The economy of Ontario has been struggling of late. The main urban driver of growth, Toronto, has an unemployment rate that is close to 7.0%. Problem areas are quite easy to identify. Financial services have been under duress since last August when the subprime mortgage problem surfaced in the United States. Difficulties having to do with liquidity and interbank lending have been much more prevalent in other countries than in Canada, but Bay Street has felt the aftershocks anyway. Write-downs of bad paper and uncertainty about lending to other banks have contributed to an overall sense of credit stagnation. Add in the commodity price drop and the Toronto Stock Exchange has felt the most chilling effects.

The province’s auto sector has been challenged by high gasoline prices earlier this year, weak U.S. demand and the switch to more fuel-efficient cars south of the border. Detroit Three producers are moving away from their comfort zone, which until recently has consisted of assembling high-profit-margin trucks and SUVs. The move in future will be to petrol-stingy compact and mid-sized passenger cars. At least, that was the perceived wisdom until gasoline prices started plummeting again. With gas back under $1.00 CAD per litre, the necessary adjustments in the auto market to more fuel efficiency may be delayed once again.

The Toronto construction scene has excelled in two areas. Office building construction has been strong since 2007 after the starts on several major projects including the Bay-Adelaide tower. There has also been an almost unbelievable surge in high-rise condominium work. Residential multi-unit starts in Toronto are +70% year to date in 2008 versus the same period in 2009. While these condos seem high-priced versus historical levels, they still remain as bargains when compared with other major international cities. As a result, a good portion of the demand is coming from well-heeled foreign investors, with residents of the Middle East and China in the forefront.

Hotel construction has also been active in the province, particularly in Toronto, but not as strong as during other boom times for construction. The most readily apparent reason has been the decline in visitors from the United States and this has been true across the country. New rules requiring Americans to carry passports when they leave and return to the U.S. have seriously cut into the travel plans of our friends and relatives to the south.

Ontario is still experiencing a good rate of population increase (+1.0% year over year), but immigration levels have tailed off a little from historical levels. New arrivals are now more likely to first settle in those regions where jobs are the most plentiful. Over the past several years, that has been in the resource pockets of the West. The lower-valued Canadian dollar will help the portion of Ontario’s manufacturing sector that sells heavily into the U.S. But it will present a problem for firms that are deeply dependent on imports as inputs into their production processes.

Québec is a mix of middling good news and mildly bad news. The province’s major city is lagging somewhat in the office vacancy-rate sweepstakes. Montreal’s downtown vacancy rate is a respectable 5.7%. But this measure blows up to 11.1% in the suburbs. The comparable national rates are 4.2% and 8.2% respectively.

Montréal is also not performing that well in terms of its unemployment rate (7.4%) and its year-over-year employment change (-1.1%). From a national perspective, Québec City lies almost exactly in the middle of all CMAs with respect to its labour market. Weak year-over-year job growth (-0.5%) is being compensated by a low unemployment rate (4.5%).

Major upcoming hospital projects in Montréal, in connection with the two largest universities, will provide a real boost to construction spending in the city. What is often overlooked about both Ontario and Québec is how important a role resources play in their overall economies. The western provinces have gained notoriety on account of their raw materials, but they are not the only big hitters in the country on this score.

Earlier this year, Québec’s aluminum sector had been poised to undertake major smelter expansions. However, this work has been temporarily thrown into doubt by the recent decline in aluminum prices. Aluminum counts on autos, aerospace, construction and consumer packaging for its demand. All of these sectors are in decline to some extent or another at this time. Aluminum production is prominent in Québec due to abundant and low-cost electric power. Electricity makes up about one-third of a smelter’s operating costs.

Aerospace is particularly important for Quebec’s economy. The province is one of the largest airplane manufacturing centres in the world. High jet fuel costs were cutting into the outlook for air traffic, but the number of airplane orders already placed assures demand for long into the future. Hydroelectric, LNG (liquified natural gas) and wind farm projects will continue to propel the engineering construction sector. The province is also heavily into infrastructure improvements to its roads and bridges, on the heels of one high-profile and tragic collapse in Laval.

In the Atlantic region, Newfoundland has been showing surprising strength. It is flexing its newfound “energy” muscles. Similar to Saskatchewan, Newfoundland is surprised to find itself among the “have” provinces. What it has is offshore oil and new agreements between the province and producers will see a next wave of mega projects receive the go-ahead over the next couple of years.

The province also has copper and nickel deposits at Voisey’s Bay, Labrador, that are being processed on the island. And it has potential power reserves in Labrador, on the lower Churchill River, that the province is gearing up to develop. The net effect is that Islanders are returning to the province to take advantage of better job prospects than at any time in memory.

The improved demographics and the greater affluence help to explain St. John’s 23% increase in housing starts year to date in 2008 and the 22% increase in new home sales prices year over year. As a final note on St. John’s, both its downtown vacancy rate (1.9%) and its suburban vacancy rate (3.6%) were the lowest among major cities in the country at the end of 2008’s second quarter.

New Brunswick has been seeing some large energy project construction, both in the LNG field and in nuclear power plant refurbishment. At the mid-way point of 2008, existing home prices in Saint John were +12.6% year over year and in Fredericton they were +10.0%, according to the Canadian Real Estate Association (CREA). However, Saint John N.B. was low on the list of labour markets in the region, ranking below both St. John’s Newfoundland and Halifax, Nova Scotia when both year-over-year employment change and unemployment rate are taken into account.

Nova Scotia is counting on offshore natural gas investment to provide a boost for its economy. In addition, shipyard work to refit seven of Canada’s twelve navy frigates will be a welcome injection of spending by the federal government, provided this holds up as the slowdown tests tax revenues. Prince Edward Island is notable at this time due to its population increase. The Confederation Bridge has reduced the province’s isolation and a 1.23% growth rate has been the result, higher than Canada’s national average of 1.17%. P.E.I.’s population increase above 1.0% is the first time this has happened since 1996.