September 2023 Quarterly Economic Commentary with Builder Member: RBC Royal Bank

With the support of our Builder Member financial institutions, the OG100 Quarterly Economic Commentary takes an in-depth look at recent economic conditions with a lens specific to helping Ontario’s mid-sized companies make better-informed business decisions.

September 2023 with Builder Member:

RBC Royal Bank 

Author: Rachel Battaglia, Economist

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Ontario’s economy started 2023 on a solid footing, growing 1% sequentially in  the first quarter, following a slight decline of 0.2% in Q4 2022. A strong manufacturing sector supported exports while a booming population kept household spending going. That said, we aren’t expecting that strength to last. In fact, there are signs heavily indebted Ontarians have since recoiled under the weight of high interest rates. This has taken a serious toll on residential investment and is now beginning to mute consumer spending. Though they haven’t yet resorted to shrinking payrolls, Ontario businesses are holding off on hiring, which contributes to ease tight labour market conditions. As momentum slows further, Ontario’s economic growth is expected to slow materially in 2023 (+1.1%) from 3.6% last year.


Amid the population surge and normalising supply chains, Ontario businesses have (somewhat) benefited from easing skilled worker shortages and smoother processes. This has been especially beneficial for Ontario’s goods-producing industries which suffered acute losses over the course of the pandemic – and continued facing labour and supply chains challenges thereafter.

With the ongoing energy transition, Ontario is positioning itself to become a leader in manufacturing electric vehicles and batteries. This is attracting large investments to the province. Capital spending plans were up already this year (+4.6% y/y) even before some of the major auto sector projects had been announced. We expect further sizable increases over the medium term.

Despite supporting positive economic growth in Q1, we believe cooling consumer demand at home and abroad to take some steam out of the province’s manufacturing sector before the year is up. In fact, we’ve already seen an uptick in the number of manufacturing business closures (+10% between Q1 2022 and Q2 2023) in the last year.

Above average employment trends have been observed among agriculture and utilities industries on account of elevated levels of investment and population as well. Though we don’t see these industries softening as acutely as the manufacturing sector over the back half of this year, contributions to real GDP growth from these sectors have historically been small. As such, continued growth in these sectors won’t be enough to pull up real GDP growth for Ontario in a meaningful way.

Though this year is shaping up to be a mixed bag for goods-producing industries, high interest rates have already forced businesses to claw back in other sectors. Indeed, the annual change in year-to-date employment growth among Ontario’s service-producing industries was among the slowest of all provinces (except B.C. and Newfoundland) – lead by a drop (-4.0%) in wholesale and retail trade. Despite faster real GDP growth among service-producing industries over the first quarter of this year, labour market softness in these sectors signals slower growth on the horizon.

labour market softens amid slower hiring

Though employment growth has maintained a good pace so far this year (+2.4% year-to-date over same period last year), unemployment has also ticked higher in the province. At 5.9%, the rate of unemployment is now the highest we’ve seen in over a year. While this does signal labour market weakening for this provincial economy, the increase in the unemployment rate doesn’t appear to be a product of job layoffs. Rather, firms have clawed back on hiring alongside a massive increase in working age newcomers. Indeed, Ontario posted the steepest decline in year-over-year job vacancies (-27%) as of June. Job openings are expected to continue falling, pushing the unemployment rate higher to 5.7% in 2023.

residential investment nosedives

High interest rates continue to act as a stiff headwind for the housing market and homebuilding. Residential investment—which includes spending on new
construction, renovations and realtor services—fell to its lowest point in decades this July on an inflation-adjusted basis. The drop since the early-2021 peak has been an astounding 45%, reflecting sharply reduced real estate activity, a moderating trend in housing starts and shrinking size of condo units being built. So long as the Bank of Canada keeps the key policy rate at 5.0%, an extreme lack of affordability is likely to keep Ontario’s residential investment soft.

More recently, the impacts of tighter monetary policy have taken a toll on retail spending. Though aggregate retail spending has continued to grow (due to heighted rates of population growth), spending on a per capita basis has shown clear signs of waning. Continuing a downward trajectory, per capita retail sales sank to just under $1,600 per month in the second quarter of this year – a 9% decrease (in real terms), from a year ago. High debt burdens are expected to further exacerbate consumers, keeping retail sales weak in 2024 (+1.4%).

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