This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Construction Industry Forecasts

Notes from Alex Carrick - Jan 12, 2012

Alex Carrick
2012 holds promise but there’s no denying the uncertainty (part 2)

With the startup of hearings, Canada is embarking on its own major pipeline debate. Enbridge’s Northern Gateway project proposes to ship half a million barrels of oil per day from fields in Alberta to Kitimat on B.C.’s Pacific Coast, for tanker transport to customers in Asia.

The Minster of Natural Resources, Joe Oliver, has written an open letter calling for a faster environmental review process and measures to ensure that outside interests, both in terms of money and celebrity status, don’t play too big a role in deciding what’s best for Canada.

One thing can be counted on. The debate over the next two years will be loud and acrimonious. It will pit environmentalists, some native bands and Hollywood movie stars against the Harper government, the business community and most economists.

Employment growth in Canada has been flat for the past six months and may not show much improvement during early 2012. This will provide the Bank of Canada with an excuse to keep its key policy-setting interest rate at an exceptionally low and stimulatory level.

Canada’s residential construction market has been surprisingly strong in the past two years. This should not be expected to persevere. Mortgage rates will stay low in 2012, but there are still several reasons to expect housing starts to ease.

Household debt to income has hit a historical high (150%) and needs to be reined in.

Jobs growth has slowed and won’t provide the income boost needed to spur on new home demand.

A couple of key markets – most notably investor condo properties in Toronto and Vancouver – are overbuilt and will need a period of consolidation.

A big worry is what this will mean for home prices. Some significant downward adjustment, in the condo market for example, would have an unfortunate effect on overall consumer confidence.

A slower housing market combined with weaker employment gains will cut into consumer spending, leaving construction in the retail sub-category of commercial work less buoyant than in a traditional cyclical recovery.

The effect will be less apparent in regions of the country where the population is growing the fastest. Generally speaking, that means the West and parts of the East (i.e., Newfoundland and Labrador).

Immigrants and fellow Canadians have been gravitating towards jobs in resource regions of the country. The present period of calm in commodity prices is expected to be short-lived.

In the office building market, low vacancy rates will support a certain moderate level of construction work. In the short run, though, some factors mitigate against a quick return to much higher activity levels. Many of our governments are determined to cut costs and lower their deficits. This means reducing payrolls. Office space requirements will suffer as a consequence.

The financial services sector seems to be adopting a similar approach. After winning so many accolades for the manner in which it survived the recession, our banking industry is demonstrating once again its commitment to sound financial management.

Year-over-year employment in the FIRE sector (finance, insurance and real estate) in December was -2.8%.

One saving grace for commercial construction in 2012 will be special projects. In the Toronto region there are the venues to be built for the PanAm Games scheduled for 2015.

The public sector components of institutional and engineering construction will be held back by spending restraints. In private sector engineering work, 2012 activity levels will depend on the degree to which commodity prices retreat.

If they fall much more, the financial viability of some major resource projects may come into doubt. Already some projects (e.g., aluminum smelter expansions in Quebec) have taken on less urgency along with declining prices.

While it may seem like a contradiction, a price increase for one commodity has the potential to alter the economic outlook in a very negative way. If the global price of oil shoots up and gasoline becomes a lot more expensive, the current fragile recovery would be placed in great jeopardy.

A dramatically higher price for oil is hardly outside the realm of possibility, given the amount of turmoil in the Arab world at this time. Iran is thought to be closing in on nuclear weapons capability. Not so mysteriously, its top nuclear scientists are being assassinated.

Tighter trade sanctions introduced by the U.S. at the start of this year, and under consideration by nations in Europe, have caused the government in Tehran to ramp up the rhetoric and threaten to close the Strait of Hormuz.

The regime in Syria continues to engage in tyranny against its own people on a daily basis. And there is uncertainty about the policy directions that will be adopted by new or about to be elected Muslim regimes in Libya, Egypt and Tunisia.

The death of “esteemed leader” Kim Jong-il in North Korea raises the question of that nation’s future dealings with South Korea. Will there be a continuation or worsening of present frosty relations or does the more upbeat but costly alternative of re-unification have a chance?

In the meantime, China continues to put an inordinate amount of effort into building up its military and naval capabilities.

Worried about the high levels of unemployment in Canada and the U.S.? It’s a scenario that in a few years will likely be turned on its head. The post World War II baby boom generation in both countries, born between the mid-1940s and mid-1960s, is beginning to reach retirement age.

Some analysts suggest the pre-occupation of boomers will gradually swing from earning and spending money to saving and hoarding it. The resulting pull-back in expenditures will take the gleam off stock market equities.

Such a view is too negative on several counts. First, many aging boomers will continue to work past the retirement age (65) of their parents. Second, with interest rates as low as they are, baby boomers will be disappointed by the returns they can make investing in bonds and guaranteed investment certificates. 

They may feel that putting money into the stock market is their only way to achieve the kinds of gains that will maintain their lifestyles. Third, baby boomers are set to become the largest inheritors of wealth in the history of the world. Their parents are reaching the ends of their life-spans and are about to pass on large nest eggs.

That’s true even when there has been considerable depreciation in the value of the family home, as has been the case in the U.S.

A good portion of the inherited money will end up in equities.

I’m an advocate of emerging nation commodity demand as a key determinant of how Canada’s economy will fare. On that basis, 2012 is not shaping up as favorably as I might have hoped.

However, with the U.S. economy coming on stronger, I think the broader “state of affairs” will continue to be okay. It’s just that we’re about to see a further prolongation of uncertain times.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.


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Read Other Recent Alex Carrick Posts

05/14 - Economic Nuggets - May 15, 2012
05/11 - Canada Rode a Second Consecutive Month of Strong Job Gains in April
05/04 - U.S. Employment Rose by a Mediocre 115,000 in April
04/27 - U.S. GDP +2.2% in Q1 2012 and Alberta led Canadian Provinces in 2011
04/18 - U.S. Inflation Low in March; Canada’s Central Bank Looking to Raise Rates
04/12 - Canada’s Trade Surplus in February Declined but Business is Optimistic
04/03 - A Tale of Two Budgets
03/29 - A strong year for new construction investment intentions in 2012
03/21 - Leading Indicator Series Add to Good News about the U.S. and Canadian Economies
03/06 - Three key trends, more forays into high-tech and the importance for construction
02/29 - Two important sources of strength: share prices and non-residential construction
02/22 - Home resale market may be picking up in the U.S. while flattening in Canada
02/16 - Good news on U.S. housing and employment is positive for Canada as well
02/08 - Home starts and job levels diverge in Canada and the U.S.
02/03 - Canada’s labour market flat in January but U.S. on a roll
01/23 - Canada’s leading indicator series continued to charge ahead in December
01/11 - 2012 holds promise but there’s no denying the uncertainty (part 1)
01/04 - How stock prices have performed depends on the timing of the data points
12/22 - Canada stands firmly in the middle of the road as it enters 2012
12/14 - Trade issues climb the agenda in both Canada and the U.S.

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