RBC vice president and deputy chief economist Dawn DesJardins, Export Development Canada deputy chief economist Stephen Tapp and ConstructConnect Canada president Mark Casaletto held a panel on March 13 at the Canadian Construction Association’s 100th anniversary conference in Banff, Alta titled “Economy and Construction Sector – Current Situation and Outlook.”
Tapp began by focusing on EDC’s global economic outlook, and said “sunshine” is an apt way to describe the current global economic outlook. More countries are experiencing growth, and revising their forecasts upward. However he warned that “tweets about trade wars” can cause distraction and uncertainty.
Economic slack is being absorbed, we are reaching capacity limits and millennials are joining the workforce. Commodity prices and other leading indicators are pointing towards a pick-up in growth.
By contrast, in 2011 the prevailing thought was that “things will get better” the next year, but after serial disappointments, by mid-2016 the forecasts began pointing upward.
“It’s the most broad based growth in over a decade,” Tapp said, and all advanced economies are in growth mode, which hasn’t been seen since before the recession.
Unemployment is falling and labour markets are tightening, thanks to millennials joining the workforce. It’s “good news for parents, but better news for the economy,” Tapp said.
Emerging markets are growing twice as fast as developed economies and “we expect that trend to continue going forward” Tapp said.
The Canadian economy also grew, and the Euro area grew faster than the United States last year. However the US has seen increased government spending and tax reform, and the Trump agenda of bringing business back to the U.S. has pleased the business community.
China and India are leading the charge with growth of almost seven per cent in Asia and a slower but sustained growth in China, which is also switching from trade to internal consumption.
The key risks are that while growth momentum continues to exceed expectations, the downside is that markets could re-price or central banks could hike rates too quickly. The biggest possible downside? New trade barriers.
“Beware of tweets” Tapp said, referring specifically to Trump’s social media habits.
There are two NAFTA negotiating tracks. One dealing with North American modernization which has gone relatively smoothly. U.S. rebalancing, however, stems from the Trump administration’s contention that the U.S. is getting a “raw deal” and is a more contentious situation. It will also decide if we get a new NAFTA deal.
Possible NAFTA 2.0 scenarios include compromise, with elections soon in Mexico and mid-terms in the U.S. in November. Talks could also break down with the U.S. attempting a withdrawl. Talks could also drag into 2019. And meanwhile NAFTA 1.0 is still in place.
Despite this uncertainty, Tapp said, Canadian exporters aren’t panicking. Firms are considering moving part of their businesses to the U.S. as a hedge to Trump’s trade behavior, though no real shifts have happened as of yet. But another response is to diversify, with some companies turning to the EU and elsewhere. Some firms are also in a “wait and see” pattern.
Key takeaways, Tapp said, are that firms should take advantage of current strong growth but be aware that growth is happening more outside Canada than within it.
Desjardins gave an outlook focused on Canada, and she said while growth will be a little slower in 2018, it will still be strong.
But there is uncertainty in the form of possible tariffs and other trade barriers.
These uncertainties are leading firms to invest slightly less than they normally would, but Canada’s economy is healthy and solid growth is expected this year.
What’s driving the Canadian economy is consumers who are “doing the heavy lifting,” Desjardins said.
She added higher interest rates and housing prices would slow that consumer growth, but business investment and fiscal stimulus will continue to grow.
The government is committed to stimulus, and money will flow into the economy, and overall this will add 0.4 per cent to economic growth over this year and the next.
Energy companies picked up last year, but transportation costs are rising which will slightly dampen growth in that sector this year.
Oil prices will likely trade between $50 and $60 in 2018, and they will not rise to their peak of $140 and similar due to continued U.S. oil supply coming on line.
Demand for energy exports are strong, but not as strong with non-energy exports. But Canada also exports industrial machinery to the United States, so there is some upside.
Home sales are on a slower trajectory, Desjardins said, but there won’t be a housing market crash. There isn’t a heavy oversupply of homes waiting to be purchased, but there will be a slowing in the pace of growth.
The Bank of Canada is gradually hiking up the policy rate, but it will likely be at a very gradual pace. Debt service costs for Canadian households will also rise in 2018.
The Canadian dollar will take direction from both relative interest rate policy and oil prices, Desjardin said.
“We will be bandied about on the currency front from these expectations, but we expect the Canadian dollar to stay around $0.80,” Desjardins said.
Casaletto said 2015-2016 were down years for the construction industry, but the fundamentals in the non-residential space were such that the labour market was still strong.
Speculation confidence is still a factor in construction, he said, but investment is returning.
The broad outlook is that total construction starts for 2018 are forecast to grow at 7.8 per cent. Civil engineering starts are forecast at 15.3 per cent, and residential at 3.1 per cent. Total non-residential starts for 2018 are forecast at 7.4 per cent.
On the residential side, there is a stabilization of the sector. Non-residential is “punching harder,” but residential is slowing down because of government measures and also simply running out of space, particularly in Toronto and Vancouver.
“This leads to densification of core urban spaces, which defines what we build,” Casaletto said.
On the commercial side, there is much job creation, not just in Canada but also in the United States.
Vacancy rates are improving in many major markets, and in Vancouver and Toronto rates are below nine per cent.
Because of that more commercial/office projects are coming online to deal with demand, particularly in Toronto.
This affects the rest of the country because big, short term builds mean there’s a greater need for mobile labour.
Construction “punches more than its weight” in the Canadian economy, but ability to supply labour despite demographics becomes a “serious challenge.”
Retail is doing well but millennials are doing much more online, so it isn’t as great a growth point.
The Canadian industrial economy is at full capacity, but we aren’t building new as much as modernizing and not expanding. Institutional is growing on the hospital side, “but a lot of government investment is going into civil.”
Infrastructure, Casaletto said, should be further along but municipalities have some difficulty coming up with funds. Despite that there is still much work being done on infrastructure and “we’ve only started making a dent out of it.”
Overall quality of Canadian infrastructure is 19th in the world, “and that means opportunity,” Casaletto said. European firms see long term demand in the infrastructure sector and long term growth in the energy sector.
Forty per cent of all energy exploration is in Canada, Casaletto said, and “the world is taking note and pushing hard on the exploration side.”
This is another area where labour supply and mobility is key, he added.
Demographics have always been important for industry, specifically population growth which has trended towards the West. Canada also has higher immigration rates than any other western country, Casaletto said.
The most important interprovincial migration flows in the last year involve Alberta, but the United States is facing trade labour shortages and is starting to look towards Canada.
Also, twenty per cent of labour is now over 55, which means those workers will be lost to retirement in the next 20 years.
Technology means that the next five years for the construction industry will be “a cliff” of disruption. Europe is much further ahead in terms of technological adoption in construction, and because of CETA those companies will introduce those practices to the Canadian industry.
Technology will “explode” in construction management software and Software As a Service, and robotics and drones. The Internet of Things and advanced analytics will also be impactful, and artificial intelligence will also have an impact. Smart Cities, BIM and blockchain are also trends to watch.