Posted by Nicholas Fearnley | Feb 16, 2022 3:00:00 PM
The upswing in global construction activity is set to continue over 2022, supported by a wave of publicly funded civil engineering projects.
Governments around the world responded to the coronavirus pandemic by fast-tracking major infrastructure projects, as investments in the economy’s productive potential have proven to be key drivers of economic recovery in previous downturns. While the November 2021 passing of a watered down US$1.2 trillion Infrastructure and Investment Jobs Act somewhat dampens our outlook for the US, the bill still provides US$500bn in new spending over the next decade, and is expected to create nearly 100,000 construction jobs by the end of 2023. Meanwhile, our view that a European “renovation wave” will drive a boom in non-residential building activity across the continent was reinforced by the December 2021 proposal to align the rules for the energy performance of building with the European Green Deal, and to decarbonize the EU’s building stock by 2050.
We have recently downgraded our outlook for China in response to a sharper than expected downturn to the real estate market following tighter regulations and credit policies, and the default of Evergrande. We now estimate real estate commencements in floor area terms fell 10% in 2021, and we anticipate a further 3% fall in 2022. Residential construction activity, however, will be somewhat supported by a backlog of existing projects, the centralized land-sale programme, and continued work on government-backed rental housing. Our view that infrastructure spending stimulus will be used to help counteract the repercussions of both the real estate downturn and outbreaks of the Omicron variant was supported by December’s Central Economic Work Conference and recent statements by top officials.
While the demand for construction activity remains strong, the actual delivery of work remains constrained by both input cost inflation and industry capacity constraints. The Euro area recorded a 7.74% year-on-year increase in construction costs for residential buildings excluding community residences over the third quarter of 2021, while the US saw a 16% year-on-year increase in construction costs for single family homes over the last quarter of 2021. Construction material costs have risen rapidly due to stronger demand, higher commodity prices and supply chain disruptions. The bulky nature of construction materials means the sector is much more exposed to increases in shipping costs than other parts of the economy. We do not believe that the factors driving this cost price inflation are structural, so while we anticipate construction cost will continue running ahead of headline inflation over the near-term, we anticipate cost growth will normalize over the coming years.
The construction sector is also grappling with labour shortages as Covid-induced mobility restrictions limit the movement of workers. Countries that rely on migrant workers such as Singapore, Malaysia and the United Arab Emirates have been hit particularly hard. We expect these shortages to ease as Covid restrictions are unwound. Germany and the Benelux countries, however, face shortages that threaten to be much more structural, as employment and vacancies in construction have already passed their previous peaks. Unless there is an increase in migration to help fill these jobs, or a sustained burst in productivity, there is a risk that companies will have to pay more to attract workers, or delay work on the existing pipeline of projects.
Topics: Industry, Recovery, Construction