When will the construction industry bounce back?

By Eline Lhoest
July 01, 2020

As the world surveys the economic wreckage of COVID-19 and the construction industry counts the cost of the biggest crisis in its history, there is only one question on people’s minds: is there now light at the end of the tunnel?

For economists like Knauf Insulation’s Davide Maiello making cast iron predictions in such unprecedented times would be as useful as astrology.

“Is construction at the bottom of the economic rollercoaster and will it climb up soon? It’s difficult to say. Are there more dark clouds to come? It’s difficult to answer now,” he says.

“If you are an optimist it’s possible to see signs that there’s light at the end of the tunnel and the upturn will be soon. On the other hand, if you’re a pessimist, there are plenty of trends to reinforce your view that things will recover very slowly or get even worse.”

So, what are those trends and signs? And what are the implications for construction?

The first thing is to assess the industry pre-pandemic. Throughout 2017, 2018 and 2019, the European construction sector enjoyed steady growth and although by the end of last year that growth was slowing, it was no-where near the peak that helped trigger the financial crisis of 2008-2009.

Still, growth varied wildly from country to country, for example, construction in Poland was up 74% in 2019 compared to 2007, while Spain struggled with -76%.

However, in the words of Davide, “In Europe overall, growth was slow but figures were expected to stay green in 2020 at around 0.6%.”

There were other reasons to be positive. At the end of 2019, public debt had fallen to 85% in the eurozone from a high of 93% five years ago; unemployment was 6.9% — a 20-year low that often led to labour shortages on building sites; and low inflation with negative interest rates was boosting investment in construction.

COVID-19 turned that world upside down.

And, lacking clear international leadership, individual European countries scrambled to stabilise their economies.

Research agency Euroconstruct, which analyses trends across 19 countries (EC-19) representing 95% of the income of EU 27 countries, predicts that by the end of 2020 the GDP across these countries will drop by up to 10% and there will be five million more unemployed than in 2019.

EC-19 construction output — excluding civil engineering — is now expected to go down by 12.7% in 2020 with the impact across individual countries varying dramatically.

According to the research company, countries that closed building sites will see particularly significant negative output, for example, -38% in Ireland, -33% in the UK, -18% in France and -11% in Italy, while in those nations that did not close sites such as Portugal or Poland, growth is predicted to be +2%.

Davide, who is Knauf Insulation’s Head of Market & Business Intelligence for Europe and CIS, says: “Euroconstruct predicts that this year’s 12.7% decrease to be partially counterbalanced by an increase of 5.6% in 2021.”

So, there will be green shoots of a solid recovery next year?

“We may be having a recovery, but that recovery will not completely balance the drop of 2020 unless — and that’s a big ‘unless’ — the €750 billion stimulus package proposed by the European Commission backed by national initiatives supports the needs of growth,” he says.

There are also other important trends set to impact construction’s recovery. On the positive side, subsidies for renovation are increasing, financial conditions such as low interest rates and the availability of money are good and subsidies for new buildings are still present.

On the negative side, there are forces that may bring down investment in buildings such as decreasing real estate prices, falling household incomes and an increasingly gloomy economic forecast.

Public debt is also surging as countries pump resources into keeping their economies afloat. Unfortunately, Europe is coming from a vulnerable position that was 15% worse than before the 2008 crisis. In many countries this debt now above 100% of national output for the first time in decades. How these bills will be paid is a decision for the future.

“You put all these elements together and you will see the market go down heavily in 2020 and unfortunately not recuperate before 2022,” says Davide. “In fact, Euroconstruct predicts that only six countries will have an output in 2022 that is higher than 2019.”

The challenge, of course, is that the pandemic has created too many unknowns and all forecasters are struggling to define the shape of the world economy post-COVID.

“Pessimists are predicting a double drop and optimists see the crisis accelerating positive social trends. The honest answer is that we don’t have any answers. The pandemic has no respect for anyone’s predictions.”