobs and lower the unemployment, nearly all job creation this quarter was in part-time positions. While the automotive manufacturing sector has been doing well and providing a significant contribution to Ontario’s economy, both new opportunities as well as threats exist. GM’s new investment in Markham’s autonomous tech centre and Fiat Chrysler’s investment to produce the first ever plug-in hybrid elective minivan in Ontario will help bolster the province’s strength in high-tech auto. But there are a number of models currently being produced in Ontario that are scheduled to be discontinued, and Unifor will be in negotiations with the big three auto manufacturers this month. The outcomes will surely be important, for jobs, exports, and the provincial economy.
For analysis of the policy developments from the last quarter, including major infrastructure developments, please read the Summer 2016 Quarterly Report.