Proud old Ontario, occupying prime real estate in the centre of the country and accounting for much of the nationâ€™s industrial base, is accustomed to success. However, the last several years have been hard on the provinceâ€™s confidence. Upstart regions in the West and the Atlantic, with their resource wealth, have taken over as main drivers of Canadaâ€™s economy. For the first time ever, Ontario is about to receive nearly $500 million in equalization transfer payments as a “have not” province.
Proud Old Ontario is Suffering some Indignities
Proud old Ontario, occupying prime real estate in the centre of the country and accounting for much of the nation/'s industrial base, is accustomed to success. However, the last several years have been hard on the province/'s confidence. Upstart regions in the West and the Atlantic, with their resource wealth, have taken over as main drivers of Canada/'s economy. For the first time ever, Ontario is about to receive nearly $500 million in equalization transfer payments as a â€œhave notâ€ province.
Ontario/'s Gross Domestic Product (GDP) growth rate has fallen at least one percentage point below the national rate for the past three years. Nor will recession-year 2009 be an improvement. Canada/'s GDP change is likely to be -1.0% this year, with Ontario coming in below that, at -1.5%.
This year will be a difficult one, but at least there will be more regional equality. The world-wide recession â€“ caused by the credit crisis, a fall-off in American consumer and housing demand and retreats in commodity purchases by developing and emerging nations âˆ’ is bringing almost everybody down, oil riggers and automakers alike. However, there is some encouraging news mixed in with the bad for Ontario, as this report will lay out.
Where Ontario is keeping up with the rest of the country is in terms of population increase. Both Ontario and the country as a whole are adding people at a rate of 1.0% per year. Ontario and Toronto, in particular, are popular destinations for immigrant arrivals. As a rule of thumb, Ontario/'s population, at 13 million, is nearly 40% of Canada as a whole and Toronto/'s population, at 5.5 million, is a similar 40% of Ontario/'s.
Toronto/'s population increases by about 100,000 individuals per year and, under normal circumstances, that also means an extra 50,000 vehicles on the city/'s streets and highways annually. While the new arrivals may cause some strains, there are also many benefits to the influx. For example, they lend support to housing prices.
Home prices across Canada are falling this year, although nothing like south of the border. Home prices in most Ontario centres will not drop to the same extent as in some western cities, most notably in Alberta and B.C., where speculative bubbles have burst.
As for residential starts, however, CanaData is forecasting Ontario/'s volume will drop from 77,000 units in 2008 to 63,000 units in 2009. The Toronto figure will adjust downward from 42,200 units last year to 29,200 units this year. The Toronto market appears especially vulnerable with respect to multi-family units, also known as condos.
In 2008, multiple-unit starts in Toronto were +67% year over year and that is not sustainable in a recession. Nation-wide, the inventory of unsold multiple units is now 80% higher than it should be. As employment prospects weaken and home sales decline further, excess inventory will become an ever larger glut on the market.
Finally, with respect to housing starts in the province, it is interesting to note that Barrie, Ontario âˆ’ a bedroom community of Greater Toronto and the gateway to the north âˆ’ led all Census Metropolitan Areas (CMAs) in the country in terms of percentage gain in singles and multiples combined, year over year in 2008, at +44%.
The following sets out some of the most important influences for Ontario/'s key industries at this time.
In raw materials, forestry is being hampered by the extreme conditions in the United States/' housing markets, where activity levels have become locked in the basement. Base and precious metal mining benefited from foreign investments at the height of the world-wide commodity boom, but now prices for copper and nickel are well off their peaks, although gold has been showing resilience thanks to uncertain financial markets.
The auto sector is in disarray, with questions about the very survival of the Detroit Three assemblers. The problems started with plummeting sales in the U.S., but this has now spread north as well. Even the Japanese manufacturers have been experiencing sales declines. So far, Chrysler and General Motors have not dipped into government loans in Canada as they have in the Unites States, but their futures still remain uncertain.
Problems in the auto sector at the both the assembly and parts stages are affecting many other industries, including steel. Earlier, steel demand was bolstered by strong capital spending around the world, with China in the forefront. Peak cyclical demand drove up iron ore and coal input prices, but these are starting to come down. Therefore, some relief in steel prices is coming at an opportune time as governments prepare to ramp up spending on infrastructure as their chief recession-fighting tool.
Bay Street/'s financial community is suffering some of the spillover effects from branch-office downsizings by U.S. banking firms. However, there has been one positive outcome of the world-wide financial sector meltdown. Canada/'s major banks, keeping our fingers crossed, have come out of this mess relatively unscathed. As a consequence, their international profiles and stature have been polished and raised accordingly.
There are some other positive developments for the province as well. For example, the decline in the value of the loonie will help to bring back film and television production to Toronto/'s lakefront and other studios. The high tech sector in the suburbs of Ottawa, Toronto and Kitchener may be in for a rough ride, but not as severe as during the dot.com collapse. And the lower currency will help non-auto manufacturing in general with U.S. export markets, once there is a return to some semblance of normality.
Regional Labour Markets
Ontario/'s unemployment rate will climb by two percentage points from 6.5% on average in 2008 to 8.5% in 2009. As for urban labour markets, CanaData compiles a composite index based on employment growth (highest to lowest) and unemployment rate (lowest to highest). The current ranking in Ontario, from best labour markets to worst, is set out below, with main economic drivers in brackets.
Ranked number (1), Kingston (the military, law enforcement and academics);
(2) Ottawa (federal government downtown and high tech in the suburbs);
(3) Sudbury (mining);
(4) Toronto (financial and business services, communications and manufacturing);
(5) Kitchener (insurance, high tech and academics);
(6) Oshawa (auto assembly, plus bedroom community for Toronto);
(7) Hamilton (steel, plus part of the trade corridor with the U.S.);
(8) London (insurance and academics);
(9) Thunder Bay (government services and academics);
(10) St Catharines-Niagara (auto-related and tourism);
And at the bottom, (11) Windsor (auto sector and gaming).
Non-residential Building Construction
In commercial construction markets, declines in office-based employment âˆ’ i.e., the finance, insurance and real estate sector, plus business services such as legal, accounting and architectural âˆ’ will raise office vacancy rates and lower rents, reducing capital spending prospects. Retail construction will be hampered by weaker job markets and lower homebuilding activity.
Warehouse construction depends on consumer spending and manufacturing and both of those sectors will be on the outs in the recession. Hotel construction has been strong of late, but many of the new projects have major condominium components and that/'s a market that is set for a correction.
Institutional construction does hold out better potential, in part due to the push for spending on both â€œsoftâ€ and â€œhardâ€ infrastructure that was contained in the recent federal budget. Medical facility construction is an ongoing requirement on account of the aging of the post-war baby boom generation.
And school facility construction at the level of higher education is warranted by impressive increases in enrolments at universities and community colleges. Partly, staying in school is a good way to weather the recession and partly it is a response to the need for more training and higher learning to compete in what has become an internationally competitive job market.
CanaData/'s square footage forecast for non-residential building starts in 2009 is still respectable at 25.8 million, down from 29.0 million in 2008. However, both of those levels are considerably down from the 40.3 million square feet in 2007, when there were starts on several large office building projects (e.g., the Bay-Adelaide Centre in Toronto).
Engineering construction is where the bulk of government/'s infrastructure spending will occur in 2009 and 2010. Three of the largest upcoming projects will be in the field of transportation: (1) the Yonge Street subway line northerly extension; (2) the toll Highway 407 easterly extension; and (3) the rapid transit railway line from Union Station to Pearson Airport.
Also on the list of planned mega projects is the addition to nuclear power capacity planned for the province. Engineering construction overall will account for upwards of $17 billion of spending in the province. The total size of Ontario/'s new construction market in 2009 will be close to $60 billion.
Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.