Historic free trade agreement should spark investment, leading to substantially greater U.S. exports in 1988 - U.S.-Canada Free Trade Agreement

Business America, Jan 18, 1988

Ontario's economy is entering its sixth year of expansion. Following 5 percent real GDP growth in 1986 and a comparable amount in 1987, output should grow at least 2.5 percent in 1988. The province rate of all the provinces and the highest growth in consumer spending, construction, and investment. As the country's industrial heartland, Ontario depends more on manufacturing than any other province. Indeed, manufacturing of automobiles, steel, pulp and paper, chemicals, mining, electronics, aircraft, consumer products, building materials, and machinery were all expected to expand in 1987 before a projected slowdown occurs in 1988. Agriculture, another important sector in Ontario, should also perform well over the forecast horizon. Employment is expected to increase by over 2.5 percent in 1988, with the unemployment rate averaging less than 6 percent. Retail sales are projected to grow by over 9 percent over the next year, consumer prices are likely to increase by about 5 percent, and nonresidential investment should grow by 10 percent. Following the national trend, however, housing starts, which exceeded all expectations in the first half of 1987, are projected to fall in 1988. Higher interest rates and higher house prices will cause potential home-buyers to withdraw from the housing market.

Ontario's economic prospects are closely tied to the United States. There is continuing concern about trade protectionism in the United States and its potentially severe impact on selected Ontario industries (one job in three in the province is directly tied to exports, predominantly to the U.S. market). The FTA will have a profound impact on the province. The gradual elimination of tariffs will cause considerable adjustment among industries, but improved access to the U.S. market is expected to generate substantial employment increases. The FTA appears to have substantial potential benefits for production and employment in the auto industry, one of the province's key sectors, and a significant increase in trans-border service industry exports can be expected.

Ontario continues to offer excellent marketing and investment opportunities for U.S. businesses in a wide spectrum of products and services. Specific sales opportunities include: computers and peripherals, CAD/CAM and robotics, auto parts and accessories, telecommunications equipment, aircraft parts, building products, plastic materials and resins, construction machinery and parts, analytical and scientific instruments, industrial controls, household furnishings and appliances, sporting goods, stereos, and video recorders. In addition, the liberalization of rules governing the financial services industry in Ontario should generate investment and sales opportunities for U.S. firms.

Quebec enjoyed strong economic growth in 1987 (around 4 percent), but 1988 growth will be smaller (projections averaging 2.3 percent). Strength in 1987 originated mainly in the housing, construction, and manufacturing sectors, whereas the expected end to the housing boom and lower consumer spending will explain the weakness this year. Forestry activity was strong in 1987 because of healthy markets for pulp, paper, and wood products. Metal mining recovered from the poor performance in 1986, boosting overall growth in the mining sector. Manufacturing of forest products, consumer goods, machinery, and building materials should all post good gains in production. Government spending was weak in 1987 and should remain so in 1988 as the provincial government continues to restrain expenditures in an attempt to lower the provincial deficit. Private nonresidential investment spending in Quebec is forecast to be strong in 1988, with most of the spending being directed toward modernization of existing plants. The shrinkage in Quebec's power surplus, the result of both economic recovery and growing export commitments, has led Hydro-Quebec to begin a number of new projects and step up the level of activity for many ongoing investment projects. Finally, there was a boom in commercial space construction in Montreal during 1986-87, with some further construction expected in 1988. The relatively good performance of the Quebec economy in 1987 and 1988 should result in solid employment growth.