Ontario's Economy Slow Down may not hurt Real Estate market

Life at a 3.5-per-cent growth rate is good for pretty much everyone, economist Rick Egelton says. At 2 per cent, he adds, some sectors are doing well, but others are struggling. At below 2 per cent, the picture starts to get ugly -- more people are struggling and many are just getting by, although some are still doing well.

That's where Ontario's economy is hovering right now. In the second quarter of this year, the provincial accounts show Canada's biggest province hardly moved.

The provincial government and most economists have dramatically scaled back their expectations for the rest of this year. And the slowdown in economic activity is widely expected to persist well into 2007.

And yet, the signs are hard to see. Retailers are not boarding up their shops, the ranks of the unemployed are not swelling and homeowners are not missing their mortgage payments. True, the provincial government's deficit will be larger than initially announced, but no one is talking about spending cuts.

The pain seems to be concentrated in a single, albeit important, sector: manufacturing. "The economy in Ontario is still expanding. You have one sector that is being hit very hard," says Mr. Egelton, chief economist at Bank of Montreal.

The secret to containing the pain is not obvious, and economists offer a variety of theories and factors about how the slowdown has been contained: low inflation, spillover demand from the West, and fiscal stimulus are the leading contenders.

Low inflation, and its corollary, low interest rates, have meant that consumers and businesses can continue to borrow, shop, invest and buy houses at a low cost.

In the past, sectoral slowdowns have been quick to spread to other sectors, because they've come at times of high inflation and high interest rates, economists say.

But this time, while the real estate market isn't booming in Ontario as it was two years ago, it is still lively. Consumer spending and retail sales have taken a bit of a breather in recent months, but they remain at high levels. Business investment, beyond the manufacturing sector, appears to be strong.

And governments are also providing support to Ontarians, points out Marie-Christine Bernard, an economist with the Conference Board of Canada. Tax cuts from Ottawa, combined with strong fiscal positions at both the federal and provincial levels, have stimulated consumer spending and kept government spending and hiring strong, she says.

Mr. Wright floats a theory: Canada may be experiencing a "rolling recession" -- a series of sectoral recessions starting with the tech-wreck in 2001 that has turned to manufacturing and the auto sector.

Since the sectoral recessions occur at a time when other economic fundamentals are solid, the overall economy "doesn't look too bad," he says.

And there's no doubt that Ontario's large and diverse economy is benefiting from the boom in the West, economists say. The oil and gas sector's thirst for goods and services has injected some strength in Ontario. But will the weakness remain relatively limited to the manufacturing sector? Most economists are nagged by their doubts.

Manufacturing makes up about 20 per cent of Ontario's economy, but every dollar of manufacturing output in the province drives about $3.25 in economic activity. Suppliers of goods and services, retailers and governments are all dependent on manufacturing money.

Over the next few quarters, as the manufacturing sector continues its slide, the most vulnerable sectors are finance, real estate, technology services, business services, engineering, warehousing, transportation and communication, says Jayson Myers, chief economist of the Canadian Manufacturers & Exporters. "I think that we will see much more significant impacts in these other sectors over the next year, given the sombre outlook in Ontario manufacturing," he says.

Because Ontario's population is growing faster than the economy, they calculate that advances in gross domestic product per capita -- a common measure of standard of living -- will slow to a crawl this year and next. That won't feel good for many Ontarians. "Ontario is very used to being at the top of the ladder," Scotiabank economist Meny Grauman says. "I don't know if there's pain now in the short term, but you can see pain coming down the road if the trend persist