Recent pessimism has created a “flat is the new up” mentality in the economy. With the wrecking ball of recession battering the world economy, talk of growth has all but disappeared, and its mention seems to generate either wistful thinking or a cynical smirk. Even so, growth opportunities do exist in an unlikely sector: non-residential construction.
Why is it unlikely? First, non-residential construction is usually quite responsive to the economic cycle. Capacity constraints typically spur excessive construction at the top of the cycle, leading in many cases to a painful contraction. Today’s excesses argue against the creation of additional capacity. Second, in most large economies, the sector is a small share of total economic activity. In the US, it amounts to just 6% of GDP, identical to the EU15 average. Canada’s share is higher, but even hefty energy investment lifts the ratio to just 7.1%. Third, construction projects often require large, long-term capital commitments that are difficult to secure in an economic downturn.
The negative arguments seem compelling, but there are a few significant upsides. First, while the sector is responsive to the economic cycle, the response is normally not immediate: non-residential construction usually lags behind the cycle. Why? Projects typically have long lead-times, and are difficult to get going, but once in motion, they are hard to stop – even when the economy goes into recession. It can take up to a year for economic downturn to affect the sector, sheltering those fortunate enough to have a piece of the action from the economic storm.
Second, non-residential construction may be a small share of activity in developed economies, but it is far more significant in emerging markets. The increased engagement of many emerging markets in international trade over the last two decades has created a great need for industrial and commercial buildings, plus the physical infrastructure necessary to facilitate burgeoning flows of goods and services. Non-residential investment in these countries can be as much as 22% of GDP, and in many cases is growing at a strong, double-digit annual pace.
Will this be sustained? The global recession will likely dampen the growth of industrial and commercial space in emerging markets from the torrid pace of the past few years. However, infrastructure spending has a long-term focus, and is much less likely to be interrupted in the near term. Moreover, emerging markets have generally managed their finances well during the boom years, and in many cases have the wherewithal to underwrite their ambitious infrastructure plans.
But the construction sector’s greatest near-term hope is just weeks old. Jolted by recent economic and financial developments, governments around the world have almost universally announced huge fiscal stimulus packages. Infrastructure is a cornerstone of most countries’ plans, and governments are scrambling to mobilize projects as quickly as is physically possible – a potentially lucrative opportunity for those able to step up to the plate in a tight timeframe.
The bottom line? Already a promising sector, global construction will get a huge boost from new government programs. Winning a piece of the action will require speed and agility – to meet the needs of time-sensitive governments, and to beat the equally-hungry competition to the punch.
The views expressed here are those of the author, and not necessarily of Export Development Canada.
Peter G. Hall
Vice-President and
Chief Economist
Export Development Canada
phall@edc.ca