Tuesday, April 21, 2009

World construction demand sinks

Construction activity is now falling quickly around the world, increasing the downward pressure on construction costs, according to Reed Construction Data. The construction decline is much deeper in many developing countries where investment, which includes construction, is a much larger share of the economy than it is in the U.S. Through March, U.S. GDP has dropped about 4 percent while investment spending has fallen 12 percent. Investment spending has already plunged more than 20 percent in several Asian and Middle East markets, which have experienced more frequent shutdowns of construction projects already underway than have occurred in the U,S.

World GDP fell at a 5 percent annual pace in the 4th quarter of last year and continued to decline at about the same pace through the winter. The International Monetary Fund (IMF) projects world GDP will fall as much as 1 percent this year, the first worldwide decline in 60 years. The IMF outlook foresees stable or slightly rising economic growth by the end of the year but a relatively sluggish recover in 2010. World construction activity is unlikely to return to the peak 2008 level until 2011 at the earliest.

The consequence is weak pricing for the resources used in construction. This occurred first in materials. The materials price surge that occurred in mid-2008 has now been fully reversed. Materials price indexes are likely to slip slightly lower later this year before rising modestly next year. Price declines for other project resources are harder to measure but have now begun. This includes design and contractor bidding where more competition has forced discounting. Prices for new construction equipment appears to have had little impact so far but used equipment prices are falling at a double-digit pace.

It also includes labor. Construction hourly wage gains abruptly slowed from more than 4 percent (annual rate) to below 2 percent in the last three months even though few union contracts have yet been re-negotiated in this weaker construction economic environment. Expect the pullbacks in professional fees, contractor margins and skilled labor rates to persist will into next year long after materials prices have begun to recover. Many union locals will have to anguish over contractor demands for wage concessions before the contract expires. -- Mark S. Kuhar

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