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 - Jun 25, 2009

Alex Carrick
Five More Questions from the CanaData Webinar on the Economic and Construction Outlooks

During CanaData’s webinar on the economic and construction outlooks on Tuesday, June 23rd, I was not able to get to all of the questions that were submitted by viewers and participants. Therefore, this blog entry takes a stab at dealing with a number of the questions that remained outstanding after the event concluded.

1) Do you believe there is enough construction sector capacity to soak up increased government spending on infrastructure projects or will this lead to inflated construction costs?

I am skeptical that the infrastructure projects on their own will result in a great deal of construction cost inflation. I suppose that this may happen in some regions, based on local conditions where the volume of job-site activity is carrying over in a fairly strong fashion. But I do think that there is only a certain window of opportunity − until the spring of next year − for the relatively low costs of construction that are currently out there.

My concern would be in the area of rising commodity prices around the world. Commodities form the basis of all construction materials. Oil, nickel and copper are already advancing. This may be a function of hoarding by China. But it does suggest that supplies generally, around the world, are on a more precarious knife edge than in recoveries past.

There are several reasons for this. Emerging nations can pump up demand on very short notice. Just-in-time inventories make all production more dependent on a well-functioning supply chain. And raw materials producers have not, themselves, been spending any money on increasing capacity. Instead, individual companies have raised their output potential by acquiring other firms, but this does nothing for overall supply levels.

2) Is it possible to focus a Canadian economy entirely away from the United States?

No, not even remotely. In my opinion, the two economies need to become even more integrated. Something has to be done about cross-border traffic, to make it easier to send goods in both directions. There are huge productivity gains to be made in this area. Also, the new passport requirements in the U.S. are reducing tourism and this is a big blow for many of our major cities and smaller communities such as Niagara Falls. A new 51-storey hotel just opened there and the timing may have proven less than fortuitous.

However, there is a major shift in the world economy that is having a significant impact on Canada’s economy. Despite all of this nation’s advances in high-tech and services, we are still being driven by our raw materials. Demand for our commodities from the likes of China and other emerging nations is having a huge impact on our regions, depending on where their strengths lie. Iron ore and coal are the basis of steel production. Québec and B.C. are big in aluminum. Many of our provinces have base and precious metal mines. Potash and uranium are keys to Saskatchewan’s future.

Of course, oil and gas is still mainly exported to the United States. But I like the idea that Enbridge is promoting in its Northern Gateway oil pipeline proposal. If approved, this will ship oil from Alberta to B.C.‘s Pacific Coast with East Asian customers in mind. It is always a good idea to have the option of more than just one client, so to speak.

3) In March, the total construction outlook was for a 1.7% decline in current dollars and now the forecast is for an 8.6% decline. Have things gotten this bad in one quarter?

Things have gotten worse in the sense that construction starts have dropped off dramatically. But that’s not the whole story. The original estimate for 2009 construction spending was based on a Statistics Canada survey as published in Private and Public Investment in Canada. This survey solicits responses from thousands of owners about their spending intentions. At the time it is published, it is the most accurate read on what to expect.

I remember thinking at the time that it seemed too optimistic. Since then, there has seemed little doubt that the numbers needed revising downward. Therefore, in my latest forecast revision, that is what I did. I adjusted the earlier numbers from Statistics Canada with a more negative bias. From 2010 on, the figures are strictly CanaData forecasts.

4) Why are the feds and the provincial governments taking so long to release infrastructure funds?

I don’t think we really understand the process that is being implemented to get the funds out there. I’ve heard several different methodologies. One that seems to me to be most likely is that the provinces and the municipalities are going ahead with projects on the speculation that the money will be forthcoming later from the federal government. In this event, many of the projects that are proceeding are priority works that would have gone ahead anyway.

But then one hears that Ottawa is not giving an okay to its one-third share for new subway cars for Toronto because this proposal does not meet the criteria as set out in the infrastructure plan. The work will extend way beyond the target completion date. Nor is it really construction − but that may not matter so much, because it certainly is infrastructure. Nevertheless, the brouhaha over this issue certainly suggests that there is an approvals process in place.

CanaData’s Top 10 starts lists for April and May include a disproportionate number of institutional and engineering projects (i.e., 8 of 10 and 7 of 10 respectively). This work is coming on-stream. It will take some time for the true momentum to show itself. I suspect that, by the fall, the increased volume of work in this area will be much more apparent.

5) Did you do a forecast on housing starts for years after 2011?

Housing starts in the 1990s averaged 150,000 units per year. From 2002 through 2008, they came in at 220,000 units per year. That’s quite a jump. Most housing experts think that the current base level, tied to family formations and immigration, should be about 175,000. This may not adequately take into account second and even third homes; other recreation properties; replacements of tear-downs; and foreign demand for condos.

Nevertheless, it seems unlikely that housing starts will return to the 200,000-unit level before 2012. So let’s call that year the first 200,000-unit year after three years that progress from 150,000 (2009), to 160,000 (2010), then 180,000 (2010). However, I have been surprised by strength in housing markets before and I’m sure I will be again. Almost everybody is interested in home ownership and it is the basis of most family’s asset accumulation. Another factor to consider, though, is that retiring baby boomers may well want to alter their lifestyles from expensive homes in the suburbs to possibly cheaper and easier living closer to shopping and recreation amenities, as well as health care.

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.


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