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Ontario’s economy is poised to benefit from U.S. growth and a weaker Canadian dollar in the next two years, likely boosting provincial government coffers by $4 billion to $5 billion, says CIBC World Markets.

Ontario’s economy will grow by 2.8% next year, behind only Alberta, CIBC predicts. In 2016, real GDP growth is forecast at 2.4%, still above the national average.

“From manufacturing shipments, to domestically driven signposts in retailing, wholesaling and homebuilding, Ontario has seen a notable resurgence, shifting from a perennial trailer to among the better performing regions of the country,” says Avery Shenfeld, chief economist at CIBC. “Employment hasn’t caught fire, but should respond at some point to firming output.”

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He’s also forecasting the Bank of Canada will significantly lag the U.S. Federal Reserve in rate hikes next year. That will cause the Canadian dollar to depreciate to roughly 85 cents U.S., repositioning the province as a more cost-competitive manufacturing location. Lower federal and provincial corporate tax rates, the shift to the HST, and a $2.5-billion fund set up by the province to court direct investment, could be further enticements.

Ontario’s economy has underperformed compared to the rest of the country since 2002. CIBC economists are calling for Ontario to match national growth in 2014 at 2.3% and move slightly ahead in the next two years. This forecast would top estimates and improve the provincial government’s bottom line.

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“All told, Ontario could have an additional $4 billion to $5 billion accumulated over two years that could be used to either exceed targets for deficit reduction or avoid the full burden of what rating agencies have judged to be tough-to-meet spending constraints,” says Shenfeld.

He notes that despite the province’s better than expected financial situation, its bond performance has been hurt by earlier downgrades in the economic outlook and risks of a corresponding move by rating agencies. As well, a softer outlook implied even tighter spending plans or the further use of tax-hike room in order for the province to meet the targeted date for a balanced budget.

“Having avoided a credit downgrade, Ontario bought itself some time, and the revenues associated with a better-than-expected nominal GDP outlook should be of value in protecting its rating,” adds Shenfeld.

“We see conditions a year from now as comparable to late 2010 and early 2011. As was the case back then, Ontario’s real growth will be topping 2.5% and 10-year Canada bonds will be near 3%. If that analogy extends to spreads, a year from now, 10-year Ontario bonds could tighten in to that earlier period’s 70 basis point spread over Canada’s.”

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Originally published on Advisor.ca

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