Economic Overview
The late 2007-early 2008 slowdown or recession in the U.S. will have
spillover implications for Canada. Canada’s real Gross Domestic Product
(GDP) growth in 2007 was around 2.5%. In 2008, it will likely come in
slightly under 2.0%. The Canadian economy has performed better of late
than the U.S. economy for three primary reasons. Going forward, these
factors will help Canada to continue to do relatively better than the
U.S. in 2008.
(1) High world commodity prices have been a boon for Canada’s large
resource sector. This is particularly true with respect to the price of
oil, which has been a stimulus to capital spending in the Alberta Tar
Sands. High commodity prices generally have also helped Canada maintain
a substantial merchandise trade surplus, while the U.S. is running a
large goods trade deficit.
(2) Canadian housing starts have stayed strong almost right up to
the present. The proportion of subprime and teaser-rate mortgages in
Canada is much lower than south of the border. This has had
wide-ranging positive impacts in that strong residential construction
has carryover implications for manufacturing and the retail sector.
Also, Canada’s employment picture has been relatively stronger because
there have not been the job losses in homebuilding. Canada created
375,000 new jobs in 2007, which was twice the long-term annual average
of 200,000.
(3) Canadian governments have been in better financial shape than
their southern counterparts. The federal government and all of the
provinces are running budget surpluses. The federal government has
initiated a program of substantial corporate tax cuts over the next
five years and there have been moderate personal tax cuts as well. The
federal Goods and Services Tax has been scaled back twice (from 7% to
5%) over the past year and some of the provinces (Québec) have also
brought in large tax reductions. Governments in Canada have rarely been
in better shape financially to undertake the public spending that is
necessary for both “hard” (highways and bridges, sewers and watermains)
and “soft” (schools and hospitals) infrastructure.
Construction Categories
Residential
Housing starts in Canada for all of 2007 were 230,000 units. They have
been over 200,000 units for the past six years. In the final month of
last year, however, they dropped to 187,500 units. Canadian housing
starts have stayed strong even as U.S. starts have plummeted more than
50% from their peak at the beginning of 2006.
In 2008, housing starts in Canada will begin to slow. CanaData’s
forecast is for 195,000 units. Real dollar spending on residential
activity is forecast at -3.0% this year, which will be virtually level
in current-dollar spending terms after inflation is taken into account.
The strength in residential work over the next two years will be as a
result of renovation work. Exceptional levels of housing resales or
sales of existing homes during the past couple of years will mean
lag-effect spending on upgrades and remodeling.
Commercial
Put-in-place spending for commercial construction is at its cyclical
peak in 2007 and 2008 (+11.0% in real dollars in both years). (An
assumed 5.0% increase in prices for non-residential construction costs
can be added to this to calculate the current dollar percent change).
Commercial starts in 2008 (48.0 million square feet) are likely to be
lower than in 2007 (55.0 million), due to some changes in sub-category
markets.
Office vacancy rates in Canada — 5.0% downtown, 8.0% in the suburbs
and 6.5% metro-wide — continue to be lower than in the United States
(15.0% overall). However, some moderation is coming in office-based
employment and there have recently been starts on a number of large
office building projects, particularly in Calgary and Toronto.
Retail construction will continue to be relatively buoyant, but as
employment growth slows and the housing sector starts to retreat, there
will be some restraint in consumer spending going forward. Consumers
are also being held back by high gasoline and heating fuel prices,
although this effect is muted in Canada by the international pricing of
oil in U.S. dollars.
Hotel and motel work is strong at this time, as it is south of the
border. However, the high-valued Canadian dollar does reduce the
prospects for foreign travel and accommodation needs.
Industrial
Real investment in industrial construction is expected to increase 3.5%
in 2008 after an increase of 4.4% in 2007. Starts will drop from 6.5
million square feet last year to 5.5 million this year.
The strength in industrial construction will continue to reside in
the resource sector. This includes projects related to mining,
agriculture and oil and gas (that is not otherwise categorized as
engineering work). These projects often involve dollar spending, but no
square footage for buildings. The only weak resource area at this time
is the forestry sector, due to the decline in U.S. housing starts and
an anticipated (but much smaller) cutback in Canada as well.
The problem limiting construction activity in this category is
manufacturing. The year-over-year change in employment in manufacturing
was -6.5% in December 2007. The capacity utilization rate for the
sector continues above 80.0%, but problems linger. The increase in
value of the Canadian dollar versus the U.S. dollar (+70% versus early
2003) holds back export sales to the U.S.
This effect will be exasperated by the slowdown in the U.S., plus
some changes on the domestic front. Weaker homebuilding will cut into
related building product manufacturing. In addition, auto sales have
been strong for many years and are set for a correction.
Institutional
Real institutional spending, backed by strong government balance
sheets, is expected to be +7.0% in 2008 versus +6.0% in 2007.
Population shifts to the west over the recent past have meant a need
for facilities spending in the areas of schools and hospitals.
Demographic change and the ability of governments to finance
construction are the driving forces in this construction category.
More private sector involvement through P3 (public-private
partnership) projects and other innovative financing and
project-management alternatives increase the potential for work to be
undertaken in the area of projects for the public good.
Aging baby boomers require increasing medical care and their
children are raising the demand for capital projects at the level of
higher education. The number of children enrolled at primary and
secondary school levels is expected to be flat-to-lower nation-wide for
the next ten years. The square footage of institutional starts was 26.0
million in 2007 and it will stay at a similar level in 2008.
Engineering
Real spending on engineering construction will be about +4.0% in 2008,
a figure in line with the long-term trend pattern for this sector. The
problem for this category of work has been, and will continue to be,
supply constraints as opposed to demand issues.
Energy projects will continue to dominate engineering construction.
A new federal-provincial revenue-sharing agreement will stimulate more
work on the Atlantic Coast and the Alberta Tar Sands continue to enjoy
boom times. Given oil prices at $100 U.S. per barrel, mega Tar Sands
projects would be going ahead even faster except for labour shortages
and some delivery/access problems to remote areas. There is likely to
be some further delay of these projects due to scary cost escalations
and the fact that Alberta’s government is proposing a new higher
royalty regime.
A new era is about to get underway in mega electric power projects.
There are proposals for massive spending in almost every region of the
country. Québec, Manitoba and British Columbia are particularly strong
in hydroelectric power potential. Ontario plans major new nuclear
facilities and Alberta is also looking at nuclear as a means to supply
electricity to the Tar Sands.
Engineering work also includes “hard” infrastructure projects. B.C.
is preparing for the 2010 Winter Olympics, plus it is also proposing a
new major long-term transportation spending initiative. In the east,
concern over the safety of aging infrastructure as a result of some
high-profile bridge collapses, has spurred on the creation of special
agencies to see that essential repair work gets done.
The plans for infrastructure spending may be subject to some
re-assessment, however, if the economic slowdown takes too big a bite
out of government revenues.
Grand Total Summary
As a final comment, the mix of weaker residential construction activity
combined with still-strong non-residential building and engineering
work will see total real construction spending in Canada increase by
2.0% in 2008 and 2009. This will be about half the level of increase
that was recorded in 2007.
http://www.reedconstructiondata.com/news/2008/02/economic-and-construction-outlooks-for-canada-in-2008/
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