Higher wages could bol­ster con­sumer spend­ing, but ris­ing in­ter­est rates and stricter mort­gage rules pose chal­lenges for the hous­ing mar­ket

Investment Executive - - FRONT PAGE - BY FIONA COL­LIE

In­fra­struc­ture projects could bol­ster eco­nomic growth in On­tario.

on­tario’s econ­omy may be slow­ing down, but 2018 still is poised to be a pos­i­tive year for Canada’s largest prov­ince.

Af­ter an in­crease in real gross do­mes­tic prod­uct ( GDP) of about 3% for On­tario in 2017, most economists be­lieve that healthy con­sumer spend­ing in both Canada and the U.S., as well as con­tin­ued i nvest­ment by the On­tario and fed­eral gov­ern­ments, will con­trib­ute to real GDP growth of around 2% in On­tario this year.

“I still would char­ac­ter­ize that [rate] as be­ing fairly vi­brant growth in On­tario,” says Robert Hogue, se­nior econ­o­mist with Royal Bank of Canada (RBC) in Toronto. “On­tario con­tin­ues to be among the faster-grow­ing pro­vin­cial economies in Canada.”

RBC an­tic­i­pates real GDP will in­crease by 2.1% in On­tario in 2018, while Van­cou­ver-based Cen­tral 1 Credit Union and Toronto-Do­min­ion Bank (TD) have slightly rosier pre­dic­tions of 2.3% for the prov­ince. The Ot­tawa-based Con­fer­ence Board of Canada has the most con­ser­va­tive es­ti­mate for On­tario’s real GDP growth in 2018, at 1.9%.

As in re­cent years, the pub­lic sec­tor will add to On­tario’s econ­omy in 2018 through sev­eral spend­ing projects. For ex­am­ple, there are sig­nif­i­cant large in­fra­struc­ture projects un­der­way — par­tic­u­larly in pub­lic tran­sit — that are be­ing funded at both the fed­eral and pro­vin­cial level.

“There are big projects in Ot­tawa and Toronto for pub­lic in­fra­struc­ture,” says MarieChris­tine Bernard, as­so­ciate di­rec­tor, pro­vin­cial fore­cast, with the Con­fer­ence Board. “Those will carry on and con­tinue to boost gov­ern­ment in­vest­ment [in the prov­ince].”

On­tario’s pro­vin­cial gov­ern­ment is un­likely to make more large project an­nounce­ments, given the po­ten­tial risks of a fu­ture eco­nomic down­turn, says Michael Dolega, se­nior econ­o­mist with TD.

“Gov­ern­ments and in­di­vid­u­als have to pre­pare them­selves for the pos­si­bil­ity that i n the medium term, there’s go­ing to be some form of sig­nif­i­cant eco­nomic down­turn — at least, the pos­si­bil­ity of that cer­tainly is not zero,” says Dolega. “The [On­tario] gov­ern­ment would be pru­dent to make sure the books are in order.”

Even though On­tario’s Lib­eral gov­ern­ment “will want to please peo­ple” in its next bud­get, given there is a spring elec­tion on the hori­zon, says Hogue, ques­tions re­main about how the gov­ern­ment will do so and still pay its bills.

“The debt has gone up quite con­sid­er­ably,” he says, “and so we will be watch­ing very closely with re­spect to what will be an­nounced i n the pro­vin­cial bud­get.”

In the mean­time, con­sumer de­mand will re­main ro­bust this year, given that On­tar­i­ans will have more money in their pock­ets, thanks to ris­ing wages.

Be­sides gen­eral wage in­creases, On­tario also boosted its min­i­mum wage to $14 an hour from $11.60 as of Jan. 1. How this in­crease will af­fect On­tario’s econ­omy is un­clear. On one hand, a higher min­i­mum wage is a plus for the econ­omy be­cause con­sumers will have more money to spend. On the other hand, busi­ness own­ers may be less in­clined to add to their work­force.

A re­cent anal­y­sis by the Con­fer­ence Board, for ex­am­ple, es­ti­mates that the wage in­crease may l ead to 29,000 fewer j obs be­ing cre­ated in 2018 than oth­er­wise may have been.

De­spite this po­ten­tial im­pact, economists ex­pect to see job gains this year. TD and RBC pre­dict em­ploy­ment growth of 1.2% and 1.4%, re­spec­tively, in 2018.

Still, the in­crease in the min­i­mum wage won’t be the “dom­i­nat­ing fac­tor” of On­tario’s eco­nomic per­for­mance this year, Bernard says. In­stead, stricter mort­gage rules and higher in­ter­est rates are likely to have more in­flu­ence.

The Bank of Canada (BoC) hiked its bench­mark in­ter­est rate by 25 ba­sis points to 1.25% in mid-Jan­uary, and is likely do so again be­fore the year is out. These in­creases could put a strain on con­sumer spend­ing, given Cana­di­ans’ high debt loads.

One pos­si­ble sav­ing grace, though, is that the BoC is in­creas­ing in­ter­est rates at a much slower pace than in pre­vi­ous tight­en­ing pe­ri­ods, says Dolega. That could make things slightly eas­ier for in­debted house­holds.

“The speed of in­crease is rel­a­tively muted,” he says, “so that should al­low a lit­tle bit of breath- ing room and a lit­tle bit of time to ad­just to the new re­al­ity. ”

New fed­eral mort­gage rules also are likely to cause a slow­down in the hous­ing mar­ket and re­lated con­sumer spend­ing. Be­gin­ning in Jan­uary, mort­gage lenders must sub­ject both non­in­sured and in­sured mort­gage ap­pli­cants to a “stress test,” forc­ing bor­row­ers to qual­ify for a higher rate than the one ne­go­ti­ated for their mort­gage con­tract.

As a re­sult, some in­di­vid­u­als may choose to hold off on pur­chas­ing a home in the com­ing year and in­stead con­tinue to save for a down pay­ment.

“The mar­ket still will be ro­bust,” says Edgard Navar­rete, bank­ing econ­o­mist, On­tario Re­gion, with Cen­tral 1 in Toronto, “but it’s not go­ing to have the ac­tiv­ity that we saw last year.”

The Con­fer­ence Board an­tic­i­pates there will be 9% fewer hous­ing starts this year com­pared with 2017. As a re­sult, res­i­den­tial con­sump­tion is likely to slow down in the com­ing year be­cause On­tar­i­ans will be less likely to buy “big ticket” items, such as ap­pli­ances and fur­ni­ture, which typ­i­cally ac­com­pany the pur­chase of a home.

Ex­ports — par­tic­u­larly those go­ing to the grow­ing U.S. econ­omy — are ex­pected to be pos­i­tive if muted i n the com­ing year. The Con­fer­ence Board, for ex­am­ple, an­tic­i­pates that ex­ports will grow by 1.6% in 2018.

The au­to­mo­bile in­dus­try is likely to ex­pe­ri­ence a re­bound in 2018 af­ter hit­ting a few snags in the lat­ter half of 2017, in­clud­ing a strike at Gen­eral Mo­tors of Canada Ltd.’s CAMI Au­to­mo­tive plant i n Inger­soll, Ont.

Of course, a po­ten­tially dark cloud hang­ing over the auto sec­tor — and all Cana­dian ex­ports, for that mat­ter — is the rene­go­ti­a­tion of the North Amer­i­can Free Trade Agree­ment (NAFTA).

“It’s Con­cern No. 1 for ex­porters,” says Peter Hall, vice pres­i­dent and chief econ­o­mist with Ot­tawabased Ex­port De­vel­op­ment Canada. “Ev­ery­body is wor­ried about this.”

Economists agree that al­though there’s plenty of un­cer­tainty sur­round­ing the NAFTA ne­go­ti­a­tions, Canada’s pro­vin­cial and na­tional economies can with­stand any changes to the treaty, in­clud­ing its fail­ure.

“Our view is that if NAFTA fails, it would ob­vi­ously have a neg­a­tive i mpact for Canada,” says Hogue. “But if the out­come is that the World Trade Or­ga­ni­za­tion rules [ap­ply, the fail­ure of NAFTA] would not be cat­a­strophic; it would not de­rail the On­tario [econ­omy] or Canada’s econ­omy.”

Ex­ports that could give On­tario’s econ­omy a boost i n 2018 in­clude ma­chin­ery and equip­ment, as well as ser­vices such as fin­tech and ar­ti­fi­cial in­tel­li­gence.

Large in­fra­struc­ture projects will con­tinue to boost gov­ern­ment in­vest­ment in On­tario this year

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