U.S. slowdown to hit Ontario says Dodge

HEATHER SCOFFIELD

Globe and Mail Update

NIAGARA-ON-THE-LAKE, ONT. — Ontario's economy will take a hit because of the U.S. slowdown, but Ontario's woes will be short-lived, Bank of Canada Governor David Dodge said Wednesday.

He urged policy makers to focus on long-term challenges in the country's economic development, rather than get caught up in a regional slump that won't last long.

“This slowing should not be prolonged,” he said in an address to the Ontario Chamber of Commerce's annual economic summit. “The real challenge for policy makers is to address the long-term structural issues facing Ontario's economy.”

Ontario's industrial base is the most vulnerable to the U.S. slowdown, since American consumers are cutting back on automobiles and housing.

“Nevertheless, modest growth in Ontario's economy should persist,” Mr. Dodge said. “Seventy per cent of Ontario's economic activity comes from the service sector, and that sector remains in good shape.”

His comments contrasted sharply with the gloomy vision put forth by John Tory, the provincial leader of the opposition Progressive Conservatives. He said the weakness seen in Ontario's manufacturing, auto and forestry sectors are a sign of wider weakness that will spread across the province's economy.

“We are not going to be able to coast our way through [these problems],” he told the conference.

Mr. Dodge, however, emphasized that the U.S. slowdown will be “mild and temporary,” and “a necessary cyclical correction,” albeit one that he admits he didn't see coming so fast or so strong.

Canada's economy fell short of his expectations in the second and third quarter of this year because of the sudden onset of the U.S. slowdown, he said. He expects third-quarter growth in Canada of about two per cent at annualized rates — the same slow pace seen in the second quarter.

But consumer spending will remain strong in Canada, and will sustain the country through the short U.S. slump.

“Overall, the Canadian economy has performed remarkably well when you consider that it is continuing to adjust to a number of powerful global forces,” Mr. Dodge said, although he reiterated that Canada's productivity has not responded well.

He also repeated his message that interest rates are fine where they are right now, and inflation should remain on steady track over the medium term.

Economists have forecast that Ontario's economy is quickly coming to a standstill, and possibly flirting with recession.

Mr. Dodge said Ontario's exports, especially in the auto sector, are hurting, but he emphasized that 70 per cent of the Ontario economy is based in the services sector, which is flourishing.

“Ontario may well underperform the Canadian average for the balance of this year and in 2007,” he said. “Nevertheless, modest growth in Ontario's economy should persist.”

The more pressing issue for Ontario's economy is the province's long-term development, Mr. Dodge said.

Forestry is being hammered by low-cost competition from Brazil and India. The auto sector is scrambling to compete with Asia. Furniture, clothing and textiles are also under intense pressure.

“But no matter which sector we are talking about, we should also remember that the importance of improving efficiency is paramount,” he said.

He urged policy makers to improve skill development, and invest in early childhood education, support post-secondary education, and improve research and development. He also pointed to the need to confront the aging work force by developing incentives to keep older work forces in the work force longer. And he urged policy makers to figure out better ways to recognize the credentials of foreign-educated workers.

The Ontario government should also embrace public-private partnerships so that the province's urgent infrastructure needs can be met quickly and affordably.

“Now is the right time to encourage partnerships between the Government of Ontario and private providers, given the climate of low nominal interest rates and the presence of large pension funds that are searching for these kinds of investment opportunities,” he said.

He gave the address via satellite from Ottawa to the meeting in Niagara on the Lake, Ont.