Ontario In For a Bumpy Ride Until at Least 2008

Monday, October 23rd, 2006
By Inya Ivkovic, MA for Profit Confidential

The province of Ontario is Canada’s largest economy. It is also the economy facing a bumpy ride in the months ahead as a strong dollar suffocates exports and domestic demand contracts. And now, two more culprits are likely to join the contraction wagon– lackluster automotive industry and weak labor market. The result? For the first time in three years, economists expect that Ontario’s real economic growth will decrease.

While Ontarians are proud of their strong currency, (Canadian dollar is now trading in the high 80-cent range), the dollar is simply slaughtering Ontario’s exports. The province is obviously miles behind in adjusting to the new foreign exchange landscape and it is seriously hurting.

While still going through the second quarter, economists started voicing their concerns that even their gloomiest forecasts could be overly optimistic given the current state of Ontario’s economy. Demonstrating the most reason for concern were weak private investments and much softer than expected consumer spending.

Economists are puzzled why the 2005 GST (Goods and Services Tax) cut of one percent hasn’t done more to boost the Ontario economy. Perhaps an explanation lies within the process itself. For my American readers, let’s just say that GST is a very emotional issue for Canadians and a great electoral ticket that has never quite panned out. Ironically, GST was introduced by the Conservative party, then the Liberals’ reign began with a promise of its annihilation, (which remained a Liberal promise to this day). And now, Conservatives have taken a mini bite out of it by cutting one percent (from seven percent) in July, and with great fanfare at that.

Unlike many of my friends, I try not to complain too much about taxes. They are a fact of life and a way to finance our great Canadian life. But, I have to add that I was really looking forward to that one percent cut, especially considering that I bought my new house after July 1st and saved quite a bit of money on the transaction.

That was the good part. The bad part was that the GST cut came with a price. As it turned out, both my husband and I are paying on average C$12.00 to C$13.00 more on our monthly income taxes. I didn’t notice it, but he did, and was told by his human resources manager that this monthly income tax increase is directly related to the GST cut.

This also meant that an average, two-income family would have to spend about C$2,500 more on taxable goods and services per month to offset the GST cut versus increased monthly income taxes. Is it any wonder that Ontarians, and I’m sure most Canadians, are actually closing their wallets instead of opening them?

Going back to Ontario’s bumpy ride ahead, statistics comparative to the rest of the country are also quite troublesome. For starters, Ontario’s 2006 annual growth is expected at a measly one percent, while the rest of the country is expected to grow at a 2.7% rate. As far as 2007 is concerned, Ontario is likely to grow 1.7%, while the rest of the country expects a growth rate of 2.5%.

At least economists are leaving us some light at the end of the tunnel, forecasting that by 2008, as Ontario implements its adjustment strategies, the province’s economy is not only expected to pick up the pace, but also to outpace the rest of the country. Can’t wait: I’m not a fan of bumpy rides, either in my car or in my finances.

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Tags: economic analysis, Economic growth