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Covid-19 impact on construction sector will be ‘catastrophic’

Posted on May 6 2020 by Gert Minnaar in General

Industry Insight estimates that up to 140 000 formal jobs could be lost as activity levels nosedive

The impact of the coronavirus on the construction sector will be catastrophic, unlike any economic shock the sector has previously had to endure, and result in it shedding an estimated 120 000 to 140 000 formal jobs, according to construction market intelligence firm Industry Insight.

David Metelerkamp, senior economist at Industry Insight, said not only is the Covid-19 pandemic going to be the worst crisis since World War II, it is now widely expected to be the worst economic crisis/recession since the Great Depression of the late 1920s.

“Never has the global economy just simply come to a complete stop,” he said.

“This is unprecedented, and the fallout is expected to be catastrophic in the short run, especially in South Africa which was already in recession.”

Metelerkamp has outlined three scenarios for the industry based on Industry Insight’s belief that the sector will likely return to work on May 14, two weeks after the initial five-week lockdown period, and operate only at 50% capacity for the first few months at a minimum.

These scenarios also assume that the construction sector will operate during the builders’ holiday at the end of the year, that the outbreak peaks in early September as forecast by the Department of Health’s panel of doctors and industry experts, and that there is no major global resurgence of the virus after the economy is slowly reopened.

In terms of these scenarios, activity levels in the construction industry will, at best, decline by 14.5% in 2020 and by 27.7% in the worst case scenario.

Recovery, then annual contractions predicted

Activity is expected to return to positive growth in 2021, but to remain negative for at least two of the following three years.

Metelerkamp said the longer-term implications for the industry are more serious and the civil industry is going to be severely hampered by the deteriorating state of the fiscus.

The downgrade by Moody’s of South Africa to a sub-investment grade rating is going to make it considerably more expensive for the government to borrow money and, with the local economy in recession, will mean a considerable contraction in revenue collection, which funds spending.

“As well as the effect of increases in government spending on Covid-19 related stimulus, this will put severe pressure on government’s finances, which means less spending on infrastructure going forward,” he said.

‘Persistent decline’ in demand

Metelerkamp said this dampens the longer-term outlook for the civil industry considerably while, for the building industry, the worse longer-term outlook will stem from what economists expect to be a persistent decline in domestic and global demand for housing, as well as commercial and retail buildings from the private sector.

He added that with so many South Africans losing their jobs, per capita income is expected to fall considerably, denting overall aggregate demand and making it difficult for South Africans to afford the basic goods and services to which they were once accustomed.

Metelerkamp’s scenarios for the construction industry over the next few years are based largely on the levels of alert as proposed by government, with construction falling under lockdown Level 2 and therefore being one of the worst-affected industries because work will only resume fully in the second-last of the five phases.

He said road construction and maintenance, on the other hand, falls into Level 3 and will be able to return to work sooner, although this will differ by province.

Moving goalposts

Metelerkamp stressed that forecasting in the time of Covid-19 has become difficult because there are so many factors to take into account that can change on a daily or weekly basis, which can then drastically alter the forecast.

Scenario 1: In terms of Industry Insight’s baseline scenario, which it estimates as a 60% probability, construction sector activity levels are forecast to decline by 22.5% in 2020, with a recovery to 4.8% growth in 2021 but followed by annual declines in activity of 2.1%, 2.9% and 2.4% in the next three years.

Scenario 2: In the more optimistic scenario, which Industry Insight believes has a 30% probability, construction activity levels will decline by 14.5% in 2020 but grow by 3.4% in 2021. However, activity levels will then decline by 1.9% in 2022 and 0.8% in 2023 before growth of 3.7% in 2024.

Scenario 3: The more pessimistic scenario, which it believes has a 55% probability, anticipates construction activity levels declining by 27.7% in 2020, growing by 5% in 2021 but then declining by 2.1%, 2.9% and 4.5% in the next three years.

The SA Forum of Civil Engineering Contractors, SA Institution of Civil Engineering, and the Construction Covid-19 Rapid Response Task Team comprising several industry bodies, all previously called on government to declare the industry an essential service and allow it to return to work.

Economic activity intertwined

Gerhard Papenfus, CEO of the National Employers Association of South Africa, stressed the economy does not operate in sectoral silos and that all economic activity is intertwined.

The construction sector was among the examples he cited to illustrate the impracticality of the Level 4 lockdown restrictions.

Papenfus said the manufacturing of construction material is allowed from May 1 but the construction industry is only partially opened, and mainly in respect of public works projects.

“It is simply counterproductive to open the manufacturing of construction material but not construction itself,” said Papenfus.

“In this regard, and in terms of health considerations, we may perhaps take advice from Italy where construction is one of the first activities that they will declare open as soon as their lockdown ends,” he added.

Why are public and private sector contracts treated differently?

Roy Mnisi, executive director of Master Builders South Africa, said on Monday it does not see the need for the government to differentiate between public and private sector contracts because “the risks are the same and they play similar roles in the sector and in the rebuilding of the economy”.

Mnisi said the task team has made another submission to the government after the release of the various lockdown levels.

A chance to save the sector

“We are hoping that any time from now we will see the whole of the construction sector go back on site and are expecting that to happen as soon as possible,” he said.

Mnisi said the construction sector was struggling even before Covid-19, with jobs being shed and companies closing down, which means the timing of the pandemic is devastating for the industry.

“But if government were to work with the industry and find ways that we can make sure the infrastructure development programmes are all rolled out, we will be igniting economic participation by the private sector and stand a chance of salvaging, or if you like, saving the construction industry,” he said.

Roy Cokayne om Moneyweb on 5 May 2020