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The situation of the construction industry at the time of the coronavirus.
The economic rebound experienced prior to the outbreak of the coronavirus epidemic had two unmistakable signs, visible to all average people: ongoing construction in large cities and declining property prices in recent years. Construction and real estate are strong pro-cyclical economic sectors, and their change in volume is a good reflection of the change in overall output in the economy. (This is not true for all sectors), therefore, they are also affected by the economic recession.
In our series of articles, we present the impact of the coronavirus on sectors of the national economy from a macroeconomic point of view. Since statistics showing changes in volume are not yet available, we rely mainly on reports from industry players. In the earlier parts of our series, we covered commerce, transportation, tourism, industry, the financial sector, the information and communication sector, and agriculture, but we also covered sectors and households with community activities. Now it is the turn of construction and real estate.
The construction industry is closely linked to other sectors of the national economy, since most companies come into contact with sectoral actors through their investments. Not only the private sector but also state investments are going through this sector, and this is particularly good news for construction players in the crown crisis. The situation is somewhat different in real estate transactions, where household activity is much more decisive.
The figure above shows that the two sectors examined in our article together have a fairly significant part of the value added within the total national economy: we have marked them in orange in the figure.
The construction industry has been divided for years, but slowed in 2020
The construction industry was already on the brink after last year’s race, certainly this year’s production growth (if it had been) would have been well below last year’s level. In this situation, the industry has been affected by the coronavirus, which could further reduce emissions.
The situation is alleviated by the fact that existing constructions scheduled for the second quarter are not expected to be delayed (unless only the client declares bankruptcy or withdraws) and any deferred investment can be recovered later, if the situation epidemic allows it.
How will the crisis affect the construction industry and how will the crisis affect the construction industry?
Employee numbers are also a good example of the procyclicality of the construction industry, which moves more or less in line with the overall performance of the economy as well as with property prices. In 2019, the sector employed a total of 340,000 people.
Attention should also be drawn to the specific nature of construction employment: project-based construction is common in the sector and reflected in employment. If investments are paralyzed, it will be easier to get rid of the large number of unskilled and unskilled workers (whose structure is not very well developed, as it is based on the complex structure of commissioned contractors of various newly formed project companies), so that Unemployment risk is also high within the sector, which may be indirectly reflected in the loss of demand from companies operating in other sectors of the national economy. Of course, this is also true in reverse: in the event of a rapid rebound, it is easier to replace the workforce, that is, unskilled construction has great capacity to reduce unemployment; It should be added that there has been a great shortage of labor in recent years.
In examining the effects of the crisis, it is worth focusing the construction industry on subsectors and sub-activities. According to the generous grouping, the OSC divides the sector as follows:
- building construction,
- and other constructions.
This in itself does not say much, but if we break down the subsectors in more detail, it will be much easier to estimate the effects in each activity. Activities that are likely to experience a greater decrease are marked in orange in the table:
As you can see, logically based on the interpretation of the crisis, many more construction activities within the construction of buildings can be classified as more at risk due to the crisis than within other construction sites. There is a very simple reason for this: other constructions are dominated by state and community orders, while orders for building constructions are mainly provided by the private sector.
The simplification calculation above shows that 80% of building construction and only 7% of other construction are at risk of further decline, and according to the weighted average of the two, 45% of production from the Construction may be affected to some extent by downtime. .
It should be noted that the previous calculation is only a very distant and solid estimate, since, on the one hand, the data reflects the situation in 2018 and, on the other hand, the logical exposure due to the nature of the crisis does not mean that investment Private will stop. that public investment is at the previous level. It should also be added that there may be a myriad of outliers in the data for each year, which can also cause a significant change due to the large amount of implementation across activity groups.
The above estimate is far from accurate for the exact definition of relapse, but it is excellent for two things: on the one hand, it perfectly shows that The construction recession due to the general economic recession is significant, certainly in double digitsz – This was already possible without estimation. On the other hand, the role of the state within the sector stands out, due to its high exposure to government orders. through the central budget, the government can keep many construction companies alive just by keeping their orders at the previous levelt, even if you spin them in a good Keynesian sense during a crisis, it can also partially compensate for the loss of market revenue. As we’ve seen so far, the government helps the sector (too) with investment loans, tax breaks, wage subsidies rather than direct public procurement.
Reports from industry players also confirm the above.
As in previous articles in our series, we have now asked some industry players to more accurately illustrate the impact on the sector through their response.
László Koji, director of the National Union of Construction Entrepreneurs (Évosz) According to him, in the construction industry, contracts concluded in January and February will be honored, but newly concluded contracts can be a problem. Overall, according to the director, 90% of awarded contracts can be fulfilled, of which the completion rate for civil engineering can be 100%, however, 20% of high-rise buildings are at risk of default. According to Koji, the main problem with the contracts concluded is the loss of labor: the proportion of foreign labor in the construction industry is high compared to the national average.
Foreign workers, on the other hand, left the country when the virus appeared, and 15,000 workers, 5% of construction workers, were immediately out of production, László Koji said.
Regarding the 5,000 workers who repatriated, the director said they could not satisfactorily replace the lost workforce either because of their qualifications or simply because of the low workforce. Due to the low labor demand of civil engineering, the implementation rate of contracts within the subsector is high.
According to László Koji, according to the first two months, the preliminary forecast for the performance of the construction industry throughout the year was HUF 4.5 billion, which would have required an average monthly turnover of HUF 350 billion; This was only halved in March.
According to the director of Évos, the construction industry could achieve a performance of 70% compared to last year, but much depends on the epidemic situation.
Reported a similar trend. Márk Arató is also the director of communications for Market Építő. According to him, civil engineering is easier to survive the crisis due to the lower demand for labor and almost totally public orders, the situation is more problematic in high-rise construction due to the closed space, so there were already projects stalled here, although most continued to operate here. New investments are also hampered by the weakening of the forint, which increases prices through more expensive purchases, so it cannot be a price reduction to compensate for the decrease in demand. Furthermore, this will have a long-term effect, as even with a possible appreciation of the forint, suppliers are unlikely to lower prices, further worsening prospects for construction production.
Arató also said that the state share is 55% in high-rise construction and almost 100% in civil engineering, so the state can easily keep actors alive by encouraging investment (this is perfectly in line with our reasoning above). As for individual players, the survival of small businesses is at stake, but that in itself does not affect production, that is, the cake will not be smaller, only the slices will be distributed differently.
Based on the above, and described at the beginning of the article, it follows that the 30% decrease mentioned by László Koji is very realistic, that is, the construction industry can reduce the total production of the national economy by up to 1-1.5 percentage points annually (Subject, of course, that if the epidemiological situation improves, this could be significantly less, but even slightly larger.) However, it can still be considered a less affected sector, mainly due to the high participation of the state.
This article continues- The situation of the construction industry at the time of the coronavirus.
- There was a free fall in real estate transactions in April
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