Decline in Canadian Building Permits Concentrated in Alberta

Canadian building permits unexpectedly fell a sizeable 4.5% in March compared with expectations of an increase of 1.2% and a gain in February of 0.8%. However, all of the weakness was concentrated in Alberta, where permits plummeted 32.9%. Excluding that province, permits rose a more impressive 5.1% in the month.

Both residential and non-residential permits fell in the month by 5.7% and 2.4%, respectively. The drop in the latter was particularly disappointing as this component had plummeted 18.9% in February. The weakness in March largely reflected a 21.9% drop in permits for industrial buildings, particularly for utility operations. The institutional sub-component also dropped, although by a more moderate 4.7%, while commercial projects recorded a small 5.3% increase. The decline in residential permits retraced only about one-third of the 16.1% surge recorded in February.

All of the weakness was concentrated in Alberta where permits declined both for residential (-30.1%) and non-residential (-35.6%) type units. Building permits in the province peaked in the second quarter of 2007 and are currently down 19.2% from that peak. This decline more than offset strong increases in Ontario (+7.3%), Saskatchewan (+29.7%) and P.E.I. (+41.8%).

The drop in the non-residential building permits in March is particularly disappointing because business investment is being relied on as a mainstay of growth this year and next. This optimism was, in part, being fuelled by the earlier-released survey by Statistics Canada on private and public investment spending that indicated an increase in capital spending this year of 6.8% up from a 4.7% rise in 2007.

However, ongoing financial market volatility and the attendant rise in the cost of capital, may be starting to apply significant restraint. Rising concern about this impediment to growth has been a key factor in the Bank of Canada’s aggressive cuts to the overnight rate, with the most recent action last week lowering this rate by 50 basis points to 3.00%.

Our forecast assumes one final reduction of 25 basis points next quarter, which will send the overnight rate to a near-term trough of 2.75%. Our expectation is that these actions will be sufficient to return business investment to a sustained growth trajectory.

Pause in flow of U.S. economic data

There are no economic data releases today in the United States. Preliminary first-quarter non-farm productivity and unit labour cost numbers will be released tomorrow. Initial jobless claims and wholesale inventories are due on Thursday and the trade balance data for March will cap off the week.

A decline in hours worked will drive a probable 1.5% gain in productivity in the first quarter. Unit labour costs are expected to be up 2.6%, as compensation is boosted by a pick-up in wages. However, unit labour costs will likely only be up a measly 0.3% year-over-year, highlighting that compensation costs have been contained over the year. This is likely to continue as slack in the economy loosens labour markets and moderates wage growth.

We expect the U.S. trade balance to have narrowed very slightly in March after the unexpected deterioration in February. Exports likely increased, although a decline in durable goods shipments suggests a muted gain. We look for nominal imports to have advanced slightly, with a big assist coming from surging crude oil prices, although subdued domestic activity indicators suggest a modest increase. Net trade is expected to add 0.5 percentage points to U.S. economic growth this year, which will help offset continuing declines in residential construction.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.