Inflationary pressures from Russia-Ukraine crisis will cause construction output to fall by 3.4%
As a result of the Russia-Ukraine crisis, the construction industry in Eastern Europe is expected to shrink by 3.4% in 2022 due to rising inflation and weak investor confidence, says GlobalData, a leading data and analytics company.
Joel Hanna, Economist at GlobalData, comments: “Construction in most countries in Eastern Europe is likely to be affected by rising energy prices, exacerbated supply chain disruptions and local currency devaluations owing to weakened investor confidence in the region over the uncertainty of the Russia-Ukraine crisis. Moreover, household income squeezes are likely to weaken demand and undermine growth in commercial construction projects, while rising construction costs will push housing prices higher, reducing demand for residential construction.”
According to GlobalData’s report, ‘Construction Market Size, Trends and Growth Forecasts by Key Regions and Countries, 2022-2026’, due to the sanctions placed on Russia by Western governments, the country’s construction market, the largest in Eastern Europe, will fall by 9.2% in 2022. In addition, economies which are heavily interlinked with Russia will suffer from disruptions to trade, supply chains, remittances, and tourism activity. Construction output in Ukraine is projected to fall by 69.1% in 2022 while the military conflict grips its economy, dampening aggregate output for Eastern European construction. However, the construction industry in Eastern Europe is expected to return to growth in 2023.
Hanna adds: “Construction costs in Eastern Europe are already rising owing to the post-pandemic demand rebound and supply-side shortages pushing up raw materials prices and shipping costs. The crisis in Ukraine adds significant upward pressure to construction costs in 2022, which will eat away further at project profitability, dampening the outlook for construction activity in the near future.”
Although the Russia-Ukraine crisis is fuelling inflation globally, the ripple effects will impact neighbouring countries far more profoundly. In addition to paying higher prices for energy and raw materials, uncertainty surrounding the war is causing investors to lose confidence in the region amid the potential for escalation and spillover. Capital flowing into Eastern Europe will consequently reduce, dampening aggregate investment across the region. This will be compounded in non-eurozone economies by weakened demand for local currencies, leading to depreciations which will increase the cost of imports, as well as the cost and servicing of foreign debt.
Public finances are also expected to be strained in 2022 as rising living costs will put pressure on national governments to support low-income households. In addition, historic levels of refugee flows from Ukraine into Poland, Romania and Hungary will put further pressure on public finances. Investment into construction projects from national governments is therefore likely to reduce under these pressures, leaving the execution of planned infrastructure projects subject to increased reliance on EU recovery funds.