Economy at risk from overvalued Canadian dollar and slower U.S. growth

TORONTO, Jan. 28 /CNW/ - Ontario's economy will outpace the national average in 2010 but remains at risk to a high Canadian dollar, weak U.S. growth and high provincial deficits, finds a new report from CIBC World Markets Inc.

"For Ontario, 2009 was a year to forget," says Warren Lovely, senior economist in CIBC's latest Economic Insights report. "But Ontario outpaced the national average by a significant margin in (the third quarter of 2009), and with momentum carried into the first half of this year, Ontario's full-year growth rate should exceed the national average for the first time in eight years.

"It was once the case that Ontario outperformed in expansion, at least until the Canadian dollar began its trend appreciation. Since that time, Ontario has lagged the national average. This year's growth rate captures comparisons to depressed levels of activity in 2009. That's particularly true in manufacturing, where shipments slumped and factory job losses lopped more than 1.5 per cent off total employment. Once an inventory restocking has run its course, growth could be harder to sustain."

Mr. Lovely expects GDP growth in the province to climb 2.4 per cent in 2010 and 2.8 per cent in 2011, once again falling behind the national average of 3.0 per cent. He adds that the factory sector must contend with an overvalued exchange rate. Lower U.S. costs and heightened competition from emerging Asia pose a threat to Ontario, North America's largest auto producer. And as a net-energy importer, higher oil and gas prices won't do producers any favours and future years will also feel the drag from government belt tightening.

However, he notes a harmonized sales tax, alongside cuts to corporate taxes, will boost competitiveness and help lure jobs. A focus on emerging sectors, such as green power, also looks to pay dividends. Growth in Canada's banking sector stands to benefit Ontario disproportionately.

The report finds that the economic recovery will not be even across the country. On the back of strong oil, potash, agriculture and uranium sectors, Saskatchewan is expected to lead economic growth in the country in 2010 with GDP up 3.0 per cent. Solid job prospects will continue to spur in-migration, with population growth stronger than at any time in the past 30 years.

The B.C. economy will be the second strongest in 2010 with 2.8 per cent growth on the basis of strength in the resource sector. The province will also see a broadening and deepening of its export base, with expanded transportation infrastructure allowing the province to lever its Gateway to Asia status. Mr. Lovely does not see the end of Olympics spending as a significant drag and notes that the adoption of a harmonized sales tax should boost investment and spur productivity growth.

Newfoundland and Labrador is forecast to see a big rebound this year with its GDP climbing 2.6 per cent as output recovers from production difficulties that plagued 2009. The economy also benefits from strong consumer spending and business investment. Barring disruptions, growth in 2011 should strengthen further to 3.3 per cent, with large energy projects having the potential to deliver strong growth longer-term.

A newfound availability of cost-effective inputs, alongside a recovery in commodity prices, is sparking re-investment in Alberta. But a still-tentative consumer suggests that the province will be slower to re-accelerate in 2010 seeing GDP growth at 2.4 per cent for the year, same as Ontario. However, by 2011 growth is expected to reach 4.2 per cent, tops in the country, just ahead of Saskatchewan.

Manitoba escaped the recession relatively unscathed, tabling a fourth straight year of above-average growth in 2009. With less ground to be made up, growth should run just in line with the national average in 2010 at 2.3 per cent, climbing to 3.1 per cent in 2011.

Recent outperformance in Québec and the Maritimes likely won't be repeated, with solid, if unspectacular gains due in 2010-11.

Real GDP Performance

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                                                CIBC Forecasts
    Y/Y %              Actual    --------------------------------------------
                        2008          2009           2010           2011
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    BC                   0.0          -2.2            2.8            3.4
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    Alta                 0.0          -2.6            2.4            4.2
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    Sask                 4.2          -1.7            3.0            4.1
    -------------------------------------------------------------------------
    Man                  2.0          -0.2            2.3            3.1
    -------------------------------------------------------------------------
    Ont                 -0.5          -3.5            2.4            2.8
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    Qué                  1.0          -1.4            2.2            2.7
    -------------------------------------------------------------------------
    NB                   0.0          -0.7            2.2            2.8
    -------------------------------------------------------------------------
    NS                   2.2          -0.4            2.1            2.6
    -------------------------------------------------------------------------
    PEI                  0.5          -0.5            1.8            2.4
    -------------------------------------------------------------------------
    N&L                  0.5          -3.5            2.6            3.3
    -------------------------------------------------------------------------
    CDA                  0.4          -2.5            2.3            3.0
    -------------------------------------------------------------------------
    U.S.                 0.4          -2.5            2.8            2.4
    -------------------------------------------------------------------------
    Source: CIBC, Statistics Canada

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/sjan10.pdf

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