February 1, 2010
Economic Snapshot
After weak start to 2010, non-residential construction should start to gain strength
JOHN CLINKARD
consulting economist, CanaData
Despite a 3.3% increase in institutional construction in the fourth quarter of 2009, the total value of non-residential construction fell by 2.5%.
This was due to a 6.8% quarter-over-quarter decline in spending on industrial projects and an accompanying 5.5% quarter-over-quarter drop in commercial construction.
The drop in non-residential construction was just slightly less than the 2.6% quarter-over-quarter decline seen in the third quarter, and the second largest quarterly decline since 1999.
Taking a look at 2009 as a whole, the effects of a collapse of investor confidence, plunging corporate profits and a sharp tightening of credit conditions late in 2008 caused current dollar non-residential spending in 2009 as a whole to shrink by 1.2%.
This decline, its largest year-over-year drop since 2000, was mainly the result of a 6.5% decline in spending on commercial projects, combined with a 16.4% pull back in spending on industrial projects.
Together, these declines more than offset a 19.3% rise in institutional construction, which was boosted by federal and provincial stimulus spending.
It should be noted that this decline in total non-residential construction was considerably smaller than the 6.5% drop projected by Statistics Canada’s initial survey of public and private investment intentions in February 2009.
It was also less than the 5% decline projected in the agency’s revised survey published in July 2009. Growth of non-res construction spending in 2009 was particularly strong in Prince Edward Island (+37.5%) and in Saskatchewan (+25.8%); in Alberta and British Columbia it declined by 7.7% and 7.4% respectively.
Non-residential construction will continue to shrink through the first half of 2010.
This will be the result of lingering clouds of uncertainty on the economic horizon, together with rising commercial vacancy rates, low levels of industrial capacity utilization plus a gradual slowdown in stimulus-driven institutional construction spending.
However, the recent quarter-over-quarter increase in corporate profits, a marked strengthening of commodity prices and the steady strengthening of investor confidence should cause business non-residential spending to accelerate in the second half of 2010 and strengthen further in 2011.
John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Data source: Statistics Canada. Chart: Reed Construction Data – CanaData.
