A global recession looms over the construction industry in 2022
Overview – infrastructure spending to drive growth
Construction is highly correlated with the economic cycle, yet it performed better than many other industries during the pandemic-induced global recession of 2020 – the worst downturn since the Great Depression of the 1930s. That resilience reflects the outdoor nature of the work, which reduced the extent to which activity was affected by control measures such as social distancing. Indeed, much of the industry carried on as normal. In the UK, for example, although construction output fell sharply in the wake of the COVID-19 outbreak, almost halving over the January to April period, it recovered almost equally swiftly and by January 2022 was above the levels seen at the end of 2019.
This was almost entirely due to rapid growth in repair and maintenance work, as well as a surge in infrastructure spending. Meanwhile, the booming housing market helped support output in 2021. The pandemic-related shift to online shopping and working from home also created a surge in demand for data centres and distribution centres. Challenges facing the sector in the UK and around the globe included a shortage of skilled labour and a surge in the cost of key inputs as supply chains came under pressure once the COVID-related restrictions were lifted and demand rocketed. Prices for structural steel beams, reinforcement bar, softwood timber and copper pipe have all risen sharply, with increases of up to 40% on an annual basis being reported in some markets, according to the global construction consultancy business Turner & Townsend.
Current position – recession fears prompt slowdown
The possibility of a global recession looms over the construction industry in 2022. The supply shocks that caused material prices to rocket last year, compounded by Russia’s invasion of Ukraine, have prompted central banks to tighten monetary policy, while consumers are reining in spending as the cost-of-living crisis bites. Given the construction industry’s traditional dependence on the economic cycle, this would suggest that activity could slow this year. Indeed, prices for key metals used in the industry (such as copper and iron ore), as well as lumber, have fallen sharply in 2022, suggesting that demand is already slowing.
The future – infrastructure spending to drive growth
Longer term, however, the outlook for the industry remains bright. The consultancy Oxford Economics predicted in a 2022 report that global construction would grow by 42% to US$15.2 trillion in 2030, from US$10.7 trillion in 2020 (at 2017 prices and exchange rates). It anticipates that average annual growth in construction, at 3.6% per annum over the decade to 2030, will be higher than in either manufacturing or services. Oxford Economics expects the fast-growing Asia Pacific economies to account for much of this growth, with spending on construction in the region expanding by more than 50%, to US$7.4 trillion in 2030.
Construction output in North America, meanwhile, is forecast to grow by 32% (or US$580 billion) between 2020 and 2030, to US$2.4 trillion. Western Europe’s construction output is expected to grow by 23% over the same period, to US$2.5 trillion. The consultancy forecasts that the UK will prove a stand-out growth market, overtaking Germany to become the largest construction market in Europe and the sixth-largest in the world by 2030.
That view was echoed by Balfour Beatty chief executive Leo Quinn, who in April 2022 predicted a decade of UK “infrastructure growth” as the construction industry gears up for a potential boom, thanks to the billions in investment set aside for the sector by the government as part of its “levelling up” drive. Public sector funding commitments include £4.8bn for infrastructure investment in towns across the country and £26bn for public capital investment to hit emissions targets.
Meanwhile, technological developments are likely to have a dramatic effect on the industry. These include off-site manufacturing (the completion of elements or components of a construction project at a different location from where they will be permanently installed), which should significantly boost construction productivity. Factories using 3D printing technologies to make components for assembly using advanced robotics are developing rapidly, particularly in the residential sector.
The need to address climate change through decarbonisation is one of the greatest challenges facing the industry. The built environment is responsible for around 40% of greenhouse-gas emissions worldwide, and the industry is racing to reduce its carbon footprint by designing and building more environmentally-friendly buildings. It is also seeking to reduce its impact on the environment through the use of recycled materials and by switching to renewable energy sources to drive the machines used in the sector – many of which currently rely on diesel.
“Recession fears prompt slowdown but the UK’s construction industry is gearing up for a potential boom over this decade, thanks to the billions in investment set aside for the sector by the government as part of its “levelling up” drive.”