Construction Industry Forecasts

From a business and economics standpoint, there is an awful lot to like about Canada’s federal election result on Monday, May 2nd.

One major impact will be on the value of our currency, the loonie. There is already media talk of a “political premium” that will add more lift to the Canadian dollar relative to many other currencies, particularly the U.S. dollar. More on this subject appears further along in this report.

Canada stood out among G7 most-developed nations during the recession. We suffered the least and emerged the strongest. Much of our success was based on the small “c” conservatism of our financial sector. Financial prudence has been our banking community’s watchword and it has served us well.

There was no need for government bail-out money. Employment levels were largely maintained among FIRE firms (finance, insurance and real estate) and this led to spillover benefits in residential real estate (a cornerstone of consumer confidence), which had moments of weakness in 2009 but has since recovered nicely.

The election of Stephen Harper to a majority government, after two previous tries resulted in minorities, will see the aforementioned financial prudence carried over into federal government fiscal caution that will make international investors stand up and take even more notice of our economy.

Every other major nation, at least those with parliamentary democracies, is dealing with some significant degree of fractious discord. In the U.S., a Democratic President and Senate are at loggerheads with a hostile Republican-controlled House of Representatives.

The governments of the U.K. and Germany are both coalitions. Australia’s ruling party is getting by on a knife-edge of support. The recent record of Prime Ministers in Japan has seen them tossed on the scrap heap annually. Prime Minister Silvio Berlusconi of Italy is embroiled in an under-age sex scandal. President Nicolas Sarkozy of France is intensely disliked by his electorate.

Longer-term planning in Canada can now proceed according to a smaller-government, lower-tax, pro-business agenda. Here are some of the positives that can be expected from the 167 seat majority in Ottawa. (155 seats or more are needed for control of the 308-seat legislature). 

The proposed budget, very much in its original form, will be re-introduced and passed. The Conservatives, through the stimulus infrastructure program, have shown themselves receptive to the notion of construction as a driver of the economy. As a further boon to building activity, the re-introduced budget will likely include a commitment to develop a long-term plan for public infrastructure. This will be established with the help of industry associations. 

The next round of corporate tax cuts will fall into place, as scheduled, on January 1 2012. The cumulative effect of several such cuts, past and present, will make Canada internationally competitive on the business-tax front. The fact that neither the Liberals nor NDP will form the next government means less likelihood of increases in personal income taxes in the years ahead.

For our resource sector – and this has mega construction project implications - cap and trade or a form of carbon tax have been taken off the table for the foreseeable future. Dinging firms on the basis of greenhouse gas emissions won’t emerge as an issue again until the U.S. passes such legislation, to be eventually included in an omnibus energy bill.

However, U.S. measures have become buried in partisan politics and aren’t likely to see the light of day until after the Presidential election in November 2012. From a competitive standpoint, it would be folly for Canada to take action on carbon emissions in isolation from similar steps south of the border.

A Conservative government is more likely to support Canada’s oil and gas industries in other ways. For example, it will be more sympathetic to the proposal to ship Alberta oil to China and Southeast Asia. During the election campaign, both the Liberals and NDP expressed opposition to tanker traffic along B.C.’s coastline.

Environmentalists will be up in arms about this. However, Canada needs to have more than one country as customer for its petroleum products. In the vernacular, we need to keep the Americans “real” when it comes to assessing our contribution to their energy shortfall. Canada having more than one buyer may help them to “focus.”

The five major international sources of U.S. oil are Canada, Mexico, Venezuela, Saudi Arabia and Nigeria. In that list, it’s pretty clear which nation has been most responsible in putting in place well-established procedures and safeguards to protect the environment.

There is likely to be more vigorous pursuit of a free trade agreement with Europe. Some subsidies in agricultural areas (e.g., dairy farming in Quebec) may fall victim under this push. It’s a price Quebec may pay for so heavily supporting the NDP. C’est la vie. That’s politics.

Under the Conservatives, there will be a more vigorous push towards a single security perimeter that surrounds both Canada and the United States. The primary aim will be to achieve enormous productivity gains and cost savings from speedier cross-border cargo and tourism traffic.

The Conservatives will be advancing their law-and-order agenda. For the construction industry, this will mean more activity in the niche market of jails and prisons.

All of the foregoing is likely to mean further upward pressure on the value of the Canadian dollar. No one should be too surprised if the loonie tests $1.10 U.S. This scenario has been given even more credence by Standard & Poor’s recent lowering of the outlook for America’s Triple A credit rating from stable to negative. That has been the fallout from little discernible progress in bringing U.S. deficit and debt problems under control.

A first sign of trouble on the U.S. debt front would be if 10-year Treasury Bills rose above 4.00% in the short term. In the meanwhile, the cost to Ottawa of borrowing from foreigners will remain relatively restrained. The easy access to foreign credit markets will offer big savings to Canadian taxpayers, through keeping the cost of debt repayment down. 

A rising currency attracts foreign investors, not just to debt instruments, but also to equities and real estate. An even higher-valued Canadian dollar will put more pressure on the manufacturing sector. But before everyone gets too alarmed, remember that the world is entering an era of higher inflation brought on by escalating commodity prices.

Canada owns many of those commodities and to the extent they are priced in declining U.S. dollars, the inflation impact here will be less. In turn, citizens of the country that has the lowest rate of price increase and the most stable finances will see strong gains in their quality of life.

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.