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April 2015
General Economic Perspective
The outlook for the civil construction industry in Alberta for 2015 and beyond is looking better
than expected. Given the challenges the Government of Alberta (GOA) has around budget
allocations there certainly was the potential for the industry to see the rehab budget cut or
deferred. The GOA stepped up to the pump and delivered a realistic long term perspective as it
pertains to civil infrastructure. Further proof is the inclusion of a feasibility study relative to the
expansion of the QE II. Here are the five year budget numbers:
Capital Plan Details - GOA Budget (millions)
2015
2016
2017
2018
2019
Total
MSI Grants
Municipal Trans Grants
497
352
846
358
846
368
846
378
776
353
3811
1809
Roads and Bridges Rehab
308
319
334
440
708
2109
Ring roads
Highway Twinning
Highway #63
41 Ave interchange Edmonton
Highway #19
Interchanges and Intersections
Support systems
P3 road rehab
QEII expansion planning
667
153
329
87
10
34
20
2
3
510
109
111
587
178
45
569
140
29
576
194
6
10
14
20
3
3
60
12
20
6
0
12
20
6
0
12
20
6
2909
774
520
87
80
84
100
23
6
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Construction Materials Quantities
2015
Programmed Tendered
7,210
6,587
2016
2017
2018
2019
Earth (x 1,000 m3)
750
Granular Base Content
2,490
2,360
320
(x 1,000 tonne)
Asphalt Cement Product Rehab
2,970
2,380
2,280
(x 1,000 tonne)
Asphalt Cement Product Other
1,780
1,680
600
(x 1,000 tonne)
* Estimated quantities include over programming in each year.
2,820
750
3,300
440
330
360
2,890
2,490
4,330
400
510
190
We would like to think that our continued advocacy and the white paper the ARHCA published
in late 2014 had some influence in the GOA setting these budget numbers. The budgeted
numbers for rehab in the five-year projection grow to that critical 1,350 km per year that
actually stop the amount of deferred rehab from growing.
It is April 9th, and the GOA is calling a provincial election. The worst kept secret that has
shadowed all the recent budget hoopla in the media, will be announced today. What does this
mean to the average Albertan? Well this would be our fourth premier in four years, almost as
many as the Oilers have had first round draft choices.
It is interesting to read the quips, or are they quotes from the various party leaders about what
“they” think is of critical importance to Albertans. Well there are also those polls that suggest
that certain parties are enjoying huge popularity with the constituents, but remember that
those polls can be incorrect.
There are also media reports about the constituents being angry with the budget, and the
timing would be bad for the progressive conservatives but we all know that elections are fodder
for promises, mudslinging, project announcements, and more media coverage than our
birdcages could use.
At the end of the day, I think the biggest unknown is which other political party will be able to
cobble together some results to claim that other political prize in Alberta, “the official
opposition.”
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Consumer Price Index (CPI) in Alberta at the end of February is 0.9 per cent, a result primarily of
rising costs of fresh meat, fruit and vegetables, and offset by pump prices. Crude prices remain
in the $50 USD per barrel range, and given the large inventory on hand globally, and the
significant increases of shale production, it begets an interesting discussion on where this price
will end up. Of course if we were able to accurately predict this trend we would probably be
rich! In 2014, according to the European Central Bank (ECB), in contrast to purely financial
assets, oil prices can be expected to be predictable to some extent. This is because crude oil is a
physical commodity whose price, at least beyond the very short term, is determined by oil
demand, oil supply and the level of inventories (e.g. Barsky and Kilian 2004, Hamilton 2009).
Hamilton (2009), for example, lists several simple theories of the expected oil price that could
provide some basis for forecasting oil prices. The degree to which the oil price forecast can be
improved using information from the physical oil market depends on the extent in which the oil
price behaves as a financial asset (see also Alquist et al. 2013). Purely financial assets tend to
immediately reflect macroeconomic news according to the efficient market hypothesis, making
the random walk assumption typically the best predictor for future developments. For oil
prices, this is not purely the case. Although oil prices have increasingly behaved as financial
asset prices over the past decade (Fratzscher et al. 2014), they have been shown to not fully act
as such (e.g. Kilian and Vega 2011). This is indirectly also confirmed by several studies that
demonstrate that the oil price forecast can be improved by including information on economic
activity for example (e.g. Alquist el al 2013).
So then, with that little economic explanation, are we any further ahead as to where those
prices are going? Well I think that prices will gradually go up this year, resting at the high $60s
by the close of the year. The basis for that assumption is:
1. Crude oil remains the base of energy needs today. Until alternate sources become
economically feasible, oil is it.
2. The somewhat tepid growth of Europe and China economies will strengthen as the year
goes on driving the prices up.
3. The oil sands ARE a significant global inventory, and even with price volatility that may
deter some expansion activity regular annual operating investment will continue to
drive GDP growth in Alberta.
4. Agriculture and forestry sectors are enjoying a very good cycle right now, which will
maintain the demand for energy products.
5. The seasoned Alberta business has weathered these oil cycles before, and has become
very sophisticated and directed in managing through these interruptions.
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Proportion of Workers Commuting to Work in Western Canada – Major Cities
Census Metropolitan
Car, truck or Car, truck or
Car, truck or
Public
Area
van (total)
van (driver) van (passenger) transit
Winnipeg
78.7%
69.8%
8.9%
13.0%
Regina
87.7%
79.6%
8.1%
4.2%
Saskatoon
86.1%
78.7%
7.5%
3.7%
Calgary
76.6%
69.1%
7.5%
15.6%
Edmonton
82.8%
75.0%
7.8%
9.7%
Kelowna
89.1%
81.4%
7.7%
2.7%
Abbotsford
93.2%
83.2%
10.0%
1.8%
Vancouver
74.4%
67.3%
7.1%
16.5%
Victoria
71.7%
64.9%
6.8%
10.2%
Source. Statistics Canada
Walking
Bicycle
5.8%
5.8%
6.2%
5.4%
5.1%
4.6%
3.2%
6.3%
10.4%
1.6%
1.4%
2.4%
1.3%
1.1%
2.1%
0.7%
1.7%
5.6%
The Canadian View
Consumer price inflation dropped to 1.0 per cent. Food prices advanced 3.9 in the 12 months to
February. Prices for food purchased from stores were up 4.3 per cent on a year-over-year basis
in February, after rising 5.4 per cent the previous month. Price gains for meat (+12.4 per cent),
fresh vegetables (+8.4 per cent) and fresh fruit (+3.5 per cent) contributed the most to the
February increase, although these gains were smaller than in January. Prices for food purchased
from restaurants rose 2.8 per cent year over year in February.
The shelter index rose 1.8 per cent on a year-over-year basis in February. Natural gas prices
increased 10.8 per cent in the 12 months to February, while the cost of homeowners' home and
mortgage insurance rose 8.6 per cent. Consumers also paid 3.8 per cent more for electricity. In
contrast, prices for fuel oil declined 23.4 per cent in February compared with the same month a
year earlier.
Transportation costs fell 5.0 per cent in the 12 months to February, following a 5.3 per cent
decrease the previous month. In addition to paying lower prices for gasoline on a year-overyear basis in February, consumers paid 1.0 per cent less for the purchase of passenger vehicles.
February marked the first year-over-year decrease in the purchase of passenger vehicles index
since May 2013.
In the spring, Bank of Canada (BOC) Business Outlook Survey, lower oil prices continue to
dampen the overall sales outlook of firms, weighing on investment and hiring intentions.
However, a majority of businesses are benefiting from the strong economic outlook in the U.S.
and the boost in competitiveness from the weaker Canadian dollar.
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Overview from the Bank of Canada survey
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Firms in the Prairies and in the energy supply chain continue to report being adversely
affected by weaker oil prices. Signs of spillovers to other sectors and regions are also
emerging. Nevertheless, many businesses indicate that lower oil prices and a weaker
currency support their business outlook, and the majority anticipate a positive impact
from strong U.S. economic growth. On balance, past sales activity continued to
improve, but businesses do not expect a material increase in sales growth over the next
12 months.
The balances of opinion on investment and employment intentions declined further,
driven by the adverse effects of lower oil prices. Intentions to increase investment are
more widespread among firms based in central Canada and those in the services sector.
The indicator of capacity pressures is little changed, and the number of firms reporting
labour shortages that are restricting their ability to meet demand remains low. Overall,
firms indicate that labour shortages are less intense than they were a year ago,
particularly in the prairies.
Firms expect little change in input price inflation over the next 12 months, but they
anticipate that output prices will increase at a somewhat faster rate, reflecting the
effects of the recent depreciation of the Canadian dollar. Inflation expectations
continue to be concentrated in the bottom half of the Bank’s inflation-control range.
The balance of opinion on credit conditions suggests an easing over the past three
months.
The Canadian dollar (CAD) is currently around $0.80 USD. The manufacturing sectors are
reaping significant benefit from the CDN dollar being this low compared to the USD, but
interestingly our dollar has not depreciated comparably to other currencies.
The World View
Emerging-market central banks are in a quandary. As the US dollar soars and the Federal
Reserve prepares to raise interest rates, other country central banks might have been expected
to start raising their own rates to protect their currencies and attract investment inflows.
Instead, many of these central banks have been cutting interest rates, owing to falling oil prices
and lower inflation. The relentless rise in the dollar is now threatening to turn the depreciation
of some emerging-market currencies into a rout. The risk is all the greater for those countries
that have borrowed heavily in US dollars, and which now face the pressure of servicing those
debts in depreciated local currencies. Although conditions differ among countries, the easing
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cycle that began late last year now looks over for most countries, and some emerging-market
central banks may soon be forced to start raising interest rates once again. (Source: The
Economist Intelligence Unit, 2015).
The price of oil remains a key story in the global economy. In mid-2014, no major forecaster
was expecting anything other than a global oil price of US $100/barrel or more for the
immediate future. After reaching a 2014 peak of US $115/barrel in mid-June, however, the
price of Brent fell by more than 60 per cent, to around US $46/barrel in late January. The price
plunged for a number of reasons, including oversupply (from the explosion of shale production
in the US), reduced demand (mainly from a weak European Union (EU) economy) and the
decision by Saudi Arabia and other major producers in the Middle East to let the price fall to
protect their market share and place pressure on higher-cost producers in other parts of the
world.
Lower oil prices are helping net oil consumers in a number of ways. By reducing the cost of
energy, especially for transport, consumers in countries like the US have more money to spend
on other things. Although the increase in income for oil consumers globally is offset by the
decline for oil producers, consumers are more likely than producers to spend their windfall. The
price of petrol in the US fell by around 45 per cent in the 12 months to early 2015.
Unsurprisingly, consumer spending in the fourth quarter of 2014 rose at its fastest pace since
the start of 2006 (4.3 per cent at an annual rate). Motorists in the US will spend around US $170
billion less at filling stations in 2015 (if prices remain where they are) compared with 2013,
when oil prices were high for the entire year.
How much will this decline in the price of oil help global growth in 2015? Lower oil prices cause
a shift of income from oil producers to oil consumers, who are more likely to spend some of
their new-found wealth. Whichever direction oil prices move in, many economists believe that
oil shocks are precursors of recessions and recoveries. World oil prices, for example, nearly
tripled between January 2007 and mid-2008, just as the Great Recession of 2008-09 was
starting. The subsequent decline in the oil price contributed to the recovery. So potentially, the
global economy today may be helped by the current price rout, but not by as much as might
have been expected.
The pick-up in the US since mid-2013 can be traced back to several factors. After a painfully
slow recovery from the 2008-09 recession, some of the improvement is simply a matter of pentup demand, especially for core purchases such as cars, computers and home furnishings. As
demand has slowly climbed, employers have stepped up hiring, which has boosted private
consumption. This in turn gives businesses the confidence to invest, which boosts demand for
factories, capital goods, and yet more hiring. The US private sector has been doing especially
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well. In the 22 quarters since the recession ended in 2009, overall US Growth Domestic Product
(GDP) growth has averaged 2.3 per cent, which is weak by historical standards. But if
government is stripped out, the private sector has expanded by a much healthier 3.2 per cent.
Private firms will not maintain this pace, but as government begins to contribute again to GDP,
US growth will have another source of support. Global trade recovered modestly in 2014 from
the year before, expanding by an estimated 3.4 per cent. While we expect the momentum to
continue in 2015, recent data present a mixed picture. According to the Organization for
Economic Co-operation and Development (OECD), total merchandise exports in the G7 and
BRICs economies (Brazil, Russia, India, China) fell by 3 per cent in the fourth quarter of 2014,
compared with the previous quarter, while imports declined by 3.7 per cent. However, as these
figures are measured in US-dollar terms, these falls partly reflect the strengthening of the dollar
against most currencies. Qualifying these data somewhat are the latest figures from the
Netherlands Bureau for Economic Policy Analysis, which draws from both International
Monetary Fund (IMF) and OECD data. In volume terms, the Netherlands Bureau estimates that
world trade grew by 4.4 per cent in December from a year earlier, its second highest reading of
the year. Meanwhile, a leading indicator of global trade, the Baltic Exchange Dry Index, which
assesses the price of shipping raw materials around the world, fell to a record low of 539 in
February. Rather than being a harbinger of things to come for global trade, this record fall is
related to oversupply in the dry-bulk shipping industry and the slowing of Chinese commodity
imports. (Source: The Economist Intelligence Unit, 2015).
Workforce Issues
Daunting are the workforce statistics that illustrate the inevitable, the need to attract new
construction workers to the industry. Upcoming baby boomer retirements coupled with
industry growth is creating the workforce shortage that could have significant impacts for the
foreseeable future. In question is the industry’s resiliency and the nebulous nature of employee
retention. This industry-wide issue requires an industry-wide solution. Although it may not
come overnight, investing expenditures now will gain merit on the long-term agenda.
With these realities in mind, perhaps exposing youth to potential trade occupations and
educational opportunities is the first step in moving forward. The federally funded Canada –
Alberta Job Grant program illustrates the government’s commitment to developing apprentices.
This same committed should be imbedded within the construction world. Investing in our youth
and finding employers to provide support throughout the apprenticeship program could reduce
the reluctance to engage in the industry. Developing career paths and supporting
apprenticeships are two important pieces to the convoluted puzzle.
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Temporary Foreign Workers (TFW) have gained significant media attention with the April 1
deadline having come and gone. Up to 16,000 individuals were sent back to their home
countries, thousands of them having been employed in the construction industry. This will only
heighten workforce demand and place additional pressure on hiring and maintaining quality
employees. With the economy the way it is, the challenge will be to fill these positions while
sustaining project deadlines.
The following excerpt is from the Canada West Foundation’s report, “Work Interrupted”. The
Temporary Foreign Worker Program (TFWP) design is aimed at preventing employers from
hiring foreign workers over Canadians. The policy, however, is less effective in eastern Canada
where there are higher rates of unemployment and overly effective in the west. In the west, the
primary challenge is that there are relatively more jobs than available Canadians who are willing
and able to fill those jobs. The policy would be more suitable if it reduced the number of foreign
workers in areas with high unemployment and provided flexibility and options in areas where
there are fewer available workers. If all things remain equal, the limits on low-wage temporary
foreign workers will generally leave western Canadian employers with no alternatives for labour
in the short term.
On the upside, if the changes to the program are supported by other interventions, there could
be some benefits in the medium to long term. Interventions that increase the labour supply
from within the existing Canadian population may become critical in the absence of foreign
workers. This includes finding ways to increase participation of under-represented populations
in the workforce, especially people with disabilities and Aboriginal people. Governments will
need to play a leadership role in these types of interventions as increasing labour force
participation is often too large, expensive or risky an undertaking for individual employers.
It is not clear whether denying employers access to workers from abroad will help with local
unemployment. Although there has been speculation on the outcomes of the changes to the
TFWP, the economic impact has not been projected, including the associated decreases in
unemployment. It has also not been assessed how the decrease in access to temporary foreign
workers could ultimately decrease the employment of Canadians due to businesses cutting
work shifts or closing altogether (Bandali, 2015).
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Regulatory and OH&S Issues
The joint committee with Alberta Sand and Gravel Association (ASGA) has been working with
Occupational Health and Safety (OH&S) to complete the revisions to Part 36, the mining
provisions. The meaningful feedback received from industry stakeholders and the mutual
understanding that worker safety is priority has aided in providing clarification for the
application of Part 36 to our industry.
Economic data and costing trends
Construction Materials Cost Trends
Portland cement
Diesel fuel
Asphalt Cement (rack price)
Steel
Haul rates
Gravel
Labour Rates
Concrete Pipe
PVC Pipe
Consumer Price Index
Construction materials
indicator
Market Modifier
Q1/14
Q2/14
Q4/14
Q1/15
220.00T
1.10/litre
650.00 Rack
+6.00 per cent
17xT per KM
16-20T
+3.00 per cent
+5.00 per cent
+5.00 per cent
+3.90 per cent
227.00T
1.15/litre
665.00 Rack
+1.00 per cent
18xT per KM
17-21T
+3.00 per cent
+1.00 per cent
+1.00 per cent
+1.90 per cent
227.00T
1.14/litre
760.00 Rack
+1.00 per cent
18xT per KM
15-20T
+3.00 per cent
+1.00 per cent
+9.00 per cent
+3.00 per cent
233.00T
1.03/litre
625.00 Rack
+3.00 per cent
N/C
17-23T
+1.50 per cent
+3.00 per cent
+1.00 per cent
+0.90 per cent
+2.00 per cent
+1.00 per cent
+3.00 per cent
+1.50 per cent
+3.30 per cent
+1.50 per cent
+1.00 per cent
+1.50 per cent
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Crude Oil Trends
120
100
86
103
84
79
80
2011
93
2013
2012
70
2014
60
52
40
2015
20
Crude Oil Price April 2015
0
Industry Capacity
Industry Capacity
available capacity in red
available capacity in red
Price $USD barrel
98
95
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
April 2015
Sector
more…
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The capacity of the industry in Alberta is tremendous, and the industry is a critical partner in the
construction and maintenance of transportation infrastructure. Our industry has the capacity,
the skill sets, and the experience to be able to help governments build solutions to
transportation issues. The civil construction industry, like any other, functions well when there
is consistency in funding activity. If the five-year forecast from the GOA for transportation
infrastructure rehab is sound, the industry can do an effective job of preparing to meet the new
demands.
Please send your comments, questions and suggestions to [email protected]. We would like
to expand this publication to cover topics of interest to you and your business. Our goal is to
ensure you have the information that will allow you to make better decisions.
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