Economists expect the construction industry to suffer a big hit in the second quarter of 2020 from the Covid-19 pandemic.
OCBC Bank Chief Economist Selena Ling believe it will come from various factors such as the government’s one-month circuit breaker measures, the increasing infections/quarantines at foreign workers dormitories and the demand shock from weak consumer and business confidence amid recessionary fears that could affect private sector demand for real estate.
In Q1 2020, the construction industry shrank 22.9% quarter-on-quarter and 4.3% year-on-year, reported The Business Times.
“A double-digit on-year contraction is expected in Q2, 2020 and may extend for the full year should the one-month circuit breaker be extended,” said Ling.
Based on empirical evidence, private construction activity – which made up about 40% of the total contracts awarded last year – has been the main drag to the overall construction sector, said Barnabas Gan, Economist at UOB.
He attributes it to delay in the return of foreign labour on the back of travel restrictions globally.
“As the construction sector has been classified as a non-essential cluster, the government’s circuit- breaker measures are expected to be another negative blow to the sector,” said Gan.
“With most of the construction activities being put on hold for the most part of April, construction growth in Q2 2020 will likely contract by 15% year on year with downside risks.”
He noted that the economic environment also remains uncertain beyond the first half of this year. “Potential scenarios include the extension of the circuit-breaker measures beyond the current stipulated period, which would further weigh on the construction sector.”
The extent of Covid-19 infection within foreign labour dormitories may also aggravate the manpower shortage, especially for the construction sector.
With this, Gan expects the sector to grow by just 0.7% year-on-year in 2020.
“There may be pent-up construction momentum after the lull in H1 due to contractual deadlines,” he said.
Irvin Seah, Senior Economist at DBS, on the other hand, expects the sector to contract by almost 2% this year.
In early January, the Building and Construction Authority forecasted total nominal construction output for this year to increase to between $30 billion and $32 billion.
The anticipated pick-up in total construction output came on the back of improved construction demand since 2018, after witnessing a slowdown from 2015 to 2017.
One consultant expects tender prices to decline once construction activity pick up again.
Ho Kong Mo, Managing Director at Surbana Jurong’s Threesixty Cost Management, said the global pandemic has impacted ongoing construction works, resulting in the suspension of works, manpower shortage and disruption of materials supply, particularly pre-cast concrete components that are primarily from Johor Baru.
“As for projects slated for the year which have yet to commence, developers are likely to take a more prudent wait-and-see approach to maintain financial liquidity amid the current uncertainty in both the global and local economy,” he said.
As of 8 April, the World Trade Organization has anticipated global trade growth to drop by up to a third this year.
“Construction demand in the private sector will inevitably be adversely affected and completions are likely to be pushed back by another six to nine months,” said Ho.
In its industry outlook report, Threesixty Cost Management expects contractors to adopt prudent cost control measures to conserve cash flow in the next two years as well as earnest cost-cutting measures to lower overheads, cost and margin.
Tenderers are also expected to adopt a more cautious and conservative stance in bidding for new projects this year to mitigate the risks.
Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this or other stories, email firstname.lastname@example.org