The effects of the coronavirus on the construction sector

Article by Ulrike Knaus (adapted for; translated by Eva Guzely) | 19.03.2020 - 08:35

Currently, it is difficult to predict the impact of the pandemic on the German economy. The construction sector, which has been doing well so far, is now right to wonder how the situation is going to develop. BauInfoConsult’s two possible scenarios.

Scenario 1: mild corona-related effects lead to only a slight slowdown in the construction sector

This scenario assumes that the spread of SARS-CoV-2 in China has reached a peak in the first quarter of 2020 and that outbreaks in other economically strong countries are also brought more or less under control by the end of the quarter. The Organisation for Economic Co-operation and Development (OECD) expects a 0.5% decrease in global growth. The global economy should thus grow by 2.4% in 2020.

The OECD expects that the German economy could get off relatively easy in the full year 2020. After that, it is going to grow by 0.3%. Previously, the OECD assumed a growth of 0.8%.

Based on the existing correlation between GDP, construction investments as well as construction volume, an economic growth of 0.3% would only have a slight impact on the performance of the construction sector. According to BauInfoConsult’s forecast model, investments in construction could grow by 2.1% in 2020 and construction volume by 2.2%.

However, this scenario, which assumes a minor corona-related impact, seems to be less probable with each day that passes, since Europe has already become the new hotspot of the pandemic.

Scenario 2: a massive impact of the coronavirus leads to a negative development in constructions

Current developments indicate that European economies are likely to suffer massive shocks. In scenario 2, the OECD assumes a significant plunge of supply and demand in the more advanced economies of the Northern hemisphere.

In this case, the OECD predicts a further growth of the global economy of only 1.5% in 2020. However, Europe would be hit particularly hard in this scenario and would see its economy shrink by at least 0.3% according to estimates by the organization. In this case, German GDP could contract by 0.3% and also slip into a slight recession.

The forecast of the experts for construction-related data shows that in this case the construction sector would also struggle with negative developments. Investments in constructions would fall by 0.4% in this scenario and construction volume would decrease by 0.5%. This negative development would be the result of a drop in demand, the effects of which are also likely to be felt in the construction sector.

A cautious outlook

As of now, BauInfoConsult’s experts are not sure what the actual repercussions on the construction sector are going to be, since economic dynamics are too fast and partly take sudden turns.

However, compared to other sectors, the construction sectors has three important aces up its sleeves which should protect it from a long-lasting shock.

Firstly, the sector faces the corona crisis at the end of a period of strong growth. This acts as a solid buffer also for the German construction sector in terms of sales but also when it comes to order backlog.

Secondly, the German construction sector is not quite as export-oriented. Germany is one of the main sales markets which means that a fall in foreign demand does not immediately lead to major problems.

Lastly, the new constructions segment is always a market for investments where long-term considerations play a central role. As a result, this market cannot be shaken up quite as easily as traditional short-term consumer markets, for example.