Is the Construction Industry Poised for a Global Crisis?
Sunday, January 6, 2019
After 10 years of growth (2008-18), we have reached the peak in the global construction growth cycle, according to projections and analysis from global credit insurer Euler Hermes.
Growth in this industry should gradually cool down to +3.0 percent in 2019, from +3.5 percent in 2018. Over the past decade, most of the growth came from emerging markets (+57 percent since 2008), while developed markets have not even fully regained their pre-crisis volumes.
Going forward, slowing GDP growth and tighter financial and monetary conditions will explain the deceleration in the residential sector (+3 percent year over year in 2019, after +3.5 percent year over year in 2018, and +4 percent year over year in 2017). Necessary fiscal discipline and the impetus of e-commerce respectively explain the limited boost expected from the infrastructure and commercial segments.
According to the company’s local experts, who report their sentiment every quarter regarding demand, profitability, liquidity and business environment, the construction sector has been incapable of building buffers and fully recovering from the 2008 crisis despite the healthy expansionary global business cycle:
- Liquidity has historically been, and will remain, the largest pain point for the industry on a global scale with the average construction sector DSO remaining at 85 days, suggesting that construction remains among the top three worst preforming sectors in regard to payment delays.
- Demand has barely recovered in some of the largest construction markets. The volume of growth on the construction markets in developed economies was negative (-0.4 percent CAGR) during the current global construction cycle (2008–now). In some of the largest construction markets, such as France, Germany, Italy and the US the demand has still not recovered to the pre-crisis volumes.
- Profitability has also been under increasing pressure from rising input costs, most notably labor costs.
The construction sector is definitely a good candidate for being the biggest victim of the next crisis. This is essential since construction is an important part of all economies (advanced and emerging) and plays a role in magnifying or reducing the impact of a cyclical slump.
See the latest construction report from Euler Hermes for more information.