Exports to resurgent U.S. could add billions to government books over
next two years
TORONTO, Sept. 17, 2014 /CNW/ - Ontario's economy is poised to be the
single biggest beneficiary of sturdy U.S. growth and a weaker Canadian
dollar in the next two years, likely boosting provincial government
coffers by $4-5 billion, finds a new report from CIBC World Markets.
The report calls for Ontario's economy to grow by 2.8 per cent next
year, behind only that of Alberta. In 2016, real GDP growth is forecast
at 2.4 per cent, but 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, who coauthored the report with senior economist,
Warren Lovely. "Employment hasn't caught fire, but should respond at
some point to firming output."
Mr. Shenfeld notes that historically, Ontario's real GDP has had the
tightest correlation to U.S. economic activity, but after years of
plant exits, capacity use has actually tightened in the face of demand
gains. "Ontario needs to cultivate growth sectors, rebuild capacity and
win the battle for new facilities.
"Our call for the Bank of Canada to significantly lag the U.S. Federal
Reserve in rates hikes next year, and a resulting depreciation of the
loonie to roughly 85 cents U.S., should reposition the province as a
more cost-competitive location. Lower federal/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."
The report notes that Ontario's economy has underperformed the national
average dating all the way back to the 2002-2007 pre-economic crisis
period. The CIBC economists are calling for Ontario to match national
growth in 2014 at 2.3 percent and move slightly ahead in each of the
next two years. This forecast would top estimates and improve the
provincial government's bottom line.
"All told, Ontario could have an additional $4-5 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 Mr. Shenfeld. "The
extra room captures published budget sensitivities to nominal GDP
divergences, and obviates the need to dip into the $1 billion in
reserves and $0.5 billion in contingencies set aside this year, and the
$1.2 billion reserved for 2015/16."
He notes that despite the fact that the province has been running ahead
of budget targets, the province's bond performance has been hurt
recently 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
"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 Mr. Shenfeld. He
says that the rebound in the U.S. and a more favourable exchange rate
have the province better positioned to rise to its fiscal challenges.
"We see conditions a year from now as comparable to late-2010 and
early-2011. As was the case back then, Ontario real growth will be
topping 2.5 per cent and 10-year Canada bonds will be near 3 per cent.
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 Canadas. So bond investors have reason to cheer "grow Ontario
grow" as gains in nominal GDP support some bond outperformance against
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eisep14.pdf
CIBC's wholesale banking business provides a range of integrated credit
and capital markets products, investment banking, and merchant banking
to clients in key financial markets in North America and around the
world. We provide innovative capital solutions and advisory expertise
across a wide range of industries as well as top-ranked research for
our corporate, government and institutional clients.
SOURCE: CIBC World Markets
For further information:
Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at (416) 594-7356, firstname.lastname@example.org or Kevin Dove, Head of External Communications at (416) 980-8835, email@example.com.