July - August 2024


Keeping an eye on the economy

Ontario’s economy likely mustered even stronger first-quarter economic growth than the robust economy 3.1% annualized print observed for Canada. This view is supported by a healthy pick up in our internal data that tracks debit and credit card spending, which in turn was fueled by sturdy job growth and another robust population increase to begin the year. What’s more, exports surged to start the year (Chart 1), driven by U.S. demand, and a massive gain in motor vehicle shipments as improving auto supply chains supported higher production.

Had the Bank of Canada not raised their policy rate, we may have taken our 2023 real GDP growth forecast even higher. However, the resilience of Ontario’s highly indebted households will soon be tested by elevated borrowing costs. Ultimately, we see consumer spending slowing well below-trend in the second half of this year and into 2024. Also, when stacked up against other provinces, Ontario’s latest budget rolled out more modest support measures for households.

With the Bank of Canada recently hiking their policy rate (and sounding quite hawkish in the statement accompanying their rate decision), home sales in the province are expected to head significantly lower in the second half of this year on the heels of a 20% bounce-back in the second quarter. This is especially true given that prices also increased sharply in Q2, significantly weakening affordability. Yet, we think prices will still post a decent gain in the third quarter, as a highly constrained supply backdrop has helped tighten markets considerably (Chart 2). Looking ahead to next year the Bank of Canada is likely to cut interest rates, setting the stage for a more sustained – though modest – recovery in sales and prices.

Improved activity in the automotive sector got manufacturing off to a solid start to begin the year. Nonetheless, the outlook through the remainder of this year and 2024 is murkier amid downgraded U.S. growth prospects, even with a competitive Canadian dollar and some potential improvements in global supply chains. Longer-term, manufacturing prospects are brightened by the new EV battery plant in St Thomas, on which construction is slated to begin next year. The fate of the planned Stellantis battery plant in Windsor still hangs in the balance, although the Ontario and federal governments have pledged funds to keep the project alive.

July – August 2023
Article Author: TD Commercial Banking


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