HIGH RISK for entreprises
Insolvency data for Q1 2019 suggest a worsening severity, which could have serious effects on providers along supply chains.
After ten years of growth (2008-2018), we have reached the peak in the global construction cycle. This year will be the turning point for the global construction industry, beginning to cool down gradually to +3% y/y in 2019, from +3.5% y/y in 2018.
Rise of infrastructure investment in Europe, the US, China and India and $1.5tn Trump infrastructure plan advancement through Congress.
The sector should see a positive environment with sustained growth underpinned by public infrastructure building and robust non-residential activity. Even though actual infrastructure spend has been lackluster in terms of execution on vast announced programmes, substantial requirements in the energy and transport infrastructure spend around the globe support a positive outlook.
The US particularly is underpinned by strength in the non-residential sector while indicators are mixed in residential. The National Association of Homebuilders sentiment index stood at 62 at its last reading, which, while below most of the 2018 levels, is a rebound from a weak Q4 18.
We expect further recovery in Europe - in particular in Germany, where increased public spending commitments should support the sector - as the prime growth driver. A solid order book growth is evidence. European companies have reported order book growth between 5% and 15% y/y. Germany should see road and public infrastructure construction, alongside housing growth driven by immigration. According to the Federal Building Office, about 350k new housing units are needed by 2021. All of this is reflected in a record high EU construction confidence index, which stood at 21 at its last reading (source: EU Commisision). We note that most recent indicators seem to suggest a decline in confidence after a recent plateau. However, the major regions remain strong. Notably, France ticked up by several points. This is largely attributable to public sector activity, most of which was confined around Paris. Hence, we might see a divide in profitability in the country between those with access to such large projects and others without. The UK is a case apart within Europe due to Brexit-related uncertainty.
China is slowing down as the property market and economy cool. Action on credit-financed construction activity has slowed the sector to 4.1% y/y activity growth in 2018, a rate that is likely to become a central outlook for the next few years. Yet infrastructure investment should still grow by 6% y/y and lift up overall growth. Infrastructure spend is likely to be the tool by which the government controls the pace of growth for the economy; evidence is still to come through. We are of the view that the current stimulus measure will benefit the consumer more than infrastructure, which was traditionally the case. Trade tensions are the prime risk for Chinese activity.
The skill shortage remains a major challenge for the sector globally. At the same time, raw material costs may be a risk to profitability. More advantageous steel costs are likely to be counteracted by stronger copper prices. Nevertheless, sustained activity should allow for margin expansionby 60bps, according to our average estimate.
On average, all of the above feeds through to 8% earnings growth for the sector in 2019 (source: Bloomberg consensus).
Non-residential construction is supported by infrastructure spend, particularly in Europe but also China. US activity is also supportive for the non-residential sector.
Residential construction indicators show mixed readings. Several housing markets are slowing down, notably China and the UK. The US may see a rebound.
Contact Euler Hermes
Economic Research Team
Sector Risk Analyst