November 13, 2009
Executive summary of CanaData’s 24th Annual Construction Industry Forecasts Conference
Their prognosis on the current health and future direction of the Canadian economy couldn't be described as bullish, but speakers at the 24th annual CanaData Construction Industry Forecasts conference in Toronto expressed cautious optimism that the worst effects of the recession are receding and that a slow upturn is underway.
Some of the reasons mentioned included Canada's energy and raw resources, its sound banking system, well-balanced government finances and the fact the country hasn't experienced the housing market meltdown which occurred in the U.S.
The Sept. 24 conference featured representatives from the financial, real estate, research and construction professions. Most of those speakers, however, conceded the recovery is fragile, citing factors such as the still precarious U.S. economy, Ontario's large deficit and the fact that the recovery is, for the most part, driven by public sector spending.
Several expressed apprehension the recovery may be transitory if federal government stimulus measures are withdrawn before private sector driven prosperity takes root.
THE GOOD NEWS? LESS BAD NEWS
The opening speaker, Scotiabank chief economist Warren Jestin, likely summed up the mood in the room when he said the good news about the economy is that there is now less bad news. Enormous fiscal stimulus has put China at the vanguard of nations starting down the road to recovery, while in the U.S. government stimulus will soon gain traction and help to bolster and support consumer spending.
While the freefall in housing and auto sales is over and retail sales have been better than expected, however, the mortgage foreclosures in the U.S. continue to climb as federal government revenues continue to slide.
Canada and the other G7 nations are heading into an uneven recovery. Their lagging performances will be in direct contrast with that of the emerging nations of India, Brazil, Russia, Mexico and especially China, which will enjoy seven per cent growth in 2009. As an example of the global economic shift now underway, Jestin noted more vehicles were sold in China this year than in the U.S.
In Canada the economy is in a recovery stage, but it will be long, gradual and often difficult. Growth in 2010 will only be 2.5 per cent, Ontario has a large financial deficit and many of the infrastructure projects either financed or partially financed under the $12-billion federal government economic stimulus package won’t get underway until later this year or early next year. The so called shovel-ready projects weren’t so ready, said Jestin.
>> Watch video of Warren Jestin explaining why he has hope for Ontario’s economic resurgence.
STIMULUS MISCONCEPTIONS
Touching on that specific point later in the day, another speaker suggested there are misconceptions about how the stimulus program is supposed to function. With the exception of some specific federal projects, most infrastructure work is the responsibility of the provinces and municipalities. They have to expedite that work before federal funds flow, explained Bill Ferreira, director of government relations and public affairs for the Canadian Construction Association (CCA).
In the past the federal and provincial governments haven’t always been ready to share project costs with municipalities, he said.
After reviewing the recent history of how federal works monies have been injected into the economy, only to be clawed back in times of economic contraction, Ferriera said the CCA believes it’s now time to establish a policy on long-term consistent infrastructure funding.
>> Watch video of Paul Ferreira discussing how 2010 will be busy with stimulus projects.
CHINA RISING
As it has been in previous CanaData conferences, a consistent theme throughout the day was the direct connection between the rapid expansion of China’s industrial, commercial and consumer base and the fluctuations of the commodity markets.
While the global economy remained in a deep slump, China led a modest rally in commodity markets beginning in April. It has been snapping up and stockpiling metals and minerals since January of this year, said Patricia Mohr, Scotiabank's vice-president of economics and a commodities market specialist. Copper prices will outperform other base metals for the next five years, she predicted.
There are other ways to gauge China’s profound impact on the global economic stage. Its rising oil dependency and desire to create a 90-day strategic stockpile will contribute to higher oil prices in the next several years. Oil prices are already rallying, partly in response to demand by India and Brazil, and because economic recovery is now underway in the U.S., said Mohr.
In other commodity markets, nickel prices have been rising, due in part to China’s continuing and record imports of nickel-containing stainless steel. Prices have also been affected by strikes at Vale Inco’s Canadian operations and significant mine shutdowns in Canada and elsewhere. Stainless steel orders are beginning to pick up in Europe and other parts of Asia, but are still weak in the U.S. Prices for other minerals such as zinc are also on the upswing.
Although it never fell into a recession, China did suffer a major slowdown late last year which it has quickly pulled out of. That remarkable turnaround was led by massive infrastructure spending on projects such as railway expansion and port development; the easing of monetary credit policies; and numerous incentives to spur consumer spending on appliances and cars. By August of this year car sales had jumped by 90 per cent compared to the same period in 2008.
It’s unlikely those incentives will be reversed for quite some time as the government needs to maintain fiscal and monetary stimulus polices to keep China’s economy moving along, said Mohr.
>> Watch video of Patricia Mohr talking about how U.S. stimulus spending will help lift global commodity prices.
DECOUPLING DOUBTS
At the same time, another economist raised doubts about the "decoupling" theory. That’s the argument which suggests internal growth in China, and that of other emerging nations, can soften the blows of the global recession regardless of economic conditions in the G7 nations.
CanaData chief economist Alex Carrick pointed out that the U.S.’ large fiscal and trade deficits are financed by China. If the Asian nation starts spending its large fiscal surpluses to stimulate demand within its own domestic economy, then fewer dollars will be available to lend to the Americans.
If that happens there will be serious implications for the U.S., such as downward pressure on its dollar, rising inflation and higher interest rates. As well, a weakened economy will reduce the demand for consumer goods from China and other Southeast Asian nations, said Carrick.
Nevertheless, there are a number of positive developments underway. The record high gasoline prices of the first half of 2008 have fallen significantly and that should stimulate demand for cars and free up discretionary incomes. In Canada those lower prices could lure back American tourists and business travelers who have largely been absent because of U.S. passport requirements.
Focusing on how Canada’s construction market is performing in the midst of the worldwide economic turmoil, Carrick said that after seven years of exceptional growth the residential market will weaken somewhat in 2009 and 2010. Reasons include lower consumer confidence, concerns about job security and the fact that pent-up demand for housing was largely met from 2002 to 2008 when there were approximately 220,000 starts annually.
In the non residential category the prospects are mixed. With respect to potential institutional construction, governments are being pulled in two directions as they wrestle with concerns about debt while realizing it may be their responsibility to a private sector that will be sorely tested.
There are ongoing needs for medical facilities for an aging population and post-secondary buildings, said Carrick, pointing out that in non-institutional construction, stock market declines have resulted in deep cuts into trust and endowment funds. While not providing a high proportion of support for universities in Canada as the U.S., a reduction in such funds impact general operations, scholarships and capital spending.
In engineering construction there are two possible scenarios with respect to government-financed infrastructure projects. Either they will be drastically reduced as tax revenues decline or they will be accelerated as part of a government effort to stimulate the economy.
Certainly few people question the need to replace aging sewers, watermains, roads and bridges. A massive bridge inspection and replacement program launched by Quebec in the wake of the Laval overpass collapse a few years ago has softened the recession’s blows on the province, said Carrick.
A particularly bright spot is the future for energy-related construction. There are no more large undeveloped hydroelectric power sites in the U.S., but there are sites available in Labrador, Quebec, Manitoba and British Columbia. A nuclear plant is being refurbished in New Brunswick and new nuclear capacity is being planned in Ontario. Projects are also being proposed in Saskatchewan and in the Alberta oil sands.
On the other hand, the outlook for other sectors isn’t as promising. Although people still have to purchase basic necessities such as food and clothing, retail spending is down and that will have a ripple effect on warehouse-type construction.
Hotel and hospitality-related construction remains sluggish, in large part because the U.S. passport regulations continue to deter Americans from visiting Canada. As for commercial tower construction, it is being held back by tighter credit and by the fact that office-based employment has passed its peak.
OFFICE CONSTRUCTION
Given that most major cities around the world are now experiencing double digit vacancies, Canadian office markets have performed better than expected, said Cushman & Wakefield senior vice-president Paul Morse. In downtown Toronto the office construction market remains strong and leasing activity is reviving from a decline which began in last quarter of 2008.
The recently completed first phase 51-storey Bay Adelaide Centre is 70 per cent leased and the 30-storey 25 York Street, scheduled for completion in November, is 80 per cent leased.
In other parts of the country the picture isn’t quite as rosy. Most office construction in Vancouver is occurring in the suburban areas and no new buildings in the downtown core are expected until 2014. With the decline in oil demand and six million square feet of buildings now under construction in Calgary, that city will have a massive oversupply of space and some short-term occupancy challenges.
For the most part, though, the Canadian market is healthy. Besides its stable financial sector, which is a principal driver in office construction, Canada didn’t have the oversupply problem that occurred in the U.S., said Morse.
>> Watch video of Paul Morse warning that Calgary's commercial real estate market is on the brink of collapse.
BUILDING HOMEBUYER CONFIDENCE
The conference participants also heard from Canadian Real Estate Association chief economist Gregory Klump. Resale activity through CREA’s registered Multiple Listing Service is up sharply in recent months, Klump noted, and potential buyer confidence in the value of home ownership is rising. The Home Renovation Tax Credit has been the catalyst for a flurry of home renovations.
Housing prices, though, will remain flat and homeowners will be very cautious about big ticket renovation spending. The tax credit may have simply accelerated renovations which might not have occurred until 2010, said Klump.
>> Watch video of Gregory Klump explaining why the recent jump in existing home sales is not sustainable.
WAVES OF CHANGE
Not all the speakers concentrated on economic issues. In a presentation titled Riding the Waves of Change, technology specialist and Daily Commercial News contributor Will ’Korky’ Koroluk provided a window into the future with an overview of how new trends and current and future technological advancements will transform the nature of the construction industry. Examples include materials which can heal themselves and laminated glass strong enough it might be used for load-bearing elements.
Featured keynote luncheon speakers were author and business journalist Linda Nazareth and her husband Lou Schizas, an investor and radio host. They presented their sometimes conflicting opinions on the causes of the recession and where the economy is now headed.
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