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Major Issues Facing Canada's Construction Industry to the End of this Year

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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 following is a compendium of major issues for construction in Canada out to the end of 2009. Market forces are a swirling mix of demand, supply, price, regional, country-wide and international factors.

The following is a compendium of major issues for construction in Canada out to the end of 2009. Market forces are a swirling mix of demand, supply, price, regional, country-wide and international factors.

Despite historically low interest rates, privately financed construction will be depressed well into 2010. Falling corporate profits, weak product demand and the credit squeeze are all contributing to the cyclical malaise.

Public sector investment demand will fill in part of the gap. But how effective this will be depends on success in resolving the following.

(1) There must be effective co-ordination of financing between two and sometimes three levels of government − federal, provincial and municipal.

(2) “Shelf-ready” work does not always mean what it implies. There may still be delays for some of these projects based on neighbourhood impact and environmental studies. Furthermore, the costs of such studies may be high relative to the capital cost.

(3) Some local governments will initiate projects without being sure that the funding will come through. Therefore, they are likely to give priority to work that has already been planned or is absolutely essential. This is not the long-term forward-planning intent of the federal and provincial government programs.

Construction Costing

With respect to construction costs, these should remain modest at least into the fall, for the following reasons. Investment spending from the private sector will remain weak. Interest rates will never be lower. And declines in some upstream commodity costs are still working their way downstream.

Furthermore, many contractors are still busy with carryover work. Once this is finished and there is more competition for work, bid prices will be more aggressive. Also, job-site labor is being freed from residential projects as housing starts decline.

For some building products, specific availability factors (e.g., number of suppliers in Canada) may keep costs relatively high. Asphalt may be one such example and it is an important one, since roadwork will be a large part of the public sector/'s spending initiatives.

Once public sector projects kick into overdrive later this year, the upward pressure on building material costs will begin to ramp up. This is more assured by the fact that other nations are pushing forward similar programs. Canada, the U.S. and China all have massive infrastructure spending plans in the works.

Also, China/'s domestic economy appears to be awakening (e.g., year-over-year car sales are positive) and this may help to move commodity prices upward by later this year.

Regional Issues

Then there are some regional questions for Canada.

Can Ontario count on returning to the kind of growth path that it has experienced in the past? Contractions in the manufacturing sector, and particularly among Detroit-based automakers, suggest possibly not.

And what about Alberta/'s former Oil Sands boom? Carbon emission issues will alter the nature of the work that goes forward, even if oil prices quickly recover to pre-recession levels, which is not likely. Over $140 USD per barrel probably lies a considerable ways into the future.

Risks to Forecasts

With respect to the outlook, here are some of the major risks.

The “Buy American” provision in Washington/'s spending plan is a source of continuing uncertainty for Canadian building product manufacturers and fabricators wishing to export product south of the border. Interpretations and alterations of the wording in the legislation still need to be sorted out.

While it appears that financial markets are healing and stock markets have some spring in their step, there is still the danger of some new shock (e.g., exceptional defaults on normal bank loans) that could seriously wound the system. The U.S. government cannot be asked to save any more front-ranking firms or industries. Prayers are being offered that there be no need for any more huge bailouts.

Finally, just remember the following. If it wasn/'t confusing, it wouldn/'t be as challenging. And it/'s the challenge that gets most of us out of bed in the morning.

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 last update:Apr 23, 2009

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