April 8, 2013
The Spring 2013 Canadian Economic and Construction Outlooks
The tone for the nation’s construction outlook was recently set by Statistics Canada’s Private and Public Investment (PPI), Intentions 2013 report. Its findings are based on a survey of 28,000 owners among business and government enterprises across the country.
The advance in total new construction this year is expected to be +1.0% in current (i.e., not adjusted for inflation) dollars. Therefore, in constant dollars, the year-over-year percentage change will be slightly negative.
The annual rate of inflation in construction is currently in a range of +2.0% to +3.0%. Only one material category is moving up dramatically at this time – forestry products. In Ontario, softwood lumber’s year-over-year cost increase has been nearly one-third. In the rest of the country, the increase has been from 15% to 19%. Material cost movements can be found in Statistics Canada’s Industrial Product Price Index (IPPI) report.
The reason for lumber’s cost escalation is the much stronger performance of new housing construction in the U.S. In Canada, the pattern for new home starts this year is likely to be the opposite.
New residential groundbreakings in Canada will fall to around 180,000 units seasonally adjusted and annualized in 2013. In 2012, the annual total was 215,000 units.
A weaker new homes market has unfortunate implications for other key sectors. Many Canadians derive a significant proportion of their weekly entertainment from window shopping in malls and other retail outlets. Items for one’s abode head the list of potential purchases, ranging from furniture and appliances to dishes and cutlery and do-it-yourself home improvement products.
Whatever cuts into retail sales will also lower output on production lines. Thankfully, there are some compensating trends of a more positive nature underway.
Major U.S. shopkeepers are bursting onto the Canadian scene, including Target, J Crew, Bloomingdale’s and Williams-Sonoma. The latter has committed to keeping its prices in Canada the same as in America, except for the biggest ticket items that require high shipping costs.
Canadians have been wondering for some time why prices for the same goods sold here, and often by the same retailer, aren’t the same as in the U.S. The increased potential for cross-border shopping, combined with Internet sales, is helping to remove the discrepancy.
At the same time, however, the value of the Canadian dollar (i.e., the loonie) has fallen slightly below parity with the U.S. dollar. An earlier wave of rapid commodity price increases launched by China has been dormant of late (except for lumber), lessening support for the loonie.
When the fizz in commodity prices is skimmed off, enthusiasm for new resource-based projects wanes. A prime example is aluminum smelter expansions. The modernization of Rio Tinto Alcan’s project in Kitimat is proceeding but other new initiatives, such as in Quebec, will await a further improvement in the metal’s price.
With respect to key oil and gas projects, where there is a long list of possibilities – including further Oil Sands work; LNG export projects along B.C.’s northern coastline; and pipeline expansions and reversals to increase flows across the country and to the U.S. – uncertainty abounds.
Projects are being halted, delayed or otherwise jeopardized by environmental objections, native opposition and/or uncertainty about government approvals. The most glaring example of the latter is Washington’s ambivalent attitude towards the northern portion of TransCanada’s XL pipeline proposal.
The shale rock energy boom in the U.S. is changing the dynamics for Canada’s oil and gas sector in several ways. (1) It is reducing energy export sales north-south. (2) It will eventually provide greater competition in selling natural gas (as LNG) to emerging markets, especially once the next wave of major improvements to the Panama Canal are completed.
And (3), through a greater adoption of cleaner-burning gas as opposed to out-of-favor coal in U.S. power generation, Canadian sales of electricity to its neighbor are also threatened.
On the plus side, the effort to move more oil around the continent is leading to extra investment by the railroads to build storage tanks and acquire more tanker cars.
In other construction project news, there are several large sports complexes for hockey, football and soccer planned or underway in major cities across Canada including Regina, Edmonton, Hamilton and Quebec City.
In the institutional category of construction, all three levels of government – federal, provincial and municipal - are embracing austerity, with reduced spending in many public areas, including capital works projects. But that’s not the end of the story. Â
Demographics are demanding that some projects proceed in health care regardless. Due to an increasing population, Alberta is pressing on with school and hospital work with borrowed money. The province’s finances have taken a blow from lower energy sector royalties this year.
Alberta is one of the two provinces, along with Saskatchewan, where job seekers are flowing in both from other jurisdictions within Canada and through international migration.
Alberta may be experiencing some unexpected problems, but its total new construction spending in 2013 is expected to exceed every other province in the country. In strictly private sector new construction, Alberta’s dominance over second-place Ontario will be an impressive +30%.
Gross domestic product (GDP) estimates for the Canadian economy in 2012 have been revised downward to about +1.5%. Optimistically, the target for 2013 is +2.0%. Canada’s best hope for a pleasant surprise lies in a U.S. economy that may be springing back to life.
The biggest barrier to economic progress south of the border is Washington. The private sector is bullish. The stock markets are certainly upbeat, with the Dow Jones Industrials (DJI) Index reaching a new all-time high in early March of this year.
But it’s anybody’s guess to what degree “sequestration” (i.e., across-the-board public sector spending cuts) and further debate about the debt ceiling will damage consumer-driven activity levels.
The February employment numbers in both countries – with a net increase in jobs of 236,000 in the U.S. and 51,000 in Canada – did lay down a solid base for an expressway forward this year.
If the recent past provides a template, however, there are sure to be some jarring speed bumps along the way.