The global construction industry, like most industries worldwide, has been rocked in recent months by events related to the COVID-19 pandemic.
The headlines tell the story of the coronavirus’ effects on our industry. From the Financial Times report of the collapse of construction projects in Europe to waves of project shutdowns in the United States to questions about the health of the supply chain, firms are experiencing, in many cases, worse problems than those during the financial crisis of 2008. The situation remains fluid, however, and construction in some global regions and U.S. states has been deemed essential, allowing projects to move forward.
International Coronavirus Impact
Analyst firm IBISWorld reported in early April on the state of construction worldwide:
▪Many countries rely on parts or products from China. As manufacturing activity resumes in China, manufacturing operators that depend on parts or products manufactured there will see an ease in supply chain disruption. However, manufacturing sectors that rely on parts or inputs from Europe and the U.S. could now see a disruption in the supply chain.
▪German construction is experiencing a decline in commercial contracts, and it anticipates that travel restrictions’ effects on the availability of labor and supply chain issues may close sites.
▪€25.5 billion of work and contracts are on hold across the UK. Equipment producers are either slowing production or diverting it to other uses, such as the announcement by manufacturer JCB of plans to redirect manufacturing to steel ventilator housings for Dyson after stopping equipment production.
▪In Australia, construction continues, although rising steel prices may affect projects.
The EU construction sector has called on the European Commission – the EU’s executive body – to officially designate the coronavirus outbreak a force majeure event to avoid penalties for firms that end in breach of contract due to the crisis.
“Activity is down by about 60 to 70 percent in southern Europe — it is an unprecedented shutdown,” said Domenico Campogrande, director-general of the European Construction Industry Federation. Production problems and restrictions on the movement of people and goods are causing significant shortages of materials and workers for the industry.
UK construction activity has fallen at the fastest pace since the financial crisis as many builders ceased work and the pandemic hit demand. The PMI for UK construction dropped to 39.3 in March from 52.6 in the previous month. Italy and Spain, both hit hard by the virus, have plummeted and the Italian construction sector’s PMI index hit 15.9 in March, the lowest level since the survey began in 1999
COVID-19 In the United States
In a webinar on April 9, Dodge reported the U.S. construction industry is being impacted through multiple channels, including effects of the coronavirus on the workforce, local bans or pauses of construction activity, economic impacts, and supply chain problems. The industry was already facing challenges from a lack of labor and talent, and COVID-19 has worsened that problem. As of the end of March, there are still 200,000 active projects and 17,000 new public projects actively being planned.
Dodge expects a rough start to Q2 for commercial construction, with a sharp but short downturn. The firm sees total commercial down -16 percent in 2020, but trending upward by 4 percent in 2021.
With the trends of e-commerce warehousing, amazonification, and grocery delivery services, we may see an uptake in grocery warehousing construction. Office space construction is actually up a little, but this includes data warehousing.
The building of hotels and motels is expected to be down by about 30%. Recreational construction, including casinos and stadiums, will also be down, possibly until a vaccine is produced and people feel confident there is no risk.
Highway and bridge infrastructure is expected to be down only 2% in 2020, then up 12% in 2021. Power and Gas Plants (includes solar and wind, electric power, gas, LNG) had a great year in 2019 up 124%, is expected to be down 47% in 2020, but then goes up 49% in 2021.
Engineering News-Record shared an online survey of U.S. firms conducted March 17-19 by the Associated General Contractors of America (AGC) reporting the majority of respondents had been told by owners or government agencies to cease work. The shutdowns come on the heels of strong growth in many parts of the country in February. Since the date of the survey, some construction has been deemed essential and has restarted.
U.S. Federal Stimulus Aid
One positive step for the U.S. construction industry is the passing on March 25 of the historic federal economic relief package – the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The bill will pump $2 trillion into the nation’s economy in an attempt to mitigate economic problems related to the coronavirus pandemic.
The stimulus package includes $25 billion for transit owners to fund operations and pay employees. The bill also provides more than $1 billion for Amtrak, including $492 million in Northeast Corridor grants and $526 million for the national network.
Another positive step for the U.S. could be the Infrastructure Bill. In March, The World Economic Forum touted infrastructure projects as a principle means to avoid a COVID-19 recession in the U.S., where such projects create economic growth. Calling the U.S. infrastructure industry “…30 years behind its global counterparts,” the article suggests a combination of centralized, data-driven projects and Fourth Industrial Revolution technologies as a partial curative.
Both Republican and Democrat leaders have been quoted in the press stating that the passing of an infrastructure bill would be very helpful to the U.S. economy, create jobs, and improve the country’s aging infrastructure.
President Trump said in a recent tweet, “With interest rates for the United States being at ZERO, this is the time to do our decades long-awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.”
House Speaker Nancy Pelosi, (D-Calif), was also pushing for infrastructure investment as part of the next phase of the federal response, asking for components related to healthcare and the digital economy.
An April 13th Wall Street Journal article reported on a move by Democrats to address infrastructure concerns, stating the “Five-year, $760 billion infrastructure plan unveiled earlier this year fits with President Trump’s new $2 trillion infrastructure proposal.” Speaker Pelosi has asked for not only bridge and road infrastructure, but also a focus on water and telecommunications infrastructure.
Construction Equipment Production – A Method for Reading the Economic Tea Leaves
Financial analysts have long used projections and revenues of construction equipment as another way to read economic tea leaves. Production at major construction heavy equipment companies like JCB, Hitachi, Caterpillar, and Case has slowed down temporarily at various production plants throughout the world.
However, there is a consistency in that many of them who have production plants in China have begun to reopen them. The reopening is a positive sign because we know China was the first country to have the coronavirus, and we now see they are the first country to begin to reopen. The restart of construction equipment production in China is the beginning of a rebound pattern.
Hitachi adjusted production at four of its seven Japanese plants, made adjustments in its Netherlands plant, suspended production at two plants in India, but resumed production February 18th in China.
Caterpillar says the global trade slowdown has begun to hurt its supply chain. The company is suspending some of its operations while pulling back its 2020 financial outlook. As for operations, the majority of Caterpillar’s facilities in the U.S. and other parts of the world are still operational.
In its construction equipment business, for example, Caterpillar expects sales from China to be flat to down 5%, and sales from Europe, Africa, and the Middle East to be flat to “slightly up” at best in 2020. Caterpillar’s Illinois plant remains open, as it fits within the essential business mandate set out by the governor of Illinois, and its plants in China have been reopened.
UK excavator manufacturer JCB has shut its nine production plants in Britain through at least the end of March in the wake of virus-affected markets. However, it too has reopened its China-based plant in Pudong, near Shanghai, which is now fully operational after stopping production last month as that country’s COVID-19 epidemic spread.
Global Financial Analysts Predictions – Will the Economy Have a V, U, or L Shaped Progression?
Goldman Sachs, a multinational investment bank and financial services company, says global damage could be as low as 0.1 percentage points over the full year. “The impact of the lower global and U.S. economic activity on 2020 S&P 500 earnings per share will be limited,” they said, predicting a V shape recovery in Q3, then a normal trend.
J.P Morgan economists’ views on the economic consequences of the virus shock have evolved dramatically in recent weeks with respect to the severity and duration of the outbreak. J.P. Morgan Global Economics Research now expects the global economy to experience an unprecedented contraction during the first half of the year as containment measures are driving deep collapses in monthly economic activity.
The U.S. economy is projected to contract by 14% in the second quarter, after experiencing a 4% contraction in the first quarter, before recovering to 8% and 4% growth in the third and fourth quarters. Euro-area GDP will suffer an even deeper contraction, with double-digit declines of 15% and 22% in the first and second quarters, before rebounding by 45% and 3.5% in the third and fourth quarters.
Chetan Ahya, Chief Global Economist, Morgan Stanley Research said in a March 20 Research Coronavirus: Recession, Response, Recovery post: “Falling demand and disrupted supply chains will trigger a global economic recession. However, strong monetary and fiscal policy responses underway could set the stage for a second-half rebound.” The company says we won’t see a deep depression.
Jim Caron, Managing Director, Global Fixed Income Team said in a February 12 Market Pulse: “For investors, we believe the question is what shape the eventual economic recovery – V, U, Bathtub or L – will take. The shape of the economy is dependent on how quickly the markets recover; speed is of the essence.
“In our view, U.S. and Chinese central banks should react quickly if further damage is done to the global economy, and it is our view that China will, in fact, do “whatever it takes” to help. A lot was going on in the world before the coronavirus outbreak, and we expect some short-term economic distress followed by a recovery. But the final shape of the recovery – V, U, Bathtub, or L – will be dependent on a number of factors.”
A New Normal?
Our industry faces serious challenges at the moment. While no one knows what might be the “new normal” going forward, we do know this: the world cannot operate without functioning infrastructure. And in complex economic times, governments can only create jobs by investing in government assets, typically public infrastructure. It is expensive to shut down ongoing construction and then later start it up again. For that and other reasons, it is very likely that most asset owners, both in the government and private markets, will want construction to continue.
COVID-19 has increased the need to have fewer people on a job site and to do more planning and monitoring from a distance. The pandemic and its resulting economic pressures also boost the need to work more efficiently, more predictably, and with less error.
Organizations will adjust to the new circumstances, which may cause an initial impact on existing projects, but by and large, construction will continue. Distant or remote working could usher in a more permanent digital transformation in the industry and the need, now more than ever, for constructors to adopt digital construction workflows and solutions.
Digital Construction Works stands with you during this difficult time. As the construction industry’s digital integrator, we help identify and implement the best processes, digital workflows, and fit-for-purpose technology to automate and optimize your construction operations for improved and predictable project results and project delivery. You don’t have to figure this out by yourself; we can do this with you or for you.