Ontario economy no longer a laggard: CIBC

Exports to resurgent US could add billions to government books over next two years.

TORONTO — Ontario’s economy is poised to be the single biggest beneficiary of sturdy US growth and a weaker Canadian dollar in the next two years, likely boosting provincial government coffers by $4-5 billion, finds a new report from CIBC World Markets.

The report calls for Ontario’s economy to grow by 2.8% next year, behind only that of Alberta. In 2016, real GDP growth is forecast at 2.4%, but still above the national average.

“From manufacturing shipments, to domestically driven signposts in retailing, wholesaling and homebuilding, Ontario has seen a notable resurgence, shifting from a perennial trailer to among the better performing regions of the country,” says Avery Shenfeld, Chief Economist at CIBC, who coauthored the report with senior economist, Warren Lovely.

“Employment hasn’t caught fire, but should respond at some point to firming output.”

Shenfeld notes that historically, Ontario’s real GDP has had the tightest correlation to US economic activity, but after years of plant exits, capacity use has actually tightened in the face of demand gains.

“Ontario needs to cultivate growth sectors, rebuild capacity and win the battle for new facilities,” he says. “Our call for the Bank of Canada to significantly lag the US Federal Reserve in rates hikes next year, and a resulting depreciation of the loonie to 85 cents US, should reposition the province as a more cost-competitive location.”

Lower federal and provincial corporate tax rates, the shift to the HST, and a $2.5 billion fund set up by the province to court direct investment, could be further enticements, he adds.

The report notes that Ontario’s economy has underperformed the national average dating all the way back to the 2002-2007 pre-economic crisis period. CIBC is calling for Ontario to match national growth in 2014 at 2.3% and move slightly ahead in each of the next two years. This forecast would top estimates and improve the provincial government’s bottom line.

“Ontario could have an additional $4-5 billion accumulated over two years that could be used to either exceed targets for deficit reduction or avoid the full burden of what rating agencies have judged to be tough-to-meet spending constraints,” says Shenfeld.

He notes that despite the fact that the province has been running ahead of budget targets, the province’s bond performance has been hurt recently by earlier downgrades in the economic outlook and risks of a corresponding move by rating agencies. As well, a softer outlook implied even tighter spending plans or the further use of tax-hike room in order for the province to meet the targeted date for a balanced budget.

The complete CIBC World Markets report is available here.

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