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 06, 2011

Alex Carrick
Globe-trotting to scope out 2011’s world economic outlook

Early January is an excellent time for globe-trotting to scope out what is happening in the world economy. Since worry about the world economic recovery rose to a crescendo in the spring of last year on account of Greece’s debt problems, it would seem that Europe is the place to start.

Sovereign debt remains a problem in several nations on the European continent, most notably in Ireland, Portugal, Spain and Belgium. However, problems at the “periphery” haven’t stopped Estonia from becoming the 17th country to adopt the Euro as its currency as of January 1st.

Also worth noting is that the leading economy in the Euro zone, Germany, is performing as if running on high octane. That nation’s economic growth in 2010 probably led the G8 at between +3.5% and +4.0%. Such a rate of growth would be the fastest advance since the reunification of East and West Germany in 1992. German export sales are soaring. New factory orders in November rose 5.2% from October. All of the gains have come in sales to non-Euro countries

Customers in emerging nations have stepped forward as eager buyers of German machinery and equipment, engineering services and both mid-range and luxury automobiles. Germany has been criticized by some analysts for basing too much of its economy on foreign trade. With a jobless rate that has fallen to only 7.5%, a stronger domestic economy is inevitable in any event.

Two key components of international business transactions and government dealings are currency values and comparative interest rates. 2010 was an interesting year for the “carry” trade. This is the practice of borrowing money in the home currency of a nation with low interest rates and investing it in the bonds and securities of a nation with higher interest rates.

Japan has a fifteen-year history of deflation with accompanying negligible interest rates. Therefore, for many years, the most common example of the carry trade has involved borrowing yen and placing the funds for investment elsewhere. This has been known as the yen carry trade.

Lately, it has been superseded by the U.S. dollar carry trade. The Federal Reserve has let it be known that record low interest rates will prevail until considerably more progress has been made in reinstating employment for the 8.4 million workers who fell by the wayside in the recession.

Furthermore, the Fed has been cranking up the printing presses in a process termed quantitative easing (QE). The second round of QE is sending funds flooding into the economies of Asia and Brazil. The longer-term consequence is that this will lead to inflation and property price bubbles.

In a similar vein, Australia and Canada were favorites for foreign investors last year on account of yielding two sources of investment gains. Both nations offered higher rates of interest than in the U.S. – Canada only marginally so but Australia to a much greater extent. And both nations experienced appreciation in their currencies versus the U.S. dollar, Australia more than Canada.

Betting on the Australian economy is becoming increasingly compromised by abnormal weather patterns. Drought in one season can turn on a wind shift to epochal flooding in the next. Much of northeastern Australia is currently under water due to torrential monsoon rains and commodity speculators are wondering what the effect will be on international coal and wheat markets.

The lead story in Canada often involves commodities. A world price of oil testing $90 USD per barrel has rekindled activity in Alberta’s Oil Sands region. The showcase project in 2011 will be resumption of work on the Voyageur upgrader near Fort McMurray. Total E&P Canada Ltd. has acquired a 49% stake in the project with Suncor owning the remainder. The two companies will also invest to guarantee bitumen supply from the Fort Hills and Joslyn Oil Sands properties.

Worldwide, the subject of commodity prices has been hijacked by developments in farming. According to the United Nations’ Food and Agricultural Organization (FAO), food prices stand higher now than in 2008 when there were riots in many nations including Haiti and Somalia and rice export bans were imposed in Egypt, Vietnam and Indonesia. The problems in 2008 stemmed from high fuel costs, a surge in Chinese demand and the move to grow corn for ethanol.

The high prices this time around are based in sugar, corn, oilseeds and some meat products, but many of the pre-conditions for trouble are emerging again. Global warming is playing particular havoc with global weather conditions as has been seen lately and oil prices are climbing.

As a further point of interest, many of the nations subject to potential food shortages are located in a region of geopolitical stress. The South China Sea and northwestern Pacific Ocean are coming under the influence of more aggressive maritime ambitions by China and the unpredictable actions of Kim Il Jong and his heir-designate son number three in North Korea.

At the same time, several of the economies in the same region of Asia are sitting on huge foreign exchange reserves earned mainly from export sales. China has a $2.7 trillion treasure chest. Japan is hoarding over $1 trillion in foreign exchange and the combined block of Taiwan, South Korea, Hong Kong, Singapore and Thailand has a nest egg of $1 trillion plus.

Returning to the U.S. economy, the capture of the House by the Republicans is bound to create interesting fallouts. One election promise by the GOP was to cut spending by $100 billion. There are already indications that this may not prove practical. At the same time, however, there can be little doubt that austerity must shortly become a “hot button” topic in the U.S. One factor forcing the issue will be the likelihood of Washington crashing into a legislated debt limit this spring.

The current debt limit is $14.29 trillion. Another $335 billion in excess spending will see that figure breached. The thrust of all recent effort has been towards lowering taxes and extending social benefits. There will have to be either spending cuts or an agreement to raise the debt limit.

There is no doubt that an accommodation will be reached. Otherwise, Washington won’t be able to meet the interest payments on its Treasury Bills, which would have disastrous ramifications.

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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Read Other Recent Alex Carrick Posts

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