Print
Email
Soaring inflation and continuous increase of interest rates by the central banks around the world are taking their toll on the world economy. The brunt of the current macroeconomic environment is largely felt by the construction sector. In fact, it is one of the industries across verticals that have been hit the hardest. Several construction firms and developers, globally, are now facing a significant risk of closure. For instance,
The surge in prices of building materials has reported a rise of 24.1% over the last year, according to the Government Building Materials and Component Index. During the pandemic itself, the construction sector experienced a substantial decline, as the supply chain of building materials was severely impacted. Now the ongoing war between Russia and Ukraine means that the cost of building materials is further increasing, putting immense pressure on the margins of construction firms.
Furthermore, during the global pandemic, many construction firms and developers took big mortgages to help them survive the Covid-19 outbreak. However, with the central bank hiking interest rates, these firms are seeing the cost of their debt rise substantially. Moreover, as the consumer appetite to take on mortgages for property purchases cool down, because of higher interest rates, residential property builders are expected to be the worst hit over the next few quarters.
All of these factors, along with the lack of labor supply, are having a significant impact on the cash flow of construction firms, and because of this, many are at risk of closure in the United Kingdom. In the United States as well, similar trends are visible, where the construction industry is struggling to cope with the hikes in interest rates. The continued increase in interest rates from the Federal Reserve System meant that residential construction activity dropped in recent months. Notably, the October Construction MetalMiner Monthly Index declined 6.96%.
However, the US$15.4 billion infrastructure plan announced by the current government to develop infrastructure across segments, including roads, bridges, and dams, among others, will likely support the industry in times of tough macroeconomic environment. But the shortage of available workers, along with the fear of possible recession, will continue to prove a challenge for the construction industry in the United States.
In Australia, where the construction industry is experiencing a strong inflow of infrastructure projects and increased spending by the national and state governments, rising prices of building materials are projected to dampen the growth of the industry from the short-term perspective. Like the global trend, Australia is also facing a shortage of available workers, which has resulted in project delays. All of these factors combined meant that a number of private construction firms have gone out of business in the Australian construction industry. The fear of recession and the constant increase in interest rates is therefore projected to have a significant growth impact on the industry from the short to medium-term perspective in Australia.
In India, state governments have started to ask the central government to intervene for easing the surging raw material prices in the country. Over the last six months, leading to October 2022, the building material prices have surged by as much as 30%. As a result of this, many players in the industry have been forced to cease construction activities. While there are several factors affecting the rise in prices of building materials, supply chain issues and the availability of building materials are one of them. These factors, along with the surging inflation, is expected to lead to further increase in the cost of building materials.
However, the spending from the Indian government on major infrastructure projects, including roadways and railways, is projected to support the construction industry in the current macroeconomic environment. Notably, in September 2022, the Indian government announced the re-development of three major railway stations, which includes Ahmedabad, New Delhi, and CSMT Mumbai. This infrastructure project is expected to cost a total of INR 100 billion.
With the construction industry, across all of these major economies in the world, facing the brunt of rising inflation, the surge in material prices, and hikes in interest rates, ConsTrack360 expects the sector to remain under pressure from the short to medium-term perspective. However, the spending from the governments on major infrastructure projects will provide some relief to the sector over the next few years.
To know more and gain a deeper understanding of the global construction market, click here.
