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Queen’s Park in Toronto. (DEBORAH BAIC/THE GLOBE AND MAIL)
Queen’s Park in Toronto. (DEBORAH BAIC/THE GLOBE AND MAIL)

Business Briefing

Breadbaskets and basket cases: What looms for Ontario’s next premier Add to ...

These are stories Report on Business is following Thursday, June 12, 2014.

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Ontario votes
It’s going to be a tough grind for Ontario's next premier.

Unemployment is high, economic growth is middling, and some regions have been laid low.

This election campaign has been about jobs, the economy and the weight of the fiscal burden. Many people are struggling, as are several of the cities that dot Canada’s most populous province.

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Here, then, is a look at where things stand:

Growth, Interrupted
Here’s how Royal Bank of Canada economists Paul Ferley, Robert Hogue and Laura Cooper summed up Ontario in an outlook released just yesterday:

“Poor weather conditions threw a few monkey wrenches at Ontario’s economy this winter, yet signs still point to activity continuing to expand so far in 2014 in the province. In fact, growth appears to be fairly broad-based, with the housing sector being among the few areas of the economy that showed a decline.”

Given the weather, RBC trimmed its forecast for economic growth this year to 2.3 per cent, better than last year’s 1.3 per cent, and pointed to perkier times in 2015, at 2.8 per cent.

RBC projects a mixed performance in an economy boosted by exports as the United States strengthens and the Canadian dollar weakens further.

On the consumer side of the ledger, retail sales are forecast to pick up markedly, by 3 per cent this year and 3.9 per cent in 2015.

The residential construction industry, however, will see a slowdown, with housing starts slipping to 58,900 this year and 58,000 next. Those levels would compare to the 61,085 of last year, 76,742 of 2012 and 67,821 of 2011.

It’s all about jobs, of course, and that’s an area of concern. RBC forecasts unemployment of 7.3 per cent this year, and 6.9 per cent in 2015. Having said that, these projections mark a steady decline from 7.8 per cent in 2011 and 2012, and 7.5 per cent last year.

The balancing act
The fiscal challenge is a biggie for the next premier, though not as bad as the one facing the young government of Quebec.

The ratio of net debt to gross domestic product stands at about 40 per cent, and is forecast to inch above 40.5 per cent before beginning to ease in the 2017-18 fiscal year, when it would dip below the 40-per-cent mark.

(Compare that to Quebec, at about 50 per cent and 46.8 per cent, respectively.)

A 2014-15 deficit equal to 1.7 per cent of GDP would be the worst in the country, by far. In comparison, Quebec’s is projected at 0.6 per cent.

Part of the challenge is sticking to deficit-reduction targets, in the case of the Liberals, or beating them, in the case of the Conservative challengers who say they can balance the books faster.

Here’s what Moody’s Investor Service said after the Liberals proposed a budget that led to today’s election:

“With the increase in expenditures, Ontario’s budget places greater reliance on revenue growth to help return to a balanced budget. However, as with many other Canadian provinces, economic growth in the past years in Ontario has been below prior forecasts.”

That’s an issue for whoever wins, regardless of the fact that this was said in response to a Liberal budget.

Breadbaskets and basket cases
In its latest studies of Ontario cities, one a few months old, the other more recent, the Conference Board of Canada painted a mixed picture of plant shutdowns, and a couple of openings, and better times in the services sector across the province. The highlights:

Among the bigger cities, Toronto is a bright spot, with economic expansion of 2.7 per cent expected this year as manufacturing rebounds and construction remains buoyant in the non-residential industries. Having said that, unemployment is forecast to dip to a still troubling 7.8 per cent, down from 2.8 per cent, and housing starts are projected to slip further from the more heady days of 2011 and 2012. This is, of course, the city where everyone spends more than they can afford, and retail sales should rise.

Just next door, Hamilton is in for growth of just 2.1 per cent, but with a much better showing on the jobs front, particularly given the planned opening of a new factory, coupled with the boost from a weak loonie and better U.S. growth. The jobless rate is forecast to decline to 5.8 per cent from 6.5 per cent. Not only that, but “the improvement to the region’s transit system is expected to make Hamilton’s housing market more attractive in the coming years.”

The Conference Board said the “poor results” of the Ottawa-Gatineau area shouldn’t really surprise anyone given that “the region’s biggest industry – public administration – has suffered significant downsizing since 2012.” Indeed, economic growth is projected to struggle at 0.9 per cent this year, the third year in a row below the 1-per-cent mark, though employment should pick up. The outlook for the area’s key tech sector is strong, and unemployment is forecast at 6.1 per cent.

Among smaller municipalities, Oshawa, home to General Motors Co., could see better times, with construction and other industries taking a “breather” but with “widespread gains across all other sectors, coupled with the stronger manufacturing and transportation and warehousing results.” Unemployment is high, projected at 7.3 per cent.

Windsor. Ouch. That other motor city has struggled with a “long, slow economic recovery from the steep downturn in 2008 and 2009,” though it is picking up. Still, economic growth is forecast at just 1.6 per cent this year, 1.5 per cent next year and 2 per cent in 2016. The jobless rate is projected at 8.8 per cent. And “what’s worse, even by 2018, Windsor is not expected to have recovered all the jobs it lost over the latter half of the 2000s.”

Kingston’s economy “continues to disappoint, as the recovery has been modest following the 2008-09 recession,” held back by government restraint, among other things. Unemployment is forecast at 6.5 per cent this year.

The St. Catharines-Niagara region has been “sluggish” of late but will pick up somewhat as manufacturing perks up modestly, though economic growth is projected to hover below 2 per cent. Unemployment is ugly, with an estimated 9,000 jobs lost last year and a jobless rate that’s expected to decline from 8.3 per cent, but still at 7.8 per cent.

The Kitchener-Waterloo-Cambridge area has been hurt by the troubles of BlackBerry Ltd. and the Schneiders meat plant shutdown, though manufacturing is getting “its stride” back. Economic growth plunged to a four-year low, through should rebound to 2.9 per cent this year. Unemployment is forecast to dip to 7.1 per cent.

London should also see better times, with a pick-up in manufacturing and construction. But economic growth is projected at just 2 per cent this year, and unemployment at 7.9 per cent.

Sudbury’s economy is projected to expand at a faster pace of 1.6 per cent, helped by mining, with the forecast for Thunder Bay “remains relatively upbeat.”

Lululemon cuts outlook
Shares of Lululemon Athletica Inc. plunged today after it posted lower first-quarter results that were slightly ahead of its expectations and lowered its forecast for the year.

The Vancouver-based company also said its chief financial officer, John Currie, who has been with the yoga wear retailer since 2007, and helped take it public, will retire at the end of the fiscal year.

In its first quarter, the retailer’s profit fell to $18.98-million (U.S.), or 13 cents a share, from $47.28-million or 32 cents a year earlier. Revenue rose to $384.6-million from $345.8-million, The Globe and Mail's Marina Strauss reports.

Lululemon also forecast revenue of between $375-million and $380-million for the second quarters, and earnings per share of 28 cents to 30 cents, with a dip in same store sales.

For the year, it sees revenues of about $1.8-billion, and earnings per share of $1.50 to $1.55. The company also projected a jump in same store sales, a key measure in retailing.

Lululemon shares were down about 17 per cent within about 15 minutes of the Nasdaq open.

Central bank warns on China
A crash of China’s shadow banking system would quickly send shockwaves through the Canadian economy, depressing commodity prices and triggering a housing market correction, the Bank of Canada warns in a new report.

The central bank said the risk of a banking crisis in China has shot up since its last check-up on the health of the Canadian financial system in December, The Globe and Mail's Barrie McKenna reports.

All of the other risks to the Canadian financial system remain largely unchanged, the bank said, including the threat of a house price collapse at home, sharply higher interest rates or the euro crisis. Indeed, despite of the simmering crisis in Ukraine, the bank judges that the risk of financial problems in Europe have ebbed.

“Our level of comfort as policy makers remains roughly what it was six months ago,” Bank of Canada Governor Stephen Poloz said in a statement.

Oil sands hurt: study
Canada’s prohibition on takeovers by state-owned enterprises in the Alberta oil sands has driven down oil company share prices, and is depriving the sector of much-needed capital to fuel expansion, a new study from the University of Calgary concludes.

In a report released today, economist Eugene Beaulieu and Matthew Saunders calculate that the policy has shaved 20 per cent from the share value of companies operating in the oil sands, The Globe and Mail's Shawn McCarthy reports. For junior companies, the impact was more like 30 per cent, to date.

“We call it a material destruction of shareholder wealth,” Mr. Beaulieu said in an interview.

Home prices rise
Canada’s housing market is still going strong.

Home prices rose 0.8 per cent in May from April, hitting fresh highs in three cities, according to the Teranet-National Bank index released today.

On a year-over-year basis, prices climbed 4.6 per cent last month, The Globe and Mail’s Tara Perkins reports.

Some highlights:

  • Halifax scored a 3.1-per-cent rise, the fastest for that city in the history of the index.
  • Calgary, touching a new high, has now chalked up fourth consecutive months of gains topping 1 per cent.
  • Prices in Toronto and Hamilton also hit fresh records.
  • Vancouver ended a year of rising prices.

Canada’s housing market is actually a series of markets, each different though some with the same concerns.

“The softness of prices east of Toronto is consistent with the excess supply prevailing in the resale markets of these metropolitan areas,” today’s report said of the year-over-year results.

“That being said, market conditions are generally balanced elsewhere, and are even tight in Calgary.”

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