October 24, 2013
Canada’s construction climate has clearly cooled – for now
Two recent releases suggest that Canada’s construction/investment climate, like the weather, is going to get somewhat cooler over the very near term. First, the most recent Bank of Canada Quarterly Business Outlook Survey (BOS) reported that, following a brief uptick in the second quarter, the number of firms recording slower sales over the previous twelve months jumped quite sharply in the third quarter.
This slowdown in sales has clearly had a pronounced negative impact on after-tax corporate profits which have been trending gradually lower since the final quarter of 2011 and were down 12.2% year-over-year in the second quarter of this year.
Consistent with the softening in sales reported in the BOS, the industrial capacity utilization rate appears to have stalled. After hitting 81.3% in the second quarter of 2012, it stands at 80.6% a year later, well below its previous peak of 85.1% reached in the second half of 2004.
This easing in capacity use appears to be largely due to a slowing in manufacturing which more than offsets gains in forestry, mining, utilities and construction.
Two other indicators which reinforce the lacklustre near-term construction/investment outlook include the BOS report on firms’ investment spending plans and investor confidence reflected by the S&P TSX stock price index.
According to the Bank of Canada, although the balance of opinion on investment spending over the next twelve months remained positive, the net percentage of firms planning to increase their spending declined from 9 to 7, its lowest value since the third quarter of 2012.
Consistent with the steady erosion in profits and despite record low interest rates, the S&P TSX has essentially moved sideways over the past nine months. This rather somber near-term outlook for investment is of course exacerbated by the lingering cloud of uncertainty hanging over the U.S. economy caused by the partial U.S. government shutdown and the looming debt ceiling which poses a serious threat to growth prospects in both Canada and the U.S.
Looking beyond the current U.S. debt debate, a number of indicators suggest that investment will pick up some steam in the first half of 2014.
First, although the BOS reported weak sales over the past twelve months, the net percentage of firms expecting stronger sales in the next twelve months jumped from 9 to 31, its strongest showing since the first quarter of 2012.
Second, the BOS also reported that firms are currently using capacity more intensively than they have in the past. Indeed, the percentage of firms reporting they would have difficulty meeting an unexpected increase in demand rose from 44 to 53 in Q3, its highest point since the final quarter of 2007.
Finally, interest rates (both short term and long term) remain extremely low and, according to the Bank of Canada’s Senior Loan Officer Survey, overall business lending conditions continued to ease in the third quarter.
Data Sources: Statistics Canada, Bank of Canada; Chart: CanaData – Reed Construction Data.