The Canadian Stockbroker© TCS newswire™
The Canadian Stockbroker © 2005 predictions;
Elevated oil prices will slow overall Canadian fiscal activity, delaying a recovery in non-residential and municipal construction.
End user spending will be partially compromised, inflation will run stronger, job gains will be smaller, and reaction (spending) in both the consumer and business areas will be more cautious.
The intensity and composition of construction spending is shifting. In retrospect, 2004 represented a year of transition for the markets.
The strengthening economy and increase in interest rates have set the stage for a recovery in public and non-residential construction activity. The wildcard in our conjecture is oil price.
A scenario of elevated oil prices and slower economic growth translates into three considerations in our 2005 forecast.
First, slower overall economic growth implies a gradual recovery in capacity utilization and vacancy rates and generally lowers the expected return on investment for most commercial properties.
Second, slower overall economic activity implies sluggish growth in employment and therefore a muted improvement in the tax bases of the provinces. TCS expects public construction will record a 2.9-percent increase for 2005.
Finally, mortgage rates will continue to rise but slowly. TCS considers a mortgage rate of 6.5 percent the tripping rate (the rate that will exert enough pressure on home affordability to result in significant declines in single-family home construction activity). The tripping rate is not expected to materialize until the end of the third quarter of 2005, thereby adding "legs" to an already strong urban construction run.
TCS sees North American construction spending reaching an inflation-adjusted level of $755 billion in 2005 (or 2.9-percent growth).
From 2005 to 2008, non-residential and public construction spending is expected to assume the mantel of growth leadership, while residential activity will step down to become the growth laggard (although maintaining historically strong levels).
Non-residential construction will sit near 0-percent growth for the next few months before a sustained upward trend is established.
Office employment growth is now advancing at a 2-percent rate. This is faster than the 1-percent rate estimated in TCS s’ summer 2004 forecast. If a more rapid growth rate of office employment can be sustained, then vacancy rates will decline at a faster rate than previously expected — potentially leading to a more rapid and meaningful recovery.
Manufacturing construction continues to post modest declines in activity. Recent statistics, however, point to some positives. Manufacturing capacity utilization rates, for example, have recorded more than one year of sustained increases. Further, manufacturing and Technical employment has gained with the addition of 100,000 net new jobs since the beginning of 2004.
Despite the good news, industry vacancy rates remain high. TCS economic research suggests that manufacturing capacity utilization must reach 80 percent before a significant revival in urban construction spending materializes.
Recent monthly statistics indicate that retail construction activity has reached a trough point. TCS expects strength to emerge in this sector soon. Retail construction is largely driven by conditions affecting the consumer. While recent statistics indicate a pause in consumer spending growth, TCS believes this pause will be short-lived.
Once an indication of sustained consumer strength is clear, retail construction responds in a rather quick fashion. TCS believes that strong retail construction activity will materialize during 2005.
Educational spending in 2004 was down by 11 percent compared to totals reached in the previous year. In a large part, the soft educational construction spending was a result of difficult budget conditions facing Municipal governments. (Public educational construction spending accounts for 82 percent of total construction spending for education projects.) TCS believes that at least two quarters of surplus budget conditions at the provincial level are required before a construction spending revival for education projects materializes.
Overall, public construction activity was down by 1 percent in 2004 when compared with totals reported in 2003.
Gains in highway construction (+1.5 percent), conservation (+1.2 percent) and utility systems (+3.4 percent) were offset by declines in publicly financed building construction (-2.9 percent), sport facilities construction (-10 percent) and water supply systems (6 percent).
In recent months, highway spending has recorded negative growth rates. TCS believes this is a reflection of continued budgetary constraints at the Federal level.
The US Congress will add in the area of $300+ billion giving considerable fuel to a positive outlook for public construction spending in 2005 hopefully Canada will follow the lead.
TCS has incorporated an upward adjustment in supplier intensities for most non-residential and some public construction sectors. Tight budget conditions currently prevail in portions of Canada; however, not all portions of each province are characterized by tight fiscal restraint. Where money is in short supply, the reasons are typically two-fold: (1) a strong budget demand has materialized due largely to strong infrastructure deficits coupled with tough renewal and rehabilitation construction activity needs (2) not enough grants or provincial transfers are available to bring operational budgets in line.
For 2004, TCS anticipated an increase in municipal infrastructure spending, a 4.4-percent gain from 2003. A gain of 2.9 percent is forecast for 2005.
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