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March 16, 2005

Guest Column

By Stephen Poloz

Sr. Vice-President & Chief Economist

EDC

Construction sector looks promising

When people think about Canada’s exports, the construction sector rarely comes to mind. After all, that is the sector that builds our roads and houses, not usually the stuff of exports.

In fact, export sales of construction materials, intermediate goods, equipment and related services are pretty big business for Canada.

In 2004 the figures are in the neighbourhood of $30 billion in sales.

This would include lumber and engineered wood products, of course, which together constitute more than half of the exports in the broader construction sector.

But it also includes quarried materials, pipes, and about $1 billion in construction machinery.

On the services side, architectural, engineering and other technical services exports exceed $3.5 billion annually, and a good portion of that would be related to the construction business.

It is noteworthy that construction sector exports weathered the export storm of 2001-2003 quite well. Canada’s total exports of goods declined in each of 2001, 2002 and 2003, and then recovered by approximately nine per cent in 2004, yielding an average annual growth rate of minus 0.6 per cent for the past four years.

But construction-related goods exports were essentially flat during 2001-2003, and surged by over 20 per cent in value in 2004, for an average growth rate in the four years of about three per cent.

Particularly noteworthy are Canada’s exports of engineered wood products, which posted an average annual growth rate of 12.6 per cent in the past four years.

Looking ahead, the situation appears pretty promising for the sector, especially in the all-important U.S. market.

The U.S. economy remains strong, and consumer spending solid within that, which means that the U.S. housing sector will continue to demand more Canadian raw materials.

Granted, the U.S. housing sector is expected to lose a bit of its recent strength in 2005-06, but on balance homebuilding will remain robust.

Meanwhile, vacancy rates in U.S. industrial space have fallen into the single digits.

The U.S. office market continues to work off the excess capacity that emerged during 2001, but there, too, vacancy rates are edging down.

In contrast, there is still excess capacity in retail space. Taken together these indicators point to moderate growth in demand for new buildings.

On top of that, the return to full health in the global economy has boosted investment in infrastructure projects in the developing world.

At the same time, global recovery has boosted the prices of some key construction sector inputs, particularly steel, aluminum and copper.

These price rises were, in large part, a return to normal levels after a period of depression, so strong pricing is likely to persist.

But the world economy is moderating to a more sustainable pace during 2005, and new capacity is coming on stream in certain raw material sectors, so some easing in pricing is likely, especially for aluminum and steel.

The bottom line?

The export of construction materials and services is big business for Canada and is exhibiting above-average growth.

With emerging markets investing heavily in infrastructure, and the U.S. economy still on a tear, demand is likely to remain robust in 2005-06.

Stephen S. Poloz, is senior vice-president and chief economist at Export Development Canada. The views expressed in this column are those of the author and not necessarily of Export Development Canada.

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