Preliminary Investment Trends Report ONTARIO: 215 224 Investment in Ontario s construction industry grows over the medium term in line with a number of proposed major resource development, electric utilities and transit system projects across the province. Overall, non-residential activity is expected to peak in 217 and then remain well above historical levels across the outlook period. Residential investment slowed briefly in 213, but resumed in 214, and is expected to rise at a steady but moderate rate across most of the period. INTRODUCTION This report highlights expected investment trends in Ontario from 215 to 224. It does so with a view to providing initial insights on how new major projects, sustaining capital and ongoing investment trends may guide construction labour markets, serving as a precursor to the more detailed Construction and Maintenance Looking Forward report to be released in early 215. The information in this investment outlook has been validated through consultations with industry, including owners, contractors and labour groups, and government. Changes in anticipated project schedules, however, can alter these expected trends. BuildForce Canada regularly monitors economic conditions and the scheduling of major construction projects in order to incorporate relevant changes into its forecasting system. September 214
ECONOMIC ENVIRONMENT The future economic performance of the provinces is determined by the behaviour of a number of key forces driving the economy. These drivers include the performance of commodity prices and the economies of Canada s major trading partners. While commodity prices remain high in historical terms, many are assumed to weaken in the short term, consistent with the world economy s overall weak recovery. Agricultural prices weakened in 214, but remain relatively stable in the long term. Prices for metals and minerals were also weaker in 214 as a result of weak global growth prospects. While prices are assumed to increase over the long term, the increases will be relatively small compared to the gains of the last decade. Both oil and gas prices increase on average over the outlook period. Oil prices are forecast to decline until 216 and increase thereafter. The price of oil is expected to exceed its previous peak of about US$1 per barrel by 219. The price of natural gas fails to return to its previous price peak. The relatively weak performance of natural gas reflects the increased supply of gas that is expected to be obtained from shale gas deposits across North America. Canada s key trading partners show a strengthening in the medium term as their economies continue their recovery from the recent recession. U.S. growth strengthens to 2.8 percent in 214 and averages 2.9 percent per year over the medium term. The Eurozone is expected to grow by 1.1 percent in 214 and then average 1.5 percent over the medium term. Expected growth in Japan will be slightly lower, averaging 1.3 percent annually. China s economic growth remains relatively strong, but its rate is lower than that observed over the past 1 years. The Canadian economy is forecast to grow by 2.1 percent in 214, up slightly from 2. percent in 213. A still recovering global economy in combination with an almost 1 percent depreciation of the Canada-U.S. exchange rate will cause export growth to strengthen and put downward pressure on import growth. GDP 1 growth averages 2.4 percent per year over the medium term, but then slows to 1.7 percent over the long term as the impact of the exchange rate depreciation diminishes and natural resource-related major project investment slows. In Ontario, economic growth is expected to average 2.3 percent over the medium term to 218 and then slow to average around 1.8 percent over the long term. CONSTRUCTION INVESTMENT TRENDS Major projects keep engineering construction strong, while more moderate growth is expected for ICI (industrial, commercial and institutional) construction. Following a brief decline in 213, residential construction investment grows steadily over the medium term in line with population growth and household formation. 2 Table 1 provides a summary of investment across these sectors. 1 Gross domestic product 2 Household formation refers to the change in the number of households (persons living under one roof or occupying a separate housing unit) from one year to the next. It is the means by which population growth is transformed into demand for new housing. Preliminary Investment Trends Report Ontario: 215 224 2
Table 1: Construction investment ($ millions*) 214f** 215f 216f 217f 218f 219f Non-residential investment (excluding maintenance) 35,818 37,679 39,31 39,733 39,12 38,43 % change 2.5% 5.2% 3.6% 1.8% -1.8% -1.5% Building 19,15 19,544 2,17 2,567 2,551 2,56 % change 2.6% 2.3% 2.9% 2.3% -.1%.% Industrial 3,29 3,443 3,71 3,79 3,647 3,547 % change 1.2% 13.7% 7.7% 2.2% -3.8% -2.7% Commercial 7,599 7,615 7,913 8,211 8,322 8,332 % change 5.6%.2% 3.9% 3.8% 1.3%.1% Institutional 8,477 8,485 8,484 8,566 8,582 8,681 % change -2.2%.1%.% 1.%.2% 1.1% Engineering 16,713 18,135 18,924 19,167 18,461 17,87 % change 2.2% 8.5% 4.3% 1.3% -3.7% -3.2% Highways/bridges 3,921 4,14 4,198 4,297 4,291 4,382 % change -2.3% 4.7% 2.3% 2.4% -.1% 2.1% Other engineering*** 12,792 14,32 14,726 14,87 14,17 13,489 % change 3.7% 9.7% 4.9% 1.% -4.7% -4.8% Maintenance 1,421 1,654 1,897 11,165 11,463 11,751 % change 1.9% 2.2% 2.3% 2.5% 2.7% 2.5% Residential investment 34,812 37,277 38,454 38,582 38,766 39,565 % change.7% 7.1% 3.2%.3%.5% 2.1% New housing 14,972 17,291 18,321 18,389 18,42 18,93 % change -.4% 15.5% 6.%.4%.1% 2.7% Renovations 19,84 19,985 2,133 2,193 2,364 2,662 % change 1.5%.7%.7%.3%.8% 1.5% * $ millions indicates that the money values are in year dollars (base year), that is, adjusted by inflation. This is used to calculate the real physical change of the values, factoring out growth due to increases in prices. Totals may not add up due to rounding. ** f refers to forecasted investment. *** Other engineering includes the construction of water, wastewater, oil and gas, pipelines, mining, power and communications-related facilities. Preliminary Investment Trends Report Ontario: 215 224 3
Non-residential Non-residential construction investment (see Figure 1) is expected to experience steady growth over the next few years, reaching a new peak by 217 before cycling down moderately as some major projects wind down. Other major engineering projects, such as nuclear refurbishments, and continued growth in ICI building construction are expected to keep overall non-residential construction close to the 217 peak across the outlook period. Figure 1: Non-residential construction investment ($ millions) 45, 4, 35, 3, 25, 2, 15, 5, 21 22 23 211 213 214 215 216 217 218 219 22 221 222 223 224 Engineering ICI building* * ICI building refers to industrial, commercial and institutional building The schedules of major resource developments, electric utilities and transit system projects drive engineering investment. As major projects come on stream, investment is expected to peak in 217 and then decline marginally as some large projects wind down. Proposed major nuclear refurbishment projects, however, keep overall investment well above historical levels of activity across the remainder of the outlook period. Preliminary Investment Trends Report Ontario: 215 224 4
Figure 2: Non-residential engineering construction investment ($ millions) 16, 14, 12, 8, 6, 4, 2, 21 22 23 211 213 214 215 216 217 218 219 22 221 222 223 224 Roads/highways/bridges Other engineering ICI building construction investment (see Figure 3) rises across the outlook period with moderately stronger growth over the near term to 217 driven primarily by increased commercial construction. Following several years of decline, industrial construction continues to grow as overall economic conditions improve and the manufacturing sector expands capacity. Investment in institutional building construction declines in 213 and 214, but then remains relatively unchanged over the near term to 218 as fiscal restraint slows government spending. Moderate growth resumes over the long term. Figure 3: Non-residential building construction investment ($ millions) 9, 8, 7, 6, 5, 4, 3, 2, 1, 21 22 23 211 213 214 215 216 217 218 219 22 221 222 223 224 Industrial building Commercial building Institutional building Preliminary Investment Trends Report Ontario: 215 224 5
Residential Household formation declined in 213, but growth resumed in 214 and is expected to rise over the medium term to 22, then cycle down later in the period in line with slower population growth. Housing starts, and thereby new residential construction investment, generally follow this trend. Investment in household renovations is expected to rise steadily over the outlook period (see figures 4 and 5). Figure 4: Housing starts and household formation 1, 9, 8, 7, 6, 5, 4, 3, 2, 21 22 23 211 213 214 215 216 217 218 219 22 221 222 223 224 Household formation Housing starts Figure 5: New housing and renovations investment ($ millions) 25, 2, 15, 5, 21 22 23 211 213 214 215 216 217 218 219 22 221 222 223 224 New housing Renovations Preliminary Investment Trends Report Ontario: 215 224 6
SUMMARY Broad labour market implications may be drawn from expected investment trends. The demand for trades and occupations in engineering construction is expected to be driven by the schedules of and investment in major resource development, electric utilities and transit system projects. Demand for these trades is expected to increase in line with growing investment in these projects until 217 and stabilize thereafter. A similar trend in demand is expected for trades involved in industrial building construction, which is driven by manufacturing investment. Stronger growth in commercial building construction investment over the outlook period is expected to offset the mild fluctuation in institutional building construction investment. Demand for trades in the residential sector is expected to remain relatively steady, driven by mostly moderate increases in new housing investment and a steady rise in renovation demand requirements. The labour market dynamics by region may vary significantly depending on the timing of regional major projects. These market conditions are derived from an investment scenario that is based on a preliminary set of assumptions about current economic conditions and proposed new projects, sustaining capital and ongoing maintenance investment. These drivers may be prone to market uncertainties, however. BuildForce Canada continually monitors the economic environment and proposed major construction projects. Any updates will be incorporated into the upcoming Construction and Maintenance Looking Forward report of labour market conditions including regional market assessments, to be released in early 215. Timely construction forecast data is available online at www.constructionforecasts.ca. Create customized reports on a broad range of selected categories within sector, trade or province covering up to 1 years. For more information, contact: BuildForce Canada Phone: 613-569-5552 info@buildforce.ca September 213 214 Funded by the Government of Canada Preliminary Investment Trends Report Ontario: 215 224 7