New construction in Canada will reach $300 billion by 2014
Alex Carrick, Daily Commercial News
CanaData is projecting that current dollar spending on new construction in Canada will rise to $301.4 billion by 2014. The level this year, based on Statistics Canada’s survey of owner’s investment intentions, is expected to be $240.6 billion.
If a $300 billion construction market is achieved in 2014, it will be an almost doubling in dollar value over ten years, since 2004’s level was $154 billion. Furthermore, CanaData’s projection of investment spending over the next three years is relatively conservative. It’s made up of cost increases that rise faster than volume increases.
The 2011 base year numbers are derived from Statistics Canada’s survey of 28,000 owners as set out in the Private and Public Investment in Canada, Intentions publication (catalogue 61-205-X).
Based on historical patterns, CanaData applied factors to the survey responses to categorize construction spending according to residential, non-residential building and engineering work. Non-residential building is further segregated into commercial, industrial and institutional.
During the seven year period, 2004 to 2010, total new “real” (i.e., adjusted for price inflation) construction in Canada recorded an annual average growth rate of +3.1%. For the four years 2011 through 2014, CanaData is forecasting an annual average change of +2.6%. Dropping 2011 from the calculation — since it displays particular weakness in institutional work — yields an annual average change of +3.5%.
In the forecast, the annual average change in constant-dollar residential spending from 2011 through 2014 will be about the same as it was from 2004 to 2010, +2.0%. Spending on non-residential building from 2004 to 2010 averaged a little more than +3.0% per year. It will realize a similar rate of increase from 2012 through 2014. 2011, however, will be a tough year for this category due to a perhaps exaggerated drop (-17.2% year over year based on Statistics Canada’s survey numbers) in institutional work. Specially budgeted government stimulus spending is winding down.
Engineering work, as has long been the case, will continue to be the standout category. Real spending on engineering construction from 2004 through 2010 averaged +4.7% per year. Given manpower and material limitations, that was probably maximum capacity growth for the sector. CanaData is projecting the 2011 through 2014 average annual gain to be +4.3%.
Civil/heavy engineering work has been and will continue to be so strong due to a need to build new infrastructure and renew aging infrastructure, plus an overflowing plate of projects in the natural resource and utilities areas.
The foregoing deals mainly with constant dollars. There are many reasons to expect a push from construction costs over the forecast period. For example, in the forestry sector, lumber prices have been restrained on account of the unprecedented downturn in U.S. housing starts. This situation will gradually turn around.
The lumber industry has raised its capacity utilization rate above 90%, due in part to sawmill closings. That’s a formula for rapid price increases once demand picks up. In addition, forest industry executives have been aggressively expanding sales in emerging markets, particularly China. Furthermore, rebuilding efforts in Japan are sure to lead to an increase in orders.
Emerging market dreams of immense and economy-transforming infrastructure projects have been leading to increased demand for all manner of raw materials. Now that the world recession has ended, this will continue to exert a general upward bias on steel, cement, aluminum and base metal prices.
Current political unrest in the MENA (Middle East and North Africa) nations is adding a significant risk premium to the price of oil. No one can say with certainty how long the turmoil will last nor how wide-sweeping its effects will be. The “doubt” factor is likely to keep oil prices at their new elevated level or higher for a long time.
Applying a measure of caution, residential and non-residential construction costs can be expected to increase by at least 3% to 5% annually over the next several years. Higher prices for some commodities will eventually lead to substitutions and/or expanded supply, but those days still appear to be some ways away.
