If you're seeking evidence that the Canadian economy is poised to evolve, as the Bank of Canada has prescribed, from one propelled by housing to one fuelled by business investment, the country's June building permits report is a pretty good place to start.
Statistics Canada reported that the value of building permits issued in June jumped 13.5 per cent from May, extending an already strong trend in construction intentions that emerged in the second quarter. It would have been easy to dismiss the rebound in permits earlier in the spring as mere catch-up by builders after an unusually harsh winter had delayed their activities, but the fact that permits continued to grow strongly in June suggests that this is more than a temporary bounce.
However, it's not being driven, as one might have supposed, by plans for another wave of home construction in a housing market that many experts believe is already overbuilt. Residential permits rose just 0.4 per cent in June from May, and were up a modest 5.2 per cent from a year earlier. Total residential permits for the second quarter as a whole were up a modest 2 per cent from the first quarter (traditionally a slow season for building permits), and were down 5.7 per cent from the same period in 2013; indeed, quarterly residential permits are no higher than they were two years ago.
The numbers suggest that residential construction is continuing its moderation, with permits stabilizing at what are still historically solid levels, and support the "soft landing" view that is pretty much everyone's best-case scenario for housing. No bursting bubble, but by the same token, the housing sector will no longer be a key engine driving Canada's economic growth.
It's the non-residential permits that are now carrying the load. They surged 32.5 per cent in June from May, and were up 42.4 per cent from a year earlier. Permits for the second quarter were the second-highest quarterly total in history, up 25 per cent from the first quarter and up 10 per cent from the same period a year earlier.
The upturn in non-residential permits suggests that businesses are poised to step up their investment in new facilities – a long-awaited development that Bank of Canada Governor Stephen Poloz considers a key to propelling Canada's next phase of economic growth. With housing taking a step into the background after doing much of the country's heavy economic lifting in the early stages of the recovery, Mr. Poloz expects business investment to pick up and fill the void. Goodness knows that after years of underinvesting, this is more than due.
It's encouraging, then, that the the industrial segment of non-residential permits – the factories and related facilities that are most closely related to investment in expanding productive capacity – soared 64 per cent in June, its biggest month-over-month gain in nearly two years, and that was after strong increases in both April and May. June industrial permits were up 62 per cent from a year earlier.
Of course, permits merely indicate intentions to build – and that's not the same as actually building. Remember that non-residential permits hit a record high in the 2013 third quarter, yet actual investment in non-residential construction has declined in each of the past two quarters. Companies have demonstrated a willingness to sit on their hands and await stronger evidence of an improved economic climate, especially in export sectors, before putting their permits into concrete action.
Still, there does look to be considerable bottled-up business investment that is, increasingly, itching to get out; the building-permit trends indicate that companies are gearing up to unleash those expansion plans. If we continue to see the kind of export demand growth indicated by this week's strong Canadian trade report (which showed the biggest surplus in two and a half years), it won't take long for a business-investment boom to follow.