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It's a World of Opportunities as Economic Thoughts Turn to Recovery

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Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

The current mantra about the world economy seems to be that no one can take recovery for granted until the private sector replaces the public sector as the source of new demand. Central bankers, with few exceptions (e.g., Australia) are unlikely to alter their extraordinarily low interest rate policies until unemployment stops rising and the need for government stimulus money winds down. A thorough read of the daily business news, however, reveals that a great deal more is going on behind the scenes and that some business owners and managers are attempting to get out front of events while tremendous opportunities are still available.

The current mantra about the world economy seems to be that no one can take recovery for granted until the private sector replaces the public sector as the source of new demand. Central bankers, with few exceptions (e.g., Australia) are unlikely to alter their extraordinarily low interest rate policies until unemployment stops rising and the need for government stimulus money winds down. A thorough read of the daily business news, however, reveals that a great deal more is going on behind the scenes and that some business owners and managers are attempting to get out front of events while tremendous opportunities are still available.

Ownership moves show belief in recovery

A couple of ownership moves strengthen the notion of a private sector belief in recovery. Warren Buffet’s Berkshire Hathaway is buying the 77.4% portion of Burlington Northern Santa Fe Railway (BNSF) that it does not already own. Reasons cited by analysts include the cost advantages that railroads have versus the trucking industry when fuel costs rise. Plus there is expectation of improvement in cargo traffic as more coal is shipped to domestic electric power plants and overseas to recovering economies in Southeast Asia. There is speculation, for example, that China has a significant shortage of coking coal. As an interesting sidebar, media reports have also conveyed the information that Bill Gates is the largest shareholder in Canada’s CN Rail. This gives credence to the notion that the “smart money” is getting behind the basics.

Another high profile ownership decision has been made by the new Board of Directors at General Motors. After months of negotiations, the Magna-Sberbank offer to buy GM’s Opel-Vauxhall division in Europe has been rejected. Again, this seems to reflect a belief that prospects for the company have improved, that its finances are in better shape (with the winding down of the Saturn, Buick and Pontiac divisions) and that the future lies in assembling and selling smaller, more fuel efficient vehicles. Furthermore, there was some reluctance to turn over trade secrets to Magna (Canada) and Sberbank (Russia). GM is Magna’s largest customer for parts.

China and South Korea

While recovery is only now getting underway in North America, it is already heating up in China. With an expected growth rate of 8%-plus this year, concern has shifted to the dangers of a ratcheting up in asset values. Commercial and residential properties seem to be most susceptible. South Korea is also experiencing rapid growth, its best in seven years. Both China and South Korea are putting their large foreign exchange reserves to good use. They have recently been investing in Oil Sands projects in Alberta. This is a propitious time for such plays since construction and operating costs are estimated to have fallen by 10% to 15% from peak levels.

Currency issues becoming more important

Currency issues are becoming more important. South Korea is realizing improved export sales in autos and electronics partly because the Won has fallen and not yet recovered. The Won first fell when shipbuilding collapsed. South Korea is the world’s largest shipbuilding nation. And China has a currency that is pegged to the U.S. dollar. An upward adjustment in the Yuan is inevitable. This will be a necessary strategy to shift the Chinese economy from an outward export orientation to a more domestically driven demand economy. To achieve this, the Chinese government will have to provide more of a social safety net for its people, thereby freeing up savings that have been tucked away “under the bed.” The Yuan’s tie to the greenback is even more precarious given the long-term decline that seems to be in the cards for the latter.

India buys gold

The latest expression of retreat from the greenback as the world’s reserve currency can be found in India’s purchase of 200 tonnes of gold from the International Monetary Fund (IMF). The value of the purchase was $6.7 billion. Furthermore, it was made with gold prices at their all-time high, $1,088.50 per troy ounce. India is the world’s largest gold importing nation, with the primary purpose being the making of jewellery. The people of India are quite comfortable with the notion of gold as a storehouse of value. India is expected to maintain a 6% GDP growth rate.

Implications for construction

What does all of this mean for Canada’s economy and the construction industry? The modest recovery in auto sales extends beyond manufacturing. It’s also good for steel and plastics, suppliers and shippers. The pick-up in commodity prices, with gold and silver soaring and copper and fossil fuel prices on the rise, is good for Canada’s resource firms. The improvement in world trade that is coming will help the railroads, warehousing, port and trans-shipment operations. Don’t sleep too soundly, private sector. You are about to receive a wake-up call.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

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