This section of the Annual Report provides management’s discussion and analysis of the OFA’s results in 2003-04, including its objectives for 2004-05. The discussion begins with a review of the economy, the financial markets and internal developments in 2003.

Economy and Financial Markets

Economy

The major economic event of 2003 was the unprecedented rate of appreciation of the Canadian dollar against its U.S. counterpart. From the beginning of 2003 to year-end, the Canadian dollar rose by almost 19 per cent, the largest 12-month movement in its history. The Canadian dollar has recently fallen back from over 78 cents U.S. to under 72 cents U.S. in May 2004, as the Bank of Canada continued reducing Canadian interest rates with two additional cuts to its overnight rate in early 2004. The Bank of Canada’s actions have lowered short-term rates by a total of 1.25 percentage points since June 2003, bringing them to their lowest level in more than 40 years.

After two years of sluggish growth, the economy of Ontario’s leading trade partner, the United States, grew by a solid 3.1 per cent in 2003. U.S. growth was particularly robust in the second half with real output rising 8.2 per cent in the third quarter, the strongest gain in nearly twenty years, and a healthy 4.1 per cent in the fourth quarter. Household and business spending were boosted by low interest rates and tax cuts while the decline in the value of the U.S. dollar in 2003 helped restore the competitiveness of U.S. exporters. U.S. auto sales were weaker, however, falling by 0.8 per cent to 16.6 million units in 2003.

Canada’s economy was affected by a number of temporary shocks in 2003, as well as the sharp currency appreciation of last year. As a result, real GDP growth slowed to just 1.7 per cent, roughly half its 3.3 per cent pace in 2002. Exports were the major source of weakness for the economy in 2003, shrinking by 2.1 per cent. Both consumer spending, which advanced by a solid 3.3 per cent, and business investment, which rebounded 4.8 per cent, offset the weakness in trade. Final domestic demand – consumer spending, investment and government spending – grew by 3.6 per cent in 2003, its strongest gain in three years.

Ontario’s economy also weathered a series of setbacks in 2003: Severe Acute Respiratory Syndrome (SARS), the August power blackout, global political tensions and the rise in the Canadian dollar. The cumulative impact of these shocks slowed Ontario’s economic growth to just 1.3 per cent in 2003, its slowest rate of growth since 1996, following a 3.6 per cent advance in 2002. Despite the challenges, final domestic demand remained robust, rising by 4.0 per cent in 2003, its largest increase in three years. Domestic demand was boosted by an 8.0 per cent rebound in machinery and equipment investment, continued strength in housing, which advanced 5.1 per cent, and a healthy 3.4 per cent advance in consumer spending. Largely as a result of the dollar’s appreciation and reduced U.S. auto sales, Ontario’s exports were the major source of weakness for the economy, falling 1.2 per cent in 2003.