Ontario, which makes up almost 40 per cent of Canada's economic heft, is now in a recession, according to the ever-scrupulous but pessimistic forecasters at the University of Toronto's Institute for Policy Analysis.
“As recessions go, this one should be very mild,” say economists Steve Murphy and Peter Dungan.
“We continue to be concerned, however, that the contraction in the U.S. economy will turn out to be worse than we expect,” and put further pressure on the Ontario economy, they said.
The recession will take its toll on employment levels, the forecast shows.
Pre-tax corporate profits are expected to contract significantly for the first three quarters of the year. Residential construction activity is also on the decline.
Ontario won't fully recover and outpace the rest of the country in growth until 2010, they say, when the province is forecast to grow 3.2 per cent compared to Canada's 3.1 per cent.
The dismal forecast mirrors the tone of the Bank of Canada on Tuesday, when it cut its key interest rate by a half percentage point for the second time in six weeks, although the central bank's projections for the country are slightly higher. The central bank slashed its forecast for Canada, now expecting 1.4 per cent growth (in real terms) in 2008, and warned that a recovery wouldn't fully take hold until the middle of 2010.
For Ontario, the main culprits are plunging exports, especially in the auto sector, and faltering consumption, said Mr. Murphy and Mr. Dungan.
The savings rate in Ontario is now negative, and that's not sustainable, and so consumption will likely be lower, they explained.Trade will be a “significant drag” on Ontario's growth, mainly because motor vehicle sales were “horrific” in December and January. Motor vehicle exports are likely to post a 10 per cent decline in the first quarter, compared to the previous quarter, and imports likely fell 4 per cent, they said.
“If things turn out worse than expected,” they add, “we continue to hope that governments do not stand to a ‘no deficit' policy.”
While the UofT forecast is on the pessimistic end of the spectrum, other economists have warned of recessionary conditions in Ontario. Toronto Dominion Bank and Royal Bank of Canada have both said Ontario has stagnated. And on Tuesday, Export Development Canada warned of a terrible year for exports, particularly in consumer goods and motor vehicles and parts heading to the United States — Ontario's mainstay.Still, TD's chief economist, Don Drummond, won't go as far as to call a recession in Ontario.“Ontario will be very close to zero in every quarter of 2008 and it is just not credible to call tiny numbers on either side of zero,” he said on Wednesday.