This report will look at the cyclical categories of non-residential building construction in Canada — commercial and industrial work. Institutional construction is more a trend phenomenon, driven by demographic factors and dependent on government financing. Engineering/civil construction can fluctuate dramatically as a result of individual large projects. There will also be comments on some key economic issues, particularly the value of the Canadian dollar and whether it should be tied to the U.S. dollar.

Office Buildings
In commercial markets, current low office vacancy rates and high rents (particularly in Calgary, Edmonton and Vancouver in the West, but also in Toronto and Ottawa in the East) mean that the underlying conditions for office building construction are at their peak in this economic cycle. Office building construction is traditionally a late-cycle bloomer, depending on workers being hired to occupy more floor space as the economy expands. CanaData expects office building starts nationwide to approach 14.0 million square feet in 2007, up from 10.3 million in 2006.

Retail Construction
Year-over-year retail sales in the United States are starting to slip. They have recently fallen below 5.0% for the first time in many years. In Canada, the 5.0%-plus figure is being maintained so far, but with rising gasoline prices (and the effect this will have on discretionary incomes), this performance is in jeopardy. World oil prices have climbed into the mid-$60 US per barrel range from a low of $55 at the start of the year. Remember, however, that oil prices reached $80 per barrel in July and August of last year.

Hotels/Motels
The hotel building sector is one of those late-cycle categories that is doing exceptionally well at this time in the United States. Hotel/motel construction starts have been ahead by as much as 100% at times recently on a year-over-year basis, and employment growth in leisure and hospitality is currently leading all sectors. Hotel construction in Canada is also on an upswing, with several new five-star hotels underway or planned for Toronto, for example. However, the future for the accommodation industry is not as clear north of the border as on the American side. This is primarily due additional out-of-country document requirements planned for American travelers starting January 1st of next year for day excursion auto trips. If implemented, this is likely to significantly cut down on U.S. visitors to Canada. Efforts are underway at the highest government levels to forestall this action.

The hotel market is interesting because it breaks down into several different segments. Airport and downtown hotels are stopping-off locations on the way to business meetings or sight-seeing. Then there are the resort and/or casino hotels that are themselves the ultimate destination. The latter properties have the potential to make the most money.

Industrial Construction
In industrial construction markets, high commodity prices are driving investment in the mining sector. Nickel and copper prices have increased by a factor of four over the past two years. Aluminum prices have doubled. Uranium prices have risen from $7 US per pound in 2003 to over $100 now, an increase of fifteen times.

In the auto sector, investment spending on assembly operations is expected to decline this year. Expansions by the parts sector, particularly Japanese firms, will make back some of this loss. Parts makers now employ more workers than the assembly side. Canada’s government should receive credit when it is due. There was representation by Canadian government and industry officials at the Tokyo Auto Show many years before some of our key competitors. This gave Canada an early advantage with Japanese automakers that has been maintained ever since.

The Canadian Dollar
The wild card with respect to export-dependent Canadian manufacturing is the value of the Canadian dollar. Many factors determine the value of the dollar, including the relative level of interest rates between Canada and the U.S., relative inflation performances, the level of government debt and so on. However, at this time, commodity prices are playing a larger role than usual, particularly the world price of oil. Canada’s trade surplus now depends far more on energy (oil and natural gas about equally) than on more traditional goods such as forestry products and motor vehicles. As a result, the Canadian dollar is moving closely in step with energy markets. Therefore, the outlook for the dollar depends, to a significant degree, on the outlook for the international price of oil.

South of the border, the opinion seems to be that oil prices will moderate once the current frenzy of speculation subsides. The current heightened speculation has been brought on by the approaching high-demand summer driving season. Outside the U.S., the body of opinion focuses more on world growth patterns. For one of the first times in recent world history, almost all the industrialized nations are growing strongly at the same time.

World Economic Growth
Canada and the U.S. are expected to record real Gross Domestic Product (GDP) growth this year of around 2.5% to 3.0%. Most other industrialized nations are also expected to show growth of at least 2.5%, including almost all of the Euro nations. Some countries will do a little better — Spain (3.5%), Mexico (3.0%) and Australia (3.0%) — while Japan may be closer to 2.0%. Also, there is a new acronym, BRIC, for four countries gaining increasing economic importance. The BRIC countries are expected to do even better than the rest of the world - Brazil (4.0%), Russia (6.0%), India (8.5%) and China (11.0%). This strong world economic growth may well move oil prices higher.

CanaData’s view is that growth in both Canada and the U.S. will be a little slower than full potential (3.5%) in 2007. This will play a role in restraining commodity prices to some extent and may keep the Canadian dollar from reaching parity with the U.S. dollar this year. However, with the Canadian dollar so close to parity (over $0.93 US), the issue of tying our currencies is coming to the fore again. This would certainly offer some advantages, in terms of an easier movement of goods and people between the two countries.

At the same time, there are several economic arguments in favour of a separate and unique Canadian dollar. First, history has shown the benefits. The low-valued Canadian dollar in 2002 ($0.65 US) forced fiscal restraint on our provincial and federal governments. Now, the state of Canadian government finances is among the best in the world. Second, the U.S. has some major financing problems that will be inherited by this country if the dollars are tied. The U.S. is running huge trade and federal government deficits. At some point (and particularly as the rest of the world expands), other nations may tire of financing those deficits by capital infusions (and see better investment opportunities elsewhere). At that time, U.S. interest rates will be forced to rise and so will Canadian rates, if the currencies are united.

Corporate Profits and the Stock Markets
There is also a sentimental or psychological reason for a separate Canadian dollar. The unique Canadian dollar is one of this country’s last symbols of identity. More and more formerly-marquee Canadian companies are succumbing to foreign ownership. Why is this happening, and why are stock markets so buoyant, setting records almost daily?

Corporate profits are perhaps demonstrating the economic cycle more clearly now than even quarterly Gross Domestic Product (GDP) figures. Profits in North America and elsewhere have been rising since 2001, but are finally leveling off. Year-over-year profit growth is now essentially 0% in the latest quarter. However, there has been an enormous accumulation of profits over the past six years. Some of that accumulation of capital is being used by corporations to buy back stock and/or launch takeover and acquisition proposals. Canada’s commodity-based resource companies are prime targets.

information from : www.buildingteamforecast.com

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