BMI View: Canada's construction industry remains the most attractive in the developed world. The country is posting growth rates in excess of many emerging markets, whilst boasting one of the most attractive business environments globally. Infrastructure will remain the highlight of the market, whilst residential construction could be the main risk to outlook, as the sector begins a steady de s cent from the heady growth rates over recent years.
Construction sector real growth surprised to the upside in Canada over 2012, following a stronger than anticipated Q4. For the year, growth of 4% was achieved. In response to this , we have slightly upgraded our growth outlook for 2013, anticipating a strong H113, to bring the year as a whole to 4.1% (compared to our previous estimate of 3.8%). Infrastructure projects will be the primary driver of growth, especially those linked to the natural resource industry. Residential construction could be the underlying threat. Whilst the market continues to post strong growth, the slowdown is certainly taking place in new projects. A sharper than anticipated decline could destabilise our outlook, as the subsector accounts for around 40% of total construction industry value.
|Robust, But Risks To Downside|
|Construction Industry Value, CADbn|
Key themes for 2013:
Supporting the energy sector: Infrastructure investment to support the energy sector will be a major element of construction activity. In addition to new pipelines and railways to transport crude and natural gas, we also see growing demand for electricity to support planned liquefied natural gas (LNG) projects in British Columbia. Regulatory hurdles regarding new pipelines notwithstanding, we expect transport solutions for hydrocarbons to be a major area of investment over the medium term as Canadian oil and natural gas production continue to rise.
Going green: In addition to building new power plants to support LNG terminals, large scale hydropower projects are also in the pipeline.
Transport investment: The freight rail network is being expanded to support energy and other commodity exports. Plans to expand mining activity into frontier regions will demand extended railways to transport goods to market - these projects are already in the planning phase. The railways sector is also being boosted by urban transit projects such as those planned in Edmonton, Vancouver, Calgary and Ottawa, with investment running into the billions of dollars.
Social infrastructure: Leveraging off its impeccable public-private partnership (PPP) credentials (the country takes the number one ranking in our global Project Finance Rankings), Canada is attracting the private sector to investment in social and public infrastructure, including hospitals, education facilities and public sector buildings. As of August 2012, there were 73 PPP projects either in the construction phase or the pre-construction phase, according to the Canadian PPP Council.
|Infrastructure Growth Outstripping Other Sectors|
|Canadian Construction Industry Value, By Subsector, CADbn|
Despite this strong outlook across the infrastructure and non-residential building sector, we do see weakness in residential construction potentially undermining growth elsewhere. The sector posted another strong year in 2012, with growth in net output of 7.1%; however, growth trended lower towards the end of the year, indicating an, albeit gradual, slowdown ahead. Despite concerns over a housing bubble and potential burst in the mainstream media, we have maintained our view that although slowing, it will be gradual. Further the fallout effects will likely be less damaging, as the market is underpinned by better lending practises than in the US sub-prime crisis.
The other risk is related to the natural resource boom in Canada. Slowing Chinese demand for minerals and rising costs as mining expands to new areas could make new projects less economically feasible, and therefore undermine demand for new infrastructure.