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Private sector non-res building outpaced public sector construction in 2011

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Based on recently-released year-end statistics, the total value of investment in non-residential building construction increased by 3.3% in 2011 following a gain of 1.2% in 2010.

Based on recently-released year-end statistics, the total value of investment in non-residential building construction increased by 3.3% in 2011 following a gain of 1.2% in 2010.

While this was the largest annual increase in non-res construction spending since 2008, it was somewhat below the 4% increase reported by Stats Canada in the Survey of Private and Pubic intentions that was published in February of 2011.

The cause of this shortfall appears to have been a larger than projected decline in public sector non-residential spending reflected in part by a 6.3% year over year decline in institutional construction that followed a 7.8% gain in 2010.

Driven by a series of solid gains in before-tax profits, plus a steady uptrend in industrial capacity utilization since mid 2010, private sector non-residential investment, reflected by the value of industrial and commercial non-residential building, rose by 8.1% in 2011 following a decline of 1.9% in 2010.

Across the country, by far the largest annual increases in non-residential building occurred in Newfoundland (+59.1%) largely on account of a 140% y/y increase in industrial building. This work included the Iron Ore Mine Expansion, the "Hibernia Capital Expansions and the Direct Shipping Iron Ore Project.

The second largest increase (+58.2%) in non-res building occurred in Prince Edward Island followed by Ontario (+9.1%), Quebec (+4.1%), British Columbia, (+3.9%) and New Brunswick (+1.4%).

In 2011, the total value of non-residential building in Alberta slipped 8.5% y/y as a sharp (47.1% y/y) decline in institutional construction more than offset a 16% y/y increase in industrial building and a 14.2% rise in commercial construction. At the same time, non-res building dropped by 5.3% in Saskatchewan due to declines in both industrial (-31.9% y/y) and institutional (-18.0%) building which more than offset a 10.3% increase in commercial construction.

Looking forward, efforts by the federal government and by most provincial governments to rein in their spending in order to improve their fiscal health will limit and possibly shrink public sector institutional construction spending during the next two to three years.

However, based on the recent performance of several key indicators, the outlook for private sector investment over the near term remains positive.

First, following a pause in the second quarter, after-tax profits exhibited a solid gain in the third quarter due to strength in mining (excluding oil and gas), real estate and retail.

Second, driven by a healthy rebound in total output, the rate of industrial capacity utilization increased from 79.9% to 81.3% in Q3/2011, its highest level since the third quarter of 2007.

Third, according to the most recent (Q4/2011) Bank of Canada Business Outlook Survey, the net percentage of firms planning to increase investment remains firmly in positive territory.

Finally, despite the persisting concern about the potential impact of the European sovereign debt crisis on North American financial markets, investor confidence reflected by the S&P/TSX Composite Index, has increased 8.7% over the past two months.

Total, private and public non-residential construction investment

Total, private and public non-residential construction investment
Data source: Statistics Canada/Chart: Reed Construction Data, CanaData.

by John Clinkard

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