September 26, 2013
In 2012, CanaData focused on emerging economies and their continuing demand for Canadian resources. In 2013, emerging economies are still a major factor, but a slowly resurging U.S. economy is the bigger story. While Canada’s domestic economy and construction sector remain buoyant, concerns also emerged over this country’s preparedness to compete in world markets over the long run.
Warren Jestin, Senior Vice-President and Chief Economist, Scotiabank noted that U.S. unemployment rates are moderating and pent-up consumer demand is driving purchases. “The U.S. is playing catch-up ball,” he said. However, skyrocketing disposable income in urban China will eventually see that consumer market eclipse the U.S.
While inflation rates remain in check and central bank rates in both Canada and the U.S. remain flat, interest rates are projected to rise over the longer term. “With the dollar around parity with the U.S., there’s also an opportunity to buy equipment and machinery at a reasonable price,” Jestin said.
He noted that while the developed world is gearing up for growth in 2014, China is gearing down, and decelerating growth in Brazil and India are putting a damper on commodity prices. Despite flagging commodity markets, however, the resource sector continues to drive both Canadian employment and income gains.
Don Drummond, Matthews Fellow and Visiting Scholar in the School of Policy Studies at Queen’s University pointed out that Canadian productivity continues to lag against the U.S. and other economies, while high interprovincial trade barriers and counterproductive tax policies are making capital equipment investment too expensive.
Drummond noted that Canada doesn’t deserve its reputation as an “exporting nation” and needs to work harder at developing foreign markets. “About 50 per cent of our exports are from 50 companies,” he said. “When we strip out cars and resources, there’s not much left.”
Alex Carrick, Chief Economist, CanaData also struck a note of concern about Canada’s ability and willingness to compete in an increasingly crowded world marketplace.
“I’m not sure whether Canadians have grasped what it takes to compete in the new world we’re entering because of the emergence of the developing world,” said Carrick.
Canada will benefit from improved U.S. economic activity and resulting demand for Canadian products and services over the short run, he said. However, Canada’s dependence on energy wealth may be threatened by the resurgence of the U.S. as an energy superpower, as it taps its vast shale oil and gas resources. That would leave Canada’s natural gas wealth virtually landlocked and limit the appeal of Canadian oil south of the border.
“The U.S. can even generate electricity more cheaply using gas as a feedstock,” said Carrick. “For Canada looking forward, we need to fix this and I don’t think we can fix this with trade as we did before. The way to fix this is also not by saying ‘no’ to pipelines that can deliver energy commodities to customers in Europe and the East.”
Ray Wong, Executive Director, Americas Research Operations, CBRE Research and Consulting reiterated the importance of resource construction, noting that large projects from coast to coast continue to drive the country’s economic growth. He also noted that non-oil and gas infrastructure spending across the country remains both vigorous and well balanced.
Last year infrastructure stimulus programs were drawing to a close, sparking concerns that government cupboards might be bare going forward. That hasn’t been the case as governments continue to invest in schools, hospitals and transportation infrastructure projects, he said.
Urban planner, Antonio Gomez-Palacio, Principal at DIALOG noted that public transit infrastructure projects will continue to thrive if planners develop the right value proposition.
He noted that, while environmental and other concerns are important, people choose public transit primarily when it offers them a better experience.
“We need to have real metrics on the resulting benefits of transit projects,” he said. “We need to find the sweet spot between what we’re putting into the system and getting out of it.”
Mark Casaletto, Vice President and General Manager, Reed Construction Data agreed that large projects, including rapid transit, will continue to push the Canadian economy. Other key areas for large construction project activity include: oil pipelines; US retailers, such as Target, entering the Canadian market; and infrastructure renewal and extreme weather contingency projects.
“A number of years ago, we talked about the Global Construction 2020 study that said that Canada would be the fifth largest construction economy in the world, and it caught our attention,” said Casaletto. “In the 2025 study, Canada continues to hold its position. It’s a big deal because it suggest that a lot of this infrastructure build-out and demand and a lot of the activity forecast in construction reports is holding true and that’s going to attract a lot of attention around the world.”
CBRE’s Wong noted that Canada remains an “oasis of stability” in terms of both office and industrial vacancies, as compared to the flagging U.S. market. In mid-2013 western Canada offered an office vacancy rate of 8.6 per cent and an industrial vacancy rate of 6.0 per cent, as compared to eastern Canada’s 8.8 per cent and 5.8 per cent respectively.
CBRE anticipates an office development wave driven by Toronto and Calgary, with actual and anticipated construction in Toronto approaching 12.5 million square feet, and Calgary topping six million. Vancouver, Ottawa, Montreal, Edmonton and Halifax are expected to post more moderate growth.
“There will be a few hiccups in the office vacancy rate, with new construction,” said Wong. “However, we believe the long-term Canadian market should be able to accept the new supply.”
Relative stability also informs the housing market, said Peter Norman, Chief Economist, Altus Group and General Manager, Altus Group Economic Consulting. While condominiums have largely contributed to a drop in single-family home construction, he predicted an uptick in both this form factor and “continued normalization on the apartment front.” For 2014, Norman saw overall housing construction picking up in BC, Ontario and Quebec, falling off somewhat in Alberta due to excess supply and remaining steady in the Atlantic provinces.
“It’s steady as she goes nationally speaking, with no real momentum in either direction,” he said.