ConstructConnect’s Chief Economist Alex Carrick recently sat down with Carolina Borges Cavalcante of Oldcastle Building Solutions to discuss the economy and the outlook for the construction industry. In Part 4 of the interview, Alex and Carolina discuss the Canadian economy.

Highlights from Part 4:

• Canada’s economy has struggled the past two years due in part to a downturn in world trade and sinking commodity prices, especially for things like oil and gas
• Canada is still waiting on a turnaround in commodities and for the manufacturing sector to pick back up
• Population growth has been around 1.2% per year, roughly 400,000 people, which has a positive impact on retail spending and construction activity
• Residential construction continues to remain strong, but skyrocketing home prices in cities like Vancouver and Toronto could hurt activity in those areas
• Infrastructure spending, especially soft infrastructure, allowed Canada to have stronger growth than the U.S. during the Great Recession driven by the foresight of the federal and local governments

Full Transcript of Part 4:

Carolina: Alex, first of all, thank you so much for coming here and spending the time with us. It’s really an honor to interview you with our partnership with ConstructConnect. We’ve been working together for several years and it’s good to have you here to answer some of my questions.

For those of you that don’t know Alex, he is the Chief Economist covering North America for ConstructConnect, as well as CanaData, and he has been providing our industry with economic and forecast data for over 30 years. During our conversation today, we’ll talk about the US economy, what we can expect for construction, and also touch upon what is happening in Canada.

As you know, Alex, two years ago our parent company CRH made a big acquisition in Canada and really increased our presence in Canada. We bought the wholesome assets and now I think we have over a billion dollars in sales in Canada so it’s a very important market to us. It’s one that we want to better understand and who better to talk about it than you. So, what’s happening in Canada?

Alex: Canada has had a couple of rough years. The GDP growth last year in Canada was 1.4%. In the US, it was 1.6%. It doesn’t sound like we’ve lagged behind that much. In actual fact, Canada has been struggling for two years. The reason is because world trade turned down and commodity prices tanked. The value of oil went down from over $100, oil at one point was as much as $140 a barrel. But it stayed around $100 for quite a while and then it dropped down to as low as $30 about a year ago.

When that happened, the resource dependent provinces of Canada really have been struggling. Just to illustrate the kind of change that can happen for Canada, just consider exports by the three major energy provinces early in this year. Last year, early in the year, exports of energy in Newfoundland and Saskatchewan and Alberta, the revenue from them was down about 30%. This year the revenue and the energy field is up about 30%. It’s that kind of swing. And that makes a big, big difference.

If commodity prices start to improve, that will have a huge positive impact on Canada. The Toronto Stock Exchange, I talked earlier about how well NASDAQ and Dow Jones had done. Toronto Stock Exchange hasn’t even gone up by 100% since it’s recession. It’s waiting for a turnaround in commodity prices. And the Bank of Canada was counting on the decline in value of the Canadian dollar to help the manufacturing sector. That’s starting to take effect.

There’s a very easy way to understand what’s happening in Canada is to look at the trade balance. The merchandise trade balance. For years before the recession, it was positive $40 billion, every month, annualized. Since the great recession, it’s been in negative territory more often than it’s been in plus. Over the last three months, it’s gone back into surplus. Hopefully, it’s starting to shift.

Carolina: Now, what’s happening in terms of demographics and population in Canada?

Alex: Excellent question because this is a huge part of growth in the economy and growth in construction if both Canada and the United States have a favorable population situation. Canada, for a long time, the population has been growing by about 1.2% per year.

A lot of that is immigration and it’s been because workers in other countries have wanted to come to Canada because they’ve known that they could work in the oil sands of Alberta, for example, building the huge mega projects and it provides employment for themselves and their families.

So, Canada has had very strong population. Some of that has shifted away from those resource dependent provinces and it’s now starting to bump up the population of Ontario and other parts of the country.

The United States population growth is about 0.7% per year. The more people you have, the more of them are spending money and that means retail spending throughout the country and that’s positive for the economy and that’s positive for construction. 1.2% or 1.3% per year in Canada, that translates to about 400,000 extra people per year and that’s a city the size of Halifax.

That’s like taking everything that’s in Halifax and building it all in one year. In the United States, even 0.7% growth, that’s about two million extra people per year. That’s a lot of people. That’s adding two extra metropolitan statistical areas per year. You can see that’s a lot of construction.

Carolina: For sure. So, in Canada, in construction there. What are the segments that you think are highlights or show more growth than others?

Alex: Well if commodities turn around then you start to get capital spending on some of those commodity areas like oil and gas and some of the resources. That’s one of the things that you’re looking at. The dollar is eventually going to kick in and help manufacturing in Canada, provided that there aren’t a lot of trade barriers and we don’t run into trouble in terms of renegotiation of NAFTA. So, manufacturing is another area. The demographics in Canada are better for things like education facilities, particularly at the younger grades.

And residential construction, see there was never the decline of home building north of the border that there was in the United States. Nothing like the kind of decline. In fact, housing starts in Canada are still over 200,000. 200,000 is the benchmark and if you’re around that figure, you’ve still got a pretty strong residential market and it has stayed about 200,000 year after year and over the last three months, it’s still been around 200,000. That’s very positive.

The only thing is that home prices in Canada have really taken off in a couple of cities like Vancouver and Toronto. By taken off, I mean 20% year over year increases. Some of the governments have stepped in and have tried to halt some of that. That might have a negative impact in that area but generally speaking, there are opportunities, continue to be opportunities for strong construction activities.

Carolina: Infrastructure was also something Prime Minister Trudeau pushed for in Canada. Is that coming true and is that something that has shown growth?

Alex: It’s certainly something that he wants to see happen and there’s talk about having an infrastructure bank and promoting these projects. P3 projects, Private-Public Partnerships have been around in Canada a lot longer than in the U.S. They’ve been quite successful in Canada. The thing with infrastructure that’s really quite interesting north of the border is that it was one of the things that caused Canadian growth through the Great Recession to stay stronger than in the U.S.

The federal government, the provinces and the municipalities, they came together and they really promoted a lot of infrastructure spending. This kind of ties in with a lot of what I said before. Because they interpreted infrastructure to mean not just the hard infrastructure, but the soft infrastructure.

We keep track of the 10 biggest project starts every month. For a period of two years between 2010 and 2011, that’s 240 projects appeared in that top 10 list. Out of that 240 projects, something like 180 of them were infrastructure and the vast majority of them were soft infrastructure.

It was hospital work and nursing homes to some degree and some educational projects so were brought forward to tide construction and the overall economy over during that rough patch. So yes, Canada has long been a proponent of how infrastructure is really what is driving economies.

Carolina: Great. Thank you very much. Alex, it’s an honor talking to you and I really, really appreciate your time. I hope all of you have enjoyed it as well.