| || ||Glen Hodgson |
Senior Vice-President and Chief Economist
Forecasting and Analysis
Ontario was on the front line of the 2008-09 financial crisis and recession. The made-in-the-USA meltdown battered an Ontario economy that is deeply linked to the United States market, dependent on large manufacturing firms and the auto sector. After an impressive initial rebound from the recession, Ontario has slipped back into tepid growth of around 2 per cent annually, and its longer-term growth prospects don’t look much better than that. If Ontario’s growth potential is to rise above 1.9 per cent annually, as forecasted by The Conference Board of Canada earlier this year, the province’s—and for that matter, Canada’s—mediocre performance on productivity growth and innovation must be improved.
Ontario continues to face pressures for fundamental restructuring in many sectors, especially in manufacturing and in the auto industry in particular. This restructuring is being driven by factors like the upward structural shift in the value of the Canadian dollar and the modest pace of economic growth in the United States. Furthermore, the Conference Board’s research indicates that aging demographics and slower labour force growth after 2015 will reduce the province’s economic growth prospects.
Stronger productivity growth could help to offset these negative forces. While there is no silver bullet when it comes to improving productivity and innovation performance, Ontario should embrace an agenda to reduce and eliminate barriers to trade and investment within Canada and internationally. The federal government is already pursuing an aggressive international free trade agenda, which will benefit Ontario firms once improved market access is secured. Ontario firms large and small should be prepared to explore international business opportunities beyond the U.S. market.
For its part, Ontario could join with other provinces to create a single Canadian market, where its goods, services, investment capital and people move freely across the country without regulatory or administrative constraints. This could be built on the positive example of the Trade, Investment and Labour Mobility Agreement between Alberta and British Columbia. Ontario firms could then become preferred suppliers to the expected resource investment surge in western Canada. Such an open-market agenda would improve business access to markets outside Ontario, and also increase competition within Ontario—both of which can boost productivity.
How large is the opportunity within Canada? The Conference Board recently estimated that $364 billion in investment would come into the oil sands alone through 2035. Nearly one-third of the economic benefits of oil sands investment are estimated to occur in provinces other than Alberta. About half of the non-Alberta employment effects from oil sands supply chains will take occur in Ontario, in sectors such as services, and in manufacturing inputs for the oil sands. And this share could rise further with an aggressive market-opening strategy.
To some extent, the structural upward shift in the value of the loonie is creating the right conditions for accelerated business investment in Ontario and across Canada in order to stay competitive, which ceteris paribus should have a positive impact on business productivity in the years ahead.
Over the past few years, the provincial and federal governments introduced significant business tax reforms aimed at creating a stronger private investment climate. These measures are an important start, although we believe that more fundamental tax reform at both the federal and provincial levels is required to streamline Canada’s complicated and burdensome tax structure. The private sector has begun to step up and take advantage of this more fiscally-friendly investment environment; private investment is expected to grow by over 7 per cent in 2012, after a strong performance in 2011.
Ontario will also require concerted action to improve workforce skills and flexibility in support of productivity and innovation, and maximize labour force growth. For example, immigration policies that identify, attract and integrate larger numbers of new Canadians into the provincial work force will be a critical element in a renewed growth strategy.
The business climate has clearly changed for Ontario. Today, its economy has to operate in a much different environment than it enjoyed in past decades. It must explicitly address all three core elements of economic growth—capital investment, productivity and the labour force. One key way to start is to be more open to the opportunities presented in a globalized world, and to the benefits of increased competition at home. But if nothing changes, Ontario will face considerable challenges even maintaining its place in Canada and North America.
Read: Needed: A Comprehensive Growth Strategy for Ontario