Why Construction growth will decrease?
Due to greater than expected inflationary pressure and further interest rates hikes, construction output in North America is forecast to contract to -3.1% in 2022 plunging to $1.87 trillion, compared to 2021’s construction output of $1.93 trillion, according to GlobalData.
The leading data and analytics company’s report, ‘Global Construction Outlook to 2026, Q3 Update’, reveals that the 2022 forecast for North America has been revised down from a growth of 2.4% to a negative 3.1%. The considerable downward revision to the forecast was mainly owed to poor performance in the US after suffering a third consecutive Year-on-Year contraction in Q2 2022. The macroeconomic environment has weighed heavily on US construction. Canada, on the other hand, is expected to retain much of the growth momentum from 2021 and is forecast to grow 4.0% in 2022.
Jack Riddleston, Construction Analyst at GlobalData, comments: “The quickly deteriorating macroeconomic environment has taken policymakers by surprise and central banks have responded to inflationary pressure by aggressively increasing interest rates. Elevated material prices, supply-side bottlenecks and labor shortages are causing delays and postponements of projects. In addition, investment in new projects will likely fall as further rate hikes will restrict access to credit.
“Underlying vulnerability in the construction industry stems from the housing market, which appears to be at an inflection point. The residential sector enjoyed extensive growth over the past 10 years in North America and was particularly strong over the pandemic period. Record low-interest rates and an excess of savings supported a housing construction and renovation boom. However, demand for housing is dropping rapidly; high mortgage rates, high household debt, and cost of living expenses are squeezing real incomes, which has resulted in a significant drop off in growth for the residential sector.”
According to the US Census Bureau, the latest housing permit data is showing that demand has eased significantly as mortgage rates have risen. New residential permits registered a 10% drop from July 2022 to August 2022 and a 16.8% drop from April 2022 and are nearing pre-pandemic levels.
Riddleston concludes: “However, as inflationary pressure subsides the outlook over the medium to long term is expected to brighten; the Biden administration is continuing on its plan to push federal dollars into the ailing economy by directing investment into infrastructure, manufacturing, and energy sectors such as the landmark $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) and the newly introduced Inflation Reduction Act (IRA) and the CHIPS and Science Act, which will drive construction activity over the forecast period.”