February 18, 2008

Construction Economics

Canadian construction economist predicts U.S. troubles will dampen Canadian economic growth

Reed Construction Data chief economist addresses Vancouver Regional Construction Association’s annual general meeting

Richard Gilbert

staff writer

The subprime mortgage crisis and weak performance of the residential sector in the U.S. will dampen the growth of the Canadian economy, says a construction economist.

Alex Carrick, Reed Construction Data economist, outlined the Canadian economic outlook for 2008 at the Vancouver Regional Construction Association’s Annual General Meeting on Jan. 30. The one hour presentation assessed the impact of the downswing in residential construction in the U.S. on the construction sector and the economy in Canada.

Carrick said the subprime mortgage crisis in the U.S. became a major problem in August 2007, when people had trouble making the adjustment to the renewal of their mortgages. The situation caused a rapid increase in foreclosures.

“The subprime mortgage crisis has brought the U.S. to the brink of a recession and that has filtered down to the rest of the U.S. economy in two ways,” Carrick said. “(First) there was a high inventory of new houses, which caused housing prices to stabilize or decline.”

The excess inventory of houses caused speculators to leave the market and reduced consumer confidence and spending. Both of these factors have caused lower rates of growth in the U.S. economy.

“On the financial side, there was a question about the stability of banks. There was a lack of confidence that the banks could pay off all the debt instruments that they had out there,” Carrick said. “This cut into liquidity, because banks are avoiding risk.”

To resolve this problem, the U.S. Treasury has been reducing interest rates and getting capital infusions from government-backed investment funds in the Middle East and China.

As a result of these two problems in the U.S., Carrick forecasted that the Canadian economy will grow by 1.8 per cent in 2008, which is lower than 2007 (2.6 per cent) and 2006 (2.8 per cent). Growth will recover in 2009 (2.5 per cent) and 2010 (three per cent).

The slowdown in economic growth in Canada will reduce the creation of new jobs to 235,000 in 2008 and 205,000 in 2009, from 375,000 in 2007. Job creation, however, will recover to 260,000 in 2010.

After six years of high construction starts, a cutback in housing is forecast in 2008, due to the reduction in economic growth and employment, a slowdown in interprovincial migration and the lack of pent up demand.

Carrick estimated housing starts in Canada will fall to 200,000 in 2008, 195,000 in 2009 and 210,000, from 230,000 in 2007.

Commercial construction was exceptionally strong in 2007, but is expected to slow down in 2008.

The trend is driven by a reduction in office-based employment in the banking and professional services sector, which includes insurance, real estate, accountants, lawyers and architects.

Retail and warehouse construction is also expected to decline, due to the slowdown in residential construction.

The hotel sector was strong in 2007, but may experience some weakness in 2008, due to a reduction in U.S. visitors and business travel. Institutional construction will remain strong in 2008. Taxation has followed the up cycle of the economy in the last few years, so all sources of government revenue are expected to be robust, he said.

Industrial construction is strong in terms of the growth of the resource sector, but may experience weakness because of the poor performance of the manufacturing sector and the high Canadian dollar.

The engineering construction sub-sector will move ahead at full capacity, despite the constraints on skilled workers and accessibility to remote regions.

Highway and bridge construction will continue in all regions of the country. The construction of electric power facilities is another growth area as the country enters a new era of energy megaprojects.

The oil and gas sector will move forward with liquid natural gas projects, drilling and pipelines being constructed across the country. However, sewer and water main work is expected to fall with the reduction in housing construction.

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