By Stewart Lewis

(February 9 – 17:50 ET) – The Big Three automakers now account for just two-thirds of the Canadian and U.S. market, down from more than 70% prior to 1998, says economists at Scotia Capital.

“The auto industry remains a bellwether indicator of Canada’s economic performance, despite the increasing share of the national economic pie represented by services. The auto industry is a significant purchaser of high-tech products, legal, accounting and banking services, as well as a variety of local goods and services,” says a recent report from Scotia, entitled Grinding the Gears: The motor vehicle industry downshifts out of overdrive.

“Domestic parts producers will also be hard hit in this down cycle, reflecting their sharply increased value-added contribution to the assembly lines throughout the NAFTA region. Even in the recent period of rising demand, auto parts prices were steadily declining, and have fallen on average by about 3% since the mid-1990s. In total, the slowing in Canada’s motor vehicle assembly & parts industry is expected to directly trim 0.3 percentage points from national GDP growth in 2001.”

Scotia is predicting that Ontario “will bear the brunt of the auto industry’s con-traction since the province encompasses 90% of Canada’s motor vehicle assembly & parts output. Motor vehicle assembly & parts account for more than one-fifth of Ontario’s manufacturing output and close to 6% of its real GDP. This industry posted more than half of the province’s hefty export gain during the past four years, beyond its 45% share of merchandise exports.”

Though the high level of North American integration in this industry diminishes its estimated multiplier effects in any one region, says Scotia, a $100 decline in nominal motor vehicle production is still expected to shrink Ontario’s nominal GDP a further $84. “The loss of one Ontario job in this industry is expected to lead to the loss of another 2.5 Ontario jobs. The motor vehicle industry’s downturn this year is expected to shave 0.7 percentage points from Ontario’s real GDP growth.”

On the other hand, Scotia does not expect the Ontario economy to slip into recession due to several industry and policy considerations. “A number of other Ontario industries have also posted stellar performances over the past four years and should retain some momentum, albeit slower, this year. They include computer and telecommunications equipment and services, business services and tourism.”