Planned Construction Spending in Canada in 2008 to be +5.0%
Alex Carrick
Statistics Canada has recently made available the results from its latest survey of major owners entitled Private and Public Investment in Canada, Intentions 2008. This survey asks for information on planned expenditures in the areas of capital and repair work, both construction and machinery/equipment-related. What follows will mainly concentrate on capital spending (i.e., new construction) on non-residential projects. This measure of construction activity is also often referred to as put-in-place work, as opposed to starts.
The results reveal much about what is going on in the country and the regional shifts that are occurring. Total current dollar construction investment in Canada in 2008 is expected to be $219 billion. This will be a 5.0% increase from the previous year. The 2007 increase versus 2006 had been a similar +6.0%, but the mix will be quite different this year. In 2007, residential investment was +8.3%, whereas it is expected to be only +1.0% in 2008.
The three major sub-components of the “total” will break down as follows in current dollars: residential, +1.0%; non-residential buildings, +10.2%; and engineering, +6.8%. Residential and engineering work are approximately 40% of total construction each and non-residential building is the other 20%.
Construction Price Index Forecasts
On the inflation front, CanaData is forecasting that residential construction prices will rise 4.8% in 2008 versus 2007 and that non-residential prices will climb 5.2%. Therefore, total “real” (i.e., inflation-adjusted) construction investment in 2008 will be almost exactly the same as in 2007. The sub-category constant-dollar changes will be as follows: residential, -3.6%; non-residential buildings, +4.8%; and engineering, +1.5%.
For ease of clarity, the remainder of this report will stick with current dollar numbers. Either set of figures highlights that non-residential buildings will exhibit the most strength in the current year.
Regional Strengths and Weaknesses
On a percentage change basis, the largest increases are expected to come in Manitoba (+22.2%) and Saskatchewan (+20.2%). All the other provinces will record an increase between +4.0% and +9.0%, except for Alberta. In that province, it appears that some fatigue has entered into both residential (-5.1%) and engineering (-3.1%) spending. However, Alberta (+29.5%) will shine in non-residential building work, with the largest percentage increase among all the provinces.
Remember that investment figures are a carryover from construction starts in earlier periods. According to CanaData statistics, 2007 was a strong year for starts in the non-residential — a.k.a. ICI (for industrial, commercial and institutional) — building category.
Commercial Construction +15.3%
Among ICI categories, commercial construction (+15.3%) will be the frontrunner. Saskatchewan (+61.9%) will record the largest percentage change, but the actual dollars will be relatively small. Alberta (+47.1%) will be the real leader. Ontario will have an almost 10% increase and Québec will be ahead by about 5%. British Columbia is a surprise at -6.2%. This is the fallout from exceptional levels of spending in the previous two years as the city has been getting ready to host the 2010 Winter Olympics.
Within commercial work, the largest spending gains by industrial sectors will come in real estate services (+22.7%, mainly in Alberta and Ontario), finance and insurance (+20.2%, mainly in Alberta, Ontario and B.C.) and retail trade (+11.8%, primarily in Alberta and Québec).
Industrial Construction +10.2%
Despite the export-sales problems created for manufacturers by the high-valued Canadian dollar, spending on industrial construction is anticipated to be +10.2% in 2008 versus 2007. The largest percentage increases will be found in Québec (+21.5%) and British Columbia (+17.8%). There will be only a modest increase in Ontario (+5.3%), which disappears when inflation is factored in.
Institutional Construction +1.4%
The level of institutional construction investment is projected to be just +1.4%. The only province with a significant increase will be Québec (+10.1%), due mainly to increased spending on public administration. Delving deeper into the institutional numbers reveals two clear trends at work.
First, investment spending in the health care area (+2.3%) will be more buoyant than in education (-6.5%). This is due to demographics. Primary and secondary school enrolments are generally in decline, while post-war baby boomers are getting ever older. Second, the West is stronger than the East. Again, look to demography. Workers and their families have been moving to resource sector jobs in western Canada.
Engineering Construction +6.8%
Engineering construction investment is expected to be +6.8% year over year nation-wide in 2008. Québec (+23.6%), due to hydroelectric and mining projects, will be the leader among the larger provinces. B.C. (+11.8%) will perform okay, but Ontario (+3.7%) will be flat. Alberta (-3.1%), however, will be the source of most weakness. Oil and gas construction-related work in Alberta is expected to be -10.7%, but remember that this is compared with a very high number (nearly $30 billion) to begin with. Mining and energy-related work in B.C. will be a healthy +34.7%.
As a final note, Ontario ($61.9 billion) will lead all provinces in total construction dollar spending in 2008. However, Alberta ($56.2 billion) thanks to engineering work in the Tar Sands, will not be that far behind. Those two provinces will combine for more than half of total construction spending in the country. Québec ($38.9) and B.C. ($34.0) are distant third and fourth place contenders.
Bank of Canada’s Spring 2008 Business Outlook Survey
The foregoing results are consistent with the latest information from the Bank of Canada (BOC) on machinery and equipment investment. This comes from the April 2008 edition of the BOC’s Business Outlook Survey, which is based on interviews with senior executives of about 100 strategically-placed firms across Canada.
On the subject of planned investments on machinery and equipment over the next 12 months, 28% of respondents said they would be upping their allocations, 45% would be maintaining the status quo and 27% would spend less. This yields a “balance of opinion” figure of only 1%, or little change from last year. The balance of opinion is the percentage expecting to spend more minus the percentage expecting to spend less.
The net figure of only 1% is the lowest since the third quarter of 2003. (The figure reached a high of 35% in the spring of 2006.) Most of the firms planning to invest less are based in eastern Canada. The two major reasons cited were as follows: (1) to take a breather after recent large expenditures; and (2) to preserve cash in uncertain economic times. Firms in the West generally expect to increase M & E spending.
