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TORONTO, June 25, 2009 – Although turmoil in the Ontario auto sector has led to production cuts and job losses, and weak U.S. demand continues to weigh broadly on the province's manufacturing activity, Ontario will see above-average growth in 2010, according to the Provincial Outlook report released by BMO Capital Markets Economics.

“Real GDP will likely contract 3.1 per cent this year, with a 2.0 per cent recovery likely in 2010 – slightly above the national average,” according to Robert Kavcic, Economist, BMO Capital Markets.

The ongoing restructuring of the North American auto sector has crippled a key foundation of the Ontario economy. New vehicle production came to a near standstill to start the year, down almost 50 per cent year-over-year through May. Meantime, plant shutdowns and closures abound, leading to rampant job losses in the sector.

“Employment in the auto assembly and parts sectors has fallen to the lowest level since the early-70s,” said Kavcic. “As the year progresses, more weakness is expected. As a result, Ontario's unemployment rate is likely headed toward 10 per cent for the first time since 1994.”

Further slack in the labour market will keep consumer spending under pressure for the rest of the year. Retail sales were down 5.0 per cent year-over-year in the first four months of the year, the worst performance East of Alberta. “One reason is waning support from the services sector,” noted Kavcic. “While services were a source of strength until mid-2008, after that point the sector has shed more than 60,000 jobs.”

However, with the U.S. economy likely to embark on a recovery by the end of the year, the stage is set for a rebound in auto sales in 2010. Meantime, an aggressive $27.5 billion infrastructure spending plan by the Province over the next two years will be topped up with an additional $5 billion in federal funding—that's nearly 3 per cent of GDP, and should help produce an above-average recovery in 2010.

Longer-term challenges remain, however, and Ontario is not in a position to outperform on a sustained basis—one particular challenge will be the broad manufacturing sector's ability to deal with a loonie that is likely to trend back toward parity.

The Province of Ontario's aggressive budget also provided a mix of tax relief for individuals and businesses, and a proposed harmonization of the sales tax. The budget penciled in a $14.1 billion fiscal 2009/10 deficit, which has since been raised to $18.5 billion in the wake of auto-sector aid. The Province's long-term plan is to return to balance by fiscal 2015/16.

The complete report can be found at www.bmocm.com/economics.

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