The current world-wide slowdown in output growth will be felt across Canada. The two main stories regionally will be the impact of falling commodity prices on the raw material-based economy of western Canada and the side effects of the U.S. recession on the heavier industries of eastern Canada.

Both the commodity producers of the West and the manufacturers of the East are currently being helped, to a degree, by the fall in value of the Canadian dollar versus the U.S. dollar. Long-term, this is likely to reverse, unless the U.S. can rein in its huge federal government debt and dependence on foreign oil (see separate article asking, “Should the U.S. and Canadian Dollars be Combined?”)

However, in the interim, the lower-valued loonie means that the fall in commodity prices — which are almost always specified in U.S. dollars — is somewhat muted for Canadian producers. For example, a drop in price from $150 USD to $100 USD is a decline from $150 CAD to say $110 CAD if the loonie drops in value by a certain percentage versus the greenback. Also, the lower-valued loonie helps Canadian manufacturers make export sales into the U.S. market, although that potential is now reduced due to the overall economic malaise south of the border.

The Construction Outlook in Western Canada
The tightest labour markets in the country are still in the West. Unemployment rates in the four western provinces — Alberta (3.8%), Saskatchewan (4.1%), Manitoba and British Columbia (both 4.6%) are all below the national average (6.1%). No province in the East comes close to having an unemployment rate as low.

On the job creation front, Saskatchewan (+3.2% year over year), Alberta (+2.5%) and B.C. (+2.2%) are among the leaders in the country, and well above the national pace (+1.6%). Only Nova Scotia (+2.4%) and Prince Edward Island (+2.2%) have comparable rates of job growth in the East.

Manitoba’s economy continues to be the least showy among the western provinces. Its most-recent population growth (+1.2% July 1 2008 versus July 1 2007) almost exactly matches the nation as a whole. New home prices in Winnipeg have shown some vigor, increasing by 12% year over year, according to Statistics Canada. However, some other news from Winnipeg is not as bullish. Office vacancy rates both downtown (6.1%) and in the suburbs (11.0%) are among the weakest among major urban centres across Canada.

The region is well-diversified with national leadership firms spread among communications, vehicle manufacturing, pharmaceuticals, agri-business and insurance. Also, the province is well-positioned to expand hydroelectric power generation. This is a strong advantage given the longer-term push to replace fossil fuels and reduce carbon emissions in power generation. Northern rivers in the province will be the recipients of massive investments to expand electric generating capacity.

Saskatchewan has caught the attention of the country lately due to its wealth of resources ranging from potash through uranium, grains and oil and gas. Through the summer of this year, all the news was bullish with respect to the province, including the fact that the population has been increasing for the past two years after almost a decade of declines. In fact, Saskatchewan’s latest population increase (+1.6%) is among the fastest in the country, falling only behind Alberta (+2.1%) and virtually tying with B.C.

The world slowdown will put a crimp in Saskatchewan’s plans through next year. Longer-term, the resource sector can only heat up again as Asia-Pacific and other emerging regions seek raw materials. Saskatchewan has also become more receptive to oil and gas investment than its immediate neighbour to the west. As for uranium demand, the province is the world’s largest producer of high-grade ore and China, India and Russia are all in the midst of huge nuclear power expansion plans. Current uranium prices are below peak, but they are also well above levels of six or seven years ago.

Saskatchewan’s economic strength is being shown in its two major cities. Regina is leading all Census Metropolitan Areas (CMAs) with a year-over-year increase in employment of 6.8%. And both Regina and Saskatoon have experienced remarkable increases in home prices over the past 12 months, both for new and existing properties — +30% to +40% respectively in Regina and +15% to +20% in Saskatoon.

British Columbia is another western province that is now being perceived as more friendly to oil and gas investment than the nation’s traditional leader, Alberta. B.C. has a number of advantages moving forward. It will be one of the first jurisdictions in North America to benefit from any pickup in the U.S. home construction market.

It also has strong potential in hydroelectric power, which is carbon-free. Premier Campbell may have to move his carbon tax plans to the back burner for a while the overall economy is stuttering. And there will a natural increase in the level of optimism as we move closer to the Winter Olympic Games in 2010.

Home prices are likely to be a depressant, however, as excessive run-ups — one might even say “bubbles” — in the good times, especially in Victoria and Vancouver, now have to be worked off. Housing markets will continue to receive support from the high level of immigrant arrivals in the province each year. B.C. and Québec record about the same number of foreign entrants each year to stand tied for second place in Canada, but still well back of Ontario.

Alberta is a bit of a quandary at the moment. The international price of oil has dropped by about half from mid-July. This has to be causing consternation among oil executives, particularly in light of the new higher royalty regime to come into effect in January 2009. Most likely, excessive investments leading to tie-ups of material and labour that have plagued mega Oil Sands projects will now get a reprieve as firms delay new commitment decisions or stretch out their spending plans. Engineering construction accounts for close to 60% of total construction in the province, well above the level anywhere else in Canada. Thanks to engineering work, the total volume of construction activity in Alberta is almost tied with Ontario for the lead among all provinces.

The housing market in Edmonton has seen a marked decline in 2008, after setting near-record levels in both 2006 and 2007. Edmonton starts so far this year are down more than 50%. Calgary, which did record an all-time record high for starts in 2006, is holding up better than Edmonton this year, with a lift coming from the multi-unit category. Calgary continues to be the fastest growing city in the country by percentage gain in population.

Calgary has been one of the bright spots in the country for office building construction in this latest cycle. But new buildings coming on-stream and a weakening in the oil and gas sector will mean slower non-residential building construction early in the forecast period. Another dampening effect will be felt from the reduction in interprovincial migration gains that have fueled much of Alberta’s economy over the past several years.