Monday, August 11, 2008

RBC reports on Ontario — A two-tiered economy

Ontario — A two-tiered economy

The first-quarter national accounts for Canada provided quite possibly the first
"hard" evidence that a downbeat scenario is, indeed, unfolding in Ontario. The
unexpected decline in Canadian real GDP most likely captured a sizeable economic
contraction in Ontario with the international trade sector delivering much
of the bad news.

Early this year, Ontario's exports were pounded by the high
Canadian dollar and the downturn in the U.S. economy, as well as by a strike at
a major U.S. motor vehicle parts manufacturer that disrupted Ontario's auto
production. Poor weather conditions also caused some disruptions.
Going forward, the spotlight will remain on the external sector. With the high
dollar and sluggish U.S. economy still hindering manufacturing sales abroad,
net trade should continue to subtract from growth in the near-term, although the
impact is likely to taper off gradually as some of the factors that restrained firstquarter
growth prove to be temporary.

Little improvement is expected in the allimportant
auto sector – plummeting motor vehicle sales (particularly of light
trucks) in the United States and ongoing restructuring in the "Big 3" North
American producers imply continued hard times. Excluding this sector, however,
Ontario exporters should feel some relief later this year and in 2009 from a
projected easing in the Canadian dollar and reacceleration of growth in the U.S.

As tough as conditions are on the external side, the story on the domestic
economy is more encouraging. Construction is holding up better than expected
and growth in consumer spending continues to be supported by a still-robust
labour market.

Despite the carnage in manufacturing jobs, total employment in
the province is still growing at a decent clip, enough to keep the unemployment
rate near a seven-year low. While the risk of the external weakness spilling over
into the domestic side is not trivial, the domestic underpinnings remain relatively
solid and should allow the overall economy to navigate through the headwinds,
keeping growth in positive territory.

Nonetheless, at 0.7% this year, our
forecasted growth rate would be the weakest since the last recession in the early

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