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 - Oct 13, 2011

Alex Carrick
Urging patience while knowing all will be revealed in the fullness of time

The term “wait and see game” could have been coined for the current economic situation. The variables are largely known. How they will play out, however, remains to be determined.

Action in Europe

In the case of government, it’s a matter of ensuring that appropriate action is taken. France and Germany need to figure out what they’ll do about the Greek debt problem. A “haircut” (i.e., debt forgiveness) seems all but inevitable. But that means preparing banks for the hits they will take to their balance sheets. Germany and France, as the largest economies in the Euro-zone – together they account for 50% of the region’s GDP – need to stand firmly behind their banks. The TARP (Troubled Asset Relief Program) in the U.S. is being held up as the ideal model. Washington has even emerged from its period of bank ownership with taxpayer money intact.

Dexia was the first test. The governments of France, Belgium and Luxembourg have taken quick action to assume responsibility and provide equity. The shoring up of the capital of other banks must proceed as quickly as possible.

The date for the key statement out of Europe with respect to an action plan on Greece has now been delayed until early November. The flaws in the European framework – where the need for unanimous approval from 17 member states has made “quick response” to crises impossible – have been glaringly exposed. On the plus side, the so-called “troika” – the European Union (EU), the European Central Bank (ECD) and the International Monetary Fund (IMF) – has made it clear the next round of Greek debt relief will be forthcoming. 

U.S. Politics

The political parties in the U.S. need to be seen as capable of compromise to at least some modest degree. President Obama’s American Jobs Act has been defeated in the Senate. But there is hope portions of it will be re-packaged and passed in smaller chunks in the months ahead. Extending employee payroll tax deductions and setting funds aside for some infrastructure projects are two areas where progress is considered most likely to occur.

Tea Partiers and Wall Street occupiers will both play roles in the upcoming election process. The former wants to reduce the size of government. The latter is upset that so little action has been taken to punish the big banks and financial firms for bringing the world to the precipice of ruin. Which contenders for President will receive a boost from one of these two new presences on the political scene?Alternatively, which will receive a mortal blow to his or her aspirations?

Monetary Policy

Correct monetary policy is largely in place. Interest rates throughout the industrialized world are nearly as low as they can go. The Bank of England is about to embark on another round of quantitative easing (i.e., increases to the money supply). The Federal Reserve has shown it is willing to try old tricks and new tricks to stir the economy out of its lethargy. More quantitative easing is likely to be carried out through a “twist” operation that will lower long-term interest rates.

The bank of England has adopted record low interest rates. The term “record” is often used loosely these days to the point where its significance has been tarnished. Not in this case. The level of interest rates in the British Isles is known back to the 1500s.

Earlier this year, the European Central Bank was quick to initiate rate increases. This was in response to a perceived inflationary threat. Gasoline prices in particular were climbing alarmingly, brought on by supply disruptions as protest movements and civil unrest swept across the Arab World. More recently, there has been an easing in the world price of oil.

All Euro-zone nations, and especially Italy, Spain, Portugal and Ireland, could use a decline in the ECB interest rate. It would help alleviate the risk premium they’re currently paying when refinancing debt.

Private Sector Variables

In the private sector, from both a business and personal perspective, two of the major variables concern commodity prices and confidence. A lower expectation for growth in China and its satellites has taken the bloom off many commodity prices. But to what extent and for how long? Those questions have tremendous importance for Canada. Investments in large scale resource projects are being counted on to help drive the Canadian economy forward even as some other industrialized economies falter. However, the respite in the emerging-nation-inspired advance in commodity prices will help when it comes to individuals’ confidence levels. Furthermore, a better employment situation in the U.S. may be occurring naturally.

The latest weekly U.S. initial jobless claim figure stayed down around 400,000. It’s been hovering around that level for the past couple of months. While 400,000 is not an outstanding figure, it does indicate the labor market south of the border has stabilized. “Stability”, albeit at the bottom, is also a word that can be applied to U.S. housing markets. Foreclosure rates are in decline and home prices have leveled off.

While the healing process continues, stability is something to be desired. It’s a whole lot more appealing than at least one of the alternatives.

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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