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.

Go to Alex Carrick's blog home

Construction Industry Forecasts

Notes from Alex Carrick - Mar 21, 2011

Alex Carrick
Eruptions in Japan and Libya alter the course of world events

The March 11 category 9.0 temblor with ensuing seven-metre-high tsunami in Japan and the March 19 UN imposed no-fly zone in Libya have very much altered the world’s physical and geopolitical landscapes. Let’s consider these events in reverse order, starting with Libya.

On March 17, the UN passed resolution number 1973 allowing member nations to arm Libyan rebels, enforce a no-fly zone over the whole country and do whatever else is necessary to protect the civilian population. This came with the backing of the 22-member League of Arab States.

Russia, Germany and China all either abstained from voting or chose not to use their vetoes. The UN took surprisingly quick action out of fear Muammar Qaddafi’s efforts to take back Benghazi and other opposition-held cities might exact a human toll similar to what happened in Rwanda.

The UN’s Security Council has authorized the use of “all necessary measures” to protect Libyan citizens. Military action under the name Operation Odyssey Dawn began on March 19. European leaders, notably the U.K. and France, agreed to take the lead with the U.S. in a supportive role.

There is no doubt Qaddafi will use anti-western sentiment to his advantage. This will be blunted as long as the Arab League stays within the coalition. But resentment about Western interference in North African and Middle-eastern affairs in order to ensure oil supplies is a real possibility.

Use of Tomahawk missiles against Libyan forces could cause a backlash. This is a region in flux. A number of autocratic rulers are already facing determined opposition. Yemen appears on the brink of a regime change, with certain army divisions choosing to switch sides to the opposition.

Saudi Arabia’s King has made the unusual move of appearing on state TV to announce a further $90 billion parceling out of government funds to his nation’s citizens. This is clearly a pay-off to a disenchanted populace as a means to forestall further trouble.

Libya’s crude oil output (about 2% of world supply) has fallen to one-quarter of its pre-crisis level. There is a good chance the flow may stop altogether. Given all of the uncertainty and turmoil in the MENA nations, the world price of oil remains surprisingly subdued.

In Japan, first fuel shipments are finally making their way to the port of Shiogama near Sendai. This will help relief efforts for the hundreds of thousands of people evacuated from their homes. The death toll from Japan’s worst disaster since WW II is expected to exceed 20,000. The economy of the northeast was lagging the rest of Japan before the quake.

The yen had been rising on speculation Japanese insurance companies would be repatriating assets to pay for the damage. Central bankers in the G7 nations intervened in currency markets to keep the value of the yen under control. Japan’s economy is heavily dependent on export sales and an appreciating yen would have been one more disaster in a string already frayed.

Production at car plants and in electronics factories has been halted due to storm damage, power disruptions and the threat of radiation leakage from the Fukushima nuclear power plant. Russia has offered to increase supplies of liquefied natural gas to Japan to help with electric power generation.

The consequences for the world at large are many. First will be the cost of reconstruction. The extra expense to Tokyo’s government could be crippling. Estimates have placed the necessary U.S. dollar equivalents between $200 billion and $250 billion.

Japan is already the world’s most heavily indebted nation, with a debt-to-GDP ratio approaching 200%.The one saving grace for the public sector is that most of the money owed has been lent by the nation’s own citizens as opposed to coming from foreigners.

Another issue is specifically related to the vast amounts of construction that will be needed. Japan has been locked in a little-growth scenario for two decades. The latest catastrophe could be the spur that kick-starts a more generalized return to prosperity for the nation as a whole.

The latter is more likely if there is a concerted effort to plan effectively for greater inclusion of the northeast in the total economy. Geographic distances in Japan are minimal. Much talk has centered on how the immediate Tokyo region accounts for 90% of the nation’s combined output. The Sendai region is not much further from Tokyo than London, Ontario is from Toronto. 

How much will the extra construction add to already climbing commodity prices? This leads to an interesting sidebar question. Will China help or hinder Japan’s rebuilding efforts? China is currently gobbling up much of the world’s natural resources. Will China be willing to set aside some of its needs to help its neighbor? Or will intense bidding wars develop? 

This will be a test of China’s desire to wear a mantle of world leadership. It will be an opportunity for China, as the world’s second largest economy, to significantly aid the nation it recently surpassed and relegated to third position.

Finally, there is the question of the effect on the nuclear power industry. Here in Canada, this has implications for Saskatchewan’s extraction firms and Ontario Hydro’s expansion plans. While nuclear power offers a great number of advantages, there are some obvious lessons to be learned.

Tokyo Electric Power Co. has been struggling to limit radiation leakage and prevent meltdown at one or more of six reactors at its Fukushima Dai-Ichi nuclear plant, 230 kilometers (140 miles) north of Tokyo. Later-generation reactors already incorporate safety features (i.e., gravity feeds) to avoid problems such as electrically-powered pumps breaking down in cooling systems.

The wisdom of building reactors on top of fault lines seems dubious regardless. Furthermore, government officials must become better at responding to crises. Particularly when faster action can lead to international offers of help and access to expertise that is not available domestically.

Until these most recent shocks, the world economy was in early delicate stages of recovery. The germane question now concerns whether or not good economic fundamentals are still in place.

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.


RSS Feed

» back to blog home

Member Comments

Post Your Own Comments 
» Not a member? Register now to become one. Otherwise, login to post your comments on this article.

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
01/12 - 2012 holds promise but there’s no denying the uncertainty (part 2)
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

click here to update your log-in and member information

click here to maintain your company profile & view metrics