TD economist says Ontario will weather economic slump better than most

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Ontario is in for rough economic times, and once the condominium boom dries up so is Toronto, according to TD Bank Financial Group's chief economist Don Drummond - with one of the few bright lights being the Canadian financial sector, headquartered here.

Indeed, said Drummond at a breakfast meeting of the Toronto Board of Trade, the country's well regulated banking industry could become a model - and possibly an architect - of a new international regulatory regime that could help prevent another sub-prime mortgage crisis.

"We haven't had these blowouts of the other financial institutions in the west - we haven't had this wilding housing cycle - and it's because we're reasonably well regulated," said Drummond. "I think we could really take a leadership position on this - not just help the world, but help the branding of Canada."

It was a rare moment of optimism in his talk to the board. Drummond was speaking to board members about economic prospects for Toronto and Ontario, just hours before Federal Finance Minister Jim Flaherty confirmed that for the first time in its history, Ontario would be named a have-not province and be eligible for federal equalization payments.

Drummond said that while Ontario would likely weather the international slowdown better than most jurisdictions, it would still be hit hard. That's because historic protections for Ontario's manufacturing sector - high tariff walls encouraging east-west trade, publicly subsidized energy costs and the Canada-U.S. auto pact ensuring manufacturing jobs in Ontario in particular - have all but vanished.

And so manufacturing has been in decline. From once accounting for 18 per cent of all employment in the province to 14 per cent today. That's still higher than the typical international rate of 10 per cent, but Drummond said it would continue to slide.

"So what replaces it?" he asked. "Well look at economic histories. I'm not saying write off manufacturing. It can still happen."

Drummond held out most hope for robust financial sector growth. He said the provincial government is beginning to recognize the importance of the sector in the Canadian - and particularly Ontarian - economy.

And as for the Toronto economy?

"Well I think the biggest worry is what's going to happen on the residential construction side, which in the 416 area code is largely condos," he said. "We have to recognize that the weakness to date has been masked by a residential construction boom and that's over. And that will put more of a stark spotlight on the weakness of manufacturing. On a relative basis, the financial services sector in Toronto is looking very well, but it's under siege as well. It's not going to be adding jobs - probably on net it's going to be laying off people.

"It's like being in a race with everybody else going backwards and we're standing still. We'll do better than other jurisdictions but our economy will be in pretty rough shape over the next year to 18 months."

He said that governments, both federal and provincial, have to deal with social issues, such as violent crime, decaying infrastructure, and an imbalanced immigration policy that is seeing large populations of well-educated and trained newcomers consistently underemployed.

He hinted that the notion that robust immigration would fill labour shortages is turning into a fallacy in Canada.

"We're expecting labour shortages and I keep hearing that they're going to get filled by immigration - but that's not going to happen with the course we're on," he said.

"Immigration - and this is a mathematical proposition, I don't think it's a statement of value - it's lowering our productivity level right now because they're falling below the earning expectations."