TORONTO - While still among the provinces worst hit by the recession, the Ontario economy now appears to be showing signs of life as it begins to overcome significant challenges, according to a new report by RBC Economics.

"Paralysis in the production and sales of motor vehicles in the province, along with difficulty in the housing market had been key components of the province-wide slump late last year and early this year," said Craig Wright, senior vice-president and chief economist, RBC. "Less uncertainty around Ontario's auto manufacturing base and the revival of motor vehicle sales in North America have put aside worst-case scenarios for the province."

The report found that the ramping up of auto production late this summer, following widespread shutdowns earlier this year, is expected to boost manufacturing activity in the third quarter and lead Ontario out of the recession.

With a brighter outlook in the auto and manufacturing sector, RBC has revised its economic contraction forecast for 2009 up to -3.1 per cent from the -3.4 per cent outlined in the June outlook. This remains the second largest drop in activity among provinces, behind Newfoundland and Labrador.

Improvements in the auto sector are expected to carry into 2010 which, along with the continued recovery in the global and U.S. markets, should boost Ontario's economic picture. Government infrastructure spending should reach its peak next year with housing construction and consumer spending expected to rebound amid rising employment. As result, RBC has revised its 2010 real GDP growth rate projections for Ontario upward toward the national average of 2.6 per cent, from the previous rate of 2.2 per cent.

The main theme of the RBC Provincial Outlook is that, while the collective performance in Canada has largely unfolded as anticipated, recent developments on the provincial side indicate that the contraction in activity is more widespread than previously thought. In response, RBC has adjusted its forecast and is projecting that nine provinces will post negative growth in 2009, leaving Manitoba as the sole province expected to show positive, if modest, growth this year. RBC is forecasting that the economies of all ten provinces will expand in 2010, with western Canada leading the way. Saskatchewan and Nova Scotia are now expected to contract (due primarily to poor summer crop conditions and weakened capital spending, respectively). On the other hand, Ontario has shown encouraging signs that a rebound will emerge during the second half of this year, prompting a reduced rate of decline overall in 2009.