Over the past decade, the Ontario economy confronted significant external challenges that raised business costs, eroded the province’s competitiveness, and lowered Ontario’s exports to the United States — its most important export market.
A near‐tripling in the price of crude oil from 2002 to 2008 resulted in sharply higher energy costs for Ontario households and businesses. At the same time, the rapid appreciation of the Canadian dollar hurt Ontario’s price competitiveness in the critical U.S. market. In 2008, as Ontario was adjusting to high oil prices and the strong Canadian dollar, the global economy fell into the most severe recession since the 1930s. Global trade collapsed, falling 10 per cent in 2009. The U.S.
economy experienced a deep recession and a significant loss of jobs. Ontario’s merchandise exports to the United States dropped by nearly one‐third in just two years. As a result, Ontario was one of the provinces hardest hit by the global recession.
Ontario’s Economic Challenges
As Ontario adjusts and adapts to the new global economic reality, it will need to confront a number of significant economic challenges. Some of these challenges arise from factors over which Ontario business, labour and government have little control — such as the external value of the Canadian dollar or the global price of commodities. Other challenges, however, arise from factors over which we do collectively have some control, such as our productivity and cost performance.
By increasing investments in machinery and equipment, skills and training, and product innovation, we can improve our productivity and labour costs, enhancing Ontario’s competitiveness. We can also make greater efforts to increase our sales in fast‐growing markets.
Central to these challenges is Ontario’s lagging productivity growth. Since 1985,
Ontario’s Productivity Growth Has Lagged the U.S.
CHART 1.1
1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Avg. Growth Ontario U.S.
1985–2000 1.3% 2.0%
2001–2011 0.4% 2.3%
Business Sector: Real Output Per Hour Worked (Index: 1984=100)
Sources: Statistics Canada, U.S. Bureau of Labor Statistics and Ontario Ministry of Finance.
U.S.
Ontario
Research and development (R&D) performed by business helps drive overall productivity growth by creating new knowledge and new technologies. Business R&D as a percentage of gross domestic product (GDP) in Ontario has continuously lagged behind the United States over the last decade, despite generous tax
incentives and funding support. The gap in business R&D activity has widened since 2005 due to a major decline in R&D performed by Ontario’s manufacturing sector.
Ontario Business R&D Spending Below the U.S.
CHART 1.2
Sources: Bureau of Economic Analysis, National Science Foundation and Statistics Canada.
0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 U.S.
Ontario Per Cent of GDP
Machinery and equipment (M&E) investment matters critically for labour productivity growth, not only because it augments the amount of capital per worker, but most importantly because it brings new technology to the workplace.
Rapid introduction of new technologies spurs innovation, efficiency gains, enhanced output and increased competitiveness.
Business investment in M&E has been a source of strength for the Ontario economy since the recession. As Ontario’s businesses strive to adapt to a high Canadian dollar and intense global competition, they have been increasing investment in productivity enhancing M&E.
As a share of real GDP, real M&E investment has been trending up and, at 4.9 per cent, currently stands at a long‐term high. However, the share of M&E investment in Ontario remains well below the equivalent U.S. ratio. Ontario’s underperformance in M&E investment relative to the United States has also widened. Since 2000, the gap between the United States and Ontario real M&E to GDP share has averaged 3.4 percentage points, more than double the average gap of 1.6 percentage points from 1981 to 1999.
Strong gains in corporate profits and healthy corporate balance sheets combined with low M&E prices have left Ontario’s businesses in an excellent position to boost investment higher.
Population aging and the consequent slowdown in the rate of labour force growth have led to concerns about skills and labour shortages in the future. Employers in some sectors and industries are already reporting recruitment challenges.
Government, along with industry, employers and educational institutions, needs to work together more closely to identify workforce challenges, including supply‐
and‐demand issues.
Ontario Businesses Could Be Investing More
CHART 1.3
Sources: Statistics Canada, U.S. Bureau of Economic Analysis and Ontario Ministry of Finance.
2 3 4 5 6 7 8 9
1980 1984 1988 1992 1996 2000 2004 2008 2012
U.S.
Ontario Machinery and Equipment Investment
as a Per Cent of Real GDP
Access to accurate, timely and comprehensive labour market information is critical to ensure workers have the best chance to be matched with available and appropriate job opportunities. Expanded coverage of labour market information is needed to inform the labour market choices of employers and employees and to ensure full labour market participation of all segments of society. Postsecondary education and training institutions also need to continuously improve their responsiveness to the evolving needs of the labour market and employers.
The Challenge of Labour Market Imbalances
“In an era of aging demographics in Canada, the availability of quality skills and labour is a critical issue to companies’ success and ability to invest in our economy.”
Jayson Myers, President & CEO, Canadian Manufacturers and Exporters, on release of CME’s Management Issues Survey of CME, BDO and Food & Consumer Products of Canada Companies, December 21, 2012.
“There have also been about 1,000 tech jobs created at medium-to-large tech firms over the last three years, a period that has seen 531 new companies established here. But those companies are now growing, fast, and a ‘conservative estimate’ is that there are roughly 1,300 unfilled tech positions locally, says Communitech’s CEO, Iain Klugman.”
Iain Marlow, Technology Reporter, “Help Wanted: Tech Workers Wooed with Catered Meals, Unlimited Vacation Time,” The Globe and Mail, September 6, 2012.
The key external challenge for Ontario has been the significant appreciation in the Canadian dollar since 2002 compared to its U.S. counterpart. The high Canadian dollar puts pressure on Ontario exporters to cut prices or lose customers.