Share

The first half of 2009 is almost complete and the pattern of Canadas construction starts has not altered much since the beginning of the year. But change is in the works and the following looks at where some of the major pluses and minuses will arise.

Three Distinct Construction Markets

There are three distinct construction markets at this time: (1) residential; (2) privately-funded non-residential, comprised of commercial and industrial work, as well as oil and gas investment in the engineering category; and (3) publicly-funded non-residential, which is institutional and the rest of engineering/civil work (e.g. bridges, roads and highways; sewerage and water treatment projects; and electric power construction).

Categories (1) and (2) are deeply depressed. Housing starts in Canada are finally showing declines similar to what has happened in the United States, although not to as serious a degree nor for as extended a time period. Action already taken in lowering mortgage rates and setting more realistic prices will moderate the housing sector decline in this country.

The recession is holding back private sector investment in the commercial and industrial construction categories. According to CanaData, commercial starts nationwide are -61% in square footage and -50% in dollars through May of this year versus the same first five months of 2008. Industrial starts are -81% in square footage and -82% in dollars.

Continuing job losses are putting a damper on consumer spending. This is holding back spending on retail projects, which also restrains transportation and warehouse work. Weak product demand, falling corporate profits, the downsizing of Chrysler and General Motors and the climb in value of the Canadian dollar will all cause industrial construction to struggle at least through the end of this year.

Oil Prices Double from a Low of $35 USD per Barrel

However, oil prices are on the mend. They are back up to $70 USD per barrel and some industry executives are already talking about bringing projects back on stream. In an interesting twist, they are also patting themselves on the back for delaying work until such a time as they can achieve bargains in construction costs. Perhaps they had better act quickly. That window of opportunity may close as early as mid-way through 2010.

Rules on new regulations for the financial sector are being worked out in the U.S. with intent to introduce legislation later this year. There are likely to be many changes with respect to bulking up capital requirements, both for “pure” banks and “near” banks, and setting guidelines for executive compensation. However, one of the most intriguing areas with particular importance for Canada will deal with speculation in commodities .

Position Limits for Commodities and Canadas Petro-currency

Economic theory suggests that commodities should be priced according to their marginal cost of production. On this basis, oil would now cost about $45 USD per barrel. There is plenty of oil available in the world, either from additional OPEC capacity or floating around in tankers. By some estimates, the role of speculators in setting many commodity prices has now increased to about 75% versus an old level of 25%. Conversely, availability factors now comprise only 25% of the price movement versus 75% of old.

There used to be position limits that were imposed on commodity dealers. These have been gradually eliminated over the past several years. This has become tremendously important for Canada, since this nation is dependent on sales of raw materials to the world. One can go even further. The loonie has virtually become a petro-currency. When the price of oil goes up, so does the value of the loonie versus the greenback.

Curbing the activities of speculators will cause a smoother transition of currency values. The value of the Canadian dollar has shot up over the last month and this has put a further strain on manufacturers trying to make export sales into the U.S. market. There is even the possibility that the Canadian dollar will shoot above par with the U.S. dollar, given the extra debt that has been assumed south of the border.

However, once the U.S. economy is clearly in recovery, the trend will be for strengthening in the value of the greenback for a while at least, until too-rapid price inflation rears its head again.

One Bright Spot in Construction

The subject of government debt leads into a consideration of the one category of construction where activity levels remain relatively okay, with prospects for considerable improvement in the second half of this year. Much of the $800 billion in U.S. federal government stimulus spending is being sidetracked into shoring up weak state and local budgets. Still, there has been a pick-up in institutional and civil construction work.

In Canada, the municipalities and provinces are being forced to go ahead with projects to meet the target deadline to finish work, which is end-of-March 2011. In many cases, the bills will be presented to Ottawa at an advanced stage in the job-site process. Canadas institutional starts are +1.0% in square footage and +56% in dollar-volume terms year to date versus January to May of last year. Engineering starts, which are only measured in dollars, are -16%. This is a relatively solid performance versus most other categories.

The Ebb and Flow of Economic Indicators is Shifting to the Positive

The ebb and flow of economic indicators over the next little while is likely to be dizzying and confusing. On the jobs front, there will be further cuts due to dealership closings and parts plants downsizing in the auto sector. At the same time, steps taken by several major U.S. banks to repay government money assigned to them under TARP is encouraging, regardless of their motives. Never mind that they want to free themselves from government interference in their internal affairs. The fact that they have been able to raise capital by other means is an enormous step on the road to restoring business confidence.

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 .