Canada’s construction small and medium enterprises have shown resilience amid economic challenges in 2024, with stable employment, growth in non-residential construction, and eased construction costs despite higher borrowing rates and a residential downturn. The Canadian Construction Association (CCA) released a quarterly report in August, providing a comprehensive analysis of Canada’s construction sector and insights into the challenges faced and successes within the industry.
Economic Context and Monetary Policy
In Q1 2024, Canada’s economy posted modest growth of 0.6%. Despite this, the country’s per-capita GDP remains 3% below pre-pandemic 2019 levels and has largely stagnated over the past decade. In contrast, the U.S. saw per-capita GDP rise by 7%, thanks to a robust services sector, highlighting a significant gap between the two economies.
This slower economic growth in Canada has reduced inflationary pressures, which has allowed the Bank of Canada to implement its first interest rate cuts in four years. In June and July 2024, the overnight rate was lowered to 4.50%, aligning with actions by central banks in Switzerland, Sweden, and the European Union. However, the Canadian rate remains higher than the Bank’s estimated neutral range of 2.25% to 3.25%.
Construction Sector Performance
The Canadian construction industry had subdued activity in Q1 2024, with overall growth of just 0.1%. This modest figure hides a more severe contraction in the residential sector, where activity fell by 1.1%, a significant drag on overall performance. This decline in residential construction reflects the ongoing challenges the housing market faces, particularly due to high interest rates and cooling demand.
Non-residential construction, on the other hand, grew by 0.6%, extending its growth streak to nine consecutive quarters. This sector’s growth was driven by modest increases in industrial and institutional investments.
Repair and engineering activities also made positive contributions, with the latter rebounding by 1% after two quarters of contraction in 2023. This recovery is significant for the broader construction sector as these areas play a critical role in sustaining overall industry growth.
Investment Trends
Investment in the construction sector presented a mixed picture. The building construction sector saw a 0.6% decline in overall investments, mainly due to a 3.6% drop in multi-residential construction.
Conversely, the non-residential sector maintained its growth trajectory for the ninth straight quarter, though at a slower pace. Investments rose by 0.2%, adding $152 million to the sector. The most notable gains were in industrial construction, up 1.2% ($57 million), and institutional construction, which saw a robust 4.6% increase, adding $165 million. The rebound in institutional construction is especially noteworthy, as it follows five quarters of decline, potentially signalling new opportunities in public infrastructure and institutional projects.
Commercial construction, however, did not follow this positive trend. It experienced its sixth consecutive quarterly contraction, with a 2.5% decline in investments, totalling $71 million. This disparity between residential and non-residential performance underscores the varying impacts of economic conditions across different segments of the market.
Business Dynamics and Sector Resilience
The Canadian construction industry is dominated by small and medium-sized enterprises (SMEs), with about 396,000 businesses active in 2023. Of these, small firms with fewer than 100 employees represent a significant portion, while micro businesses with one to four employees make up 68% of the total. Medium-sized firms account for just 0.8%, and large firms with more than 500 employees comprise less than 1%.
SMEs face greater vulnerability to economic downturns due to their limited financial reserves. However, the sector has shown resilience, with the number of active businesses increasing in 2023. Moreover, business exits have stabilized, with fewer firms leaving the market compared to the historic lows recorded in Q2 2020.
Material Costs and Price Trends
Material costs in Q1 2024 showed a range of trends. The Building Construction Price Index (BCPI) rose by 0.77%, continuing its deceleration for the fifth consecutive quarter. This moderation in construction costs is favourable for stakeholders in the industry, including investors, as it signals a slowdown in price pressures.
The Industrial Product Price Index (IPPI) declined slightly by 0.21%, although this masked considerable variations across product categories. The chemicals and chemical products group saw a 0.63% increase, while cement and other non-metallic mineral products rose by 2.93%. The energy products group saw a notable 4.25% decrease, with refined petroleum, motor gasoline, and diesel prices falling sharply. Conversely, lumber and wood products saw a 2.42% increase, driven by higher softwood lumber prices, which could affect construction project costs, particularly in residential and commercial buildings.
Capacity Utilization
The construction sector’s Capacity Utilization Rate (CUR) rose to 86.7% in Q1 2024, marking a stabilization and modest recovery from previous declines. This increase suggests a rise in demand and improved operational efficiency, which is a positive sign for future construction activity.
Future Outlook
Looking ahead, the outlook for the construction industry is cautiously optimistic. Interest rate cuts could further improve the financial environment, particularly for SMEs that have shown resilience despite economic pressures. However, potential policy shifts, international tariffs, and global oil price fluctuations continue to pose risks. Labour shortages remain a significant concern, with many construction businesses expecting ongoing difficulties in securing skilled workers.