On Monday, the Financial Accountability Office of Ontario released its Economic and Budget Outlook for spring 2020. Heavily impacted by the past six weeks of COVID-19 turmoil, and by the shape that turmoil could take over the next several months, the FAO’s near-term projections for the Ontario economy are grim.
The headline number, which the FAO bases on the current shutdown being “largely sustained through the middle of the year, with a selective and gradual reopening of activities beginning in the summer”, is especially vile: a nine percent decline in Ontario’s real GDP in 2020. If accurate, that would mark the largest annual drop in GDP on record.
“Measured from its pre-recession peak in the fourth quarter of 2019, Ontario real GDP is projected to decline by 14.7 per cent over the first half of 2020, bringing economic activity back to the level of nine years ago,” the report says.
But accurately projecting what the province’s economy will look like after an extended period of unprecedented disruption is somewhat of a fool’s errand, says DLC chief economist Dr. Sherry Cooper.
“Anybody who thinks they can put a number on a point estimate for 2020’s growth rate for Ontario – or the country, or any country for that matter – amazes me. No one knows. No one has anything to go by to make these assumptions,” Cooper says. “It could be way worse. It could be a little better, but not much.”
Even with the FAO’s numbers stripped away, the challenges faced by the province are mounting: a sharp decrease in output across much of the economy, driven by lower domestic and foreign demand; rising debt levels (both personal and government) that could rein-in much needed spending; and, of course, the damage done by the almost 1.1 million jobs lost in March and April. While the FAO sees moderate, ongoing improvements in the labour market taking place during the second half of 2020, Ontario’s annual unemployment rate will reach 10.5 per cent in 2020, almost twice what it was just a year ago.
Also distressing are the province’s debt levels, which are set to balloon because of the increased borrowing related to COVID-19. Ontario’s net debt-to-GDP levels are projected to hit a record 49.7 percent in 2020-21. Cooper, however, doesn’t see the province responding by cutting infrastructure spending
“I do think we’ll see infrastructure spending regardless, as we will federally, because why not? They need to stimulate the economy. They need to put people to work, and that’s as good a way to do it as any,” she says.
But the FAO does provide some good news: the recovery should be well under way next year. Even if the provincial economy undergoes a “muted recovery”, where containment measures are removed more gradually, GDP growth is expected to rise 4.6 percent in 2021. (Although GDP for 2020 would fall even further, 9.2 percent, under these conditions.) A best-case scenario sees GDP growth of 8.5 percent next year.
Cooper expects the economy to rebound in 2021, but “nowhere near enough to bring us back to where we were before this all started.” She does, however, see housing playing a role in the recovery.
“I think it will help,” she says, but adds that real estate won’t be booming for a while, despite the record-shattering pace it was on in January and February. Buyers, sellers and their realtors will all be cautious, but pent-up demand and the potential for underwater homeowners needing to sell quickly should ignite a fair share of deals.
“And with interest rates as low as they are and mortgage rates declining, for many people this will be a great time to buy,” says Cooper. “Wherever there’s disruption, there’s always opportunity.”