Following a brutal 2009, Ontario is expecting increased opportunities in services-related businesses (IE:TV)

By Jade Hemeon | February 2010

The outlook for On-tario’s economy in 2010 is quite bright, as it is expected to show a heartening recovery. That’s a significant change from the dark days of 2009, when Ontario had the worst deterioration in economic growth and employment among all the provinces.

Alex Koustas, an economist with Bank of Nova Scotia’s economics department in Toronto, is forecasting that Ontario’s real gross domestic product growth will rebound to 2.9% in 2010, following an estimated drop of 3.2% in 2009. The projection is higher than the 2.7% growth the bank forecasts for Canada as a whole.

Heavy government stimulus, consumer spending and exports will all contribute to Ontario’s better economic health this year, says Koustas, while manufacturing, retail sales and housing starts will all gain strength relative to last year’s poor performances.

“Out of all the provinces, Ontario suffered the worst losses in 2009, as it is the most exposed to the U.S. economy,” he says. “There’s been a huge dip in automobile production, which is the industry most tied to U.S. economic fortunes. The effects trickle all the way down the supply chain to components, plastics and fabricated metals. A lot of big industries in Ontario are tied to auto production.”

The auto industry began showing signs of improvement in late 2009, and the renewed vigour is carrying over into 2010 because of pent-up demand and inventory replacement; however, the industry will never return to its former glory, analysts say. This is significant because the auto industry employs more than 150,000 Canadians directly, plus another 340,000 indirectly. It is also the largest industry within Ontario’s manufacturing sector.

After auto production in Canada dropped by 28% to 1.5 million vehicles in 2009, it is expected to rebound to 1.9 million units in 2010, according to Detroit-based J.D. Power & Associates Inc. But Dave Cutting, senior manager of North American forecasting with J.D. Power, does not foresee production getting back to the 2.5 million vehicles produced annually in Ontario earlier this decade.

“The quality of cars is better, people are keeping them longer and maintaining them better,” says Cutting. “The appeal of a new car is not what it used to be, as consumers are now occupied by other priorities, such as the weaker economy and higher unemployment. In addition, the fleet market has shrunk dramatically.”

Ontario’s auto industry is facing ongoing consolidation with the upcoming closing of a Ford Motor Co. plant in St. Thomas in 2011. Last year, General Motors Corp. closed a light truck plant in Oshawa. Auto analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont., says Ontario’s auto industry has lost 50,000 jobs since 2006 and has been hurt by long-term structural change as well as cyclical issues related to the economy.

It is also becoming increasingly difficult to compete with lower-cost plants in parts of the U.S. and Mexico that are not unionized, he says. As a result, he expects Canada’s share of total North American auto production — virtually all of which takes place in Ontario — to drop to as low as 12% during the next four to five years from its current perch of 16%.

“More jobs will be lost in the auto industry, and the need for increased productivity is overwhelming,” DesRosiers says. “Cyclically, there will be an uptick in the next year, but we will never get all the jobs back because, structurally, we are losing jobs to other jurisdictions where labour and other costs are less.”

The pain in Ontario has spread beyond the auto industry, with the high Canadian dollar and low-cost goods from developing countries creating competitive pressures for a variety of manufactured goods. The past year has seen a 12% loss of jobs in the manufacturing sector, overall, accelerating a decline that began before the recession, according to Scotiabank figures.

Many of these jobs will never be recovered in the manufacturing area, but the province will pick up the slack as opportunities increase in services-related businesses, including financial services, real estate, health care and education, as well as in professions such as law and accounting.

Ontario is witnessing “significant healing” in these industries, says Warren Lovely, executive director and senior economist with CIBC World Markets Toronto. The financial services industry is a meaningful employer in Ontario, and healthier stock markets and debt markets are benefiting banks, insurance companies and securities firms.