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Canada’s industrial heartland has had a tough year.
A new study by TD Economics estimates that output for goods-producing industries in Ontario in 2024 dropped at its steepest rate since the pandemic.
Service industries are likely to account for a record high of almost 80 per cent of the province’s gross domestic product, creating the biggest growth gap between the two sectors since the global financial crisis.
How did this happen?
Manufacturing and construction are the main culprits, said TD economist Rishi Sondhi.
There has been a sharp drop in condo investment as pre-sales plummeted in key markets like the Greater Toronto Area. This construction slowdown has weighed on manufacturing, reducing demand for fabricated metals and machinery.
The auto industry, however, has been the biggest drag on output this year as factories in Canada and the United States closed for electric vehicle retooling.
This decline in goods production has put a “significant damper” on Ontario’s economy, said Sondhi. Overall GDP has been boosted by strong population growth, but looking beyond that to per capita performance and the province’s economy has shrank by nearly 3 per cent since mid-2022.
The weaker economy has cooled the labour market, with job vacancies falling below 2019 levels and unemployment rate up almost two percentage points from the lows of 2023.
The public sector has become a big driver, with healthcare, education and public administration likely to contribute almost half of the economy’s growth in 2024.
2025 will bring some improvements to manufacturing’s outlook, but not much, said Sondhi.
Auto production is likely to pick up next year, along with demand for goods from south of the border, helped by a lower Canadian dollar. But homebuilding will remain slow, population gains weak and government spending modest, he said.
Then there is the uncertainty arising from Donald Trump’s election.
“The potential for tariffs on Canadian products ahead of the 2026 USMCA negotiations looms large,” wrote Sondhi.
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The flight or fall of the loonie doesn’t drive inflation like it used to, but it still has some sway, says Douglas Porter, chief economist at BMO Capital Markets.
This chart from BMO suggests there is still “a very strong correlation” between the currency and Canada’s inflation rate versus the United States.
“Roughly speaking, a 10 per cent rise in the cost of the US$ will lift relative Canadian inflation by 1 ppt,” Porter wrote in a note.
The Canadian dollar has sunk to a four-year low in recent days, and even though Bank of Canada governor Tiff Macklem said concerns about a falling currency “are not factoring into our current monetary policy decisions,” the loonie may soon be back on the central bank’s radar.