Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada.
Ontario is, for all its challenges, a relatively affluent industrial economy. Even though its manufacturing base has struggled, one does not have to look far south to see how other manufacturing economies have fared worse – Ontario is not like the U.S. Midwestern rust belt, and Toronto and Hamilton are not Detroit or Buffalo.
Ontario remains a relatively healthy economy – new Conference Board of Canada research being released this month shows that its performance is comparable to solid European countries such as Switzerland and Germany. But Ontario is in the midst of a long-term transition – one that began more than a decade ago, when the Canadian dollar was low and the United States was a ready export market. As Ontario voters choose a government on June 12, they need a clear picture of where their province stands compared to the rest of the world, in order to compete with it.
Ontario's standard of living has been slipping for three decades. The Conference Board's new How Canada Performs analysis, which grades the economic performance of 26 jurisdictions (10 provinces and 16 advanced countries), shows that in the 1980s and 1990s, Ontario was among the global leaders in income per capita and economic growth. Since the 2000s, Ontario has failed to earn an "A" grade on economic growth, even recording a couple of "D" grades, and its income per capita has slipped to "B" and "C" grades.
As the U.S. economy gathered momentum in 2013, Ontario's job growth ranked fourth among Canadian provinces and surpassed all other peer countries. But these gains were due in part to the catch-up from steep job losses during the 2008-09 recession, and to weak job growth elsewhere. Ontario's unemployment rate remains above the Canadian average and is sharply higher than in Western Canada. The province's economic growth rate of 1.2 per cent in 2013 ranked in the middle of the pack among the 26 jurisdictions assessed, which reflects the struggles of peer countries – such as those in the euro zone – more than it does Ontario's performance.
The short-term uptick should continue into 2014 and 2015, but the more positive outlook will not last. Ontario faces a steady erosion of its growth potential and prosperity, primarily due to demographics. An older population will limit projected growth in the labour force, and higher immigration levels can only partly offset aging demographics.
Stronger productivity growth is the one way to counteract those forces. Productivity is the single most important determinant of a country's prosperity over the longer term, as it is a measure of how efficiently goods and services are produced. Like most other provinces, Ontario has a mediocre track record on productivity compared with international peers.
Private-sector investment and innovation are important to sustainable productivity growth. Yet Ontario firms are not as deeply integrated into global production and supply chains as they need to be, judging from its middle-of-the-pack rankings on inward and outward foreign direct investment. Thanks to trade liberalization and the rise of global supply chains, FDI has increasingly become a much sought-after means of generating wealth and stimulating trade.
The Ontario government has a central role in improving productivity through creating a solid investment environment for the private sector and boosting public spending on infrastructure and education. But chronic fiscal deficits and rising debt levels have limited Ontario's options to invest more in productivity-enhancing measures. A credible plan for balancing the budget is an essential step for any future government.
If budgets are not brought back into balance, it will ultimately limit public investment in the very measures needed to bolster long-term productivity growth – leaving Ontario further behind more fiscally responsible competitors.
Ontario is still seeking its place in a globalized world. Boosting productivity will provide the road map to finding it. Ontario's voters should be looking for a political commitment and plans to address productivity.
Glen Hodgson