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Construction to suffer double-digit knockdown from Covid-19 pandemic
AS THE novel coronavirus pandemic continues to unfold, the construction industry is expected to be hammered, with economists looking at further double-digit contraction.
"Unfortunately, the construction sector will take a big hit in Q2 2020 from the Covid-19 pandemic - first from the one-month circuit breaker and the rising infections/quarantines at foreign workers dormitories, as well as the demand shock arising from weak business and consumer confidence amid recessionary fears which could impact private sector demand for real estate," said Selena Ling, OCBC Bank chief economist.
The S$30 billion construction industry contracted 4.3 per cent year on year in Q1 2020. On a quarter-on-quarter basis, the sector shrank 22.9 per cent.
"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," she said.
When it is safe to resume activity, public sector infrastructure projects are likely to be stepped up to kickstart the Singapore economy, but that may be a late-2020 or even 2021 story, said Ms Ling.
According to UOB economist Barnabas Gan, empirical evidence shows that private construction activity, which accounted for about 40 per cent of the total contracts awarded in 2019, has been the primary drag to the overall construction sector.
This is due to the delay in the return of foreign labour as a result of travel restrictions globally, he said.
"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 Mr 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 per cent year on year with downside risks."
Beyond the first half of 2020, the economic environment remains uncertain, he said. "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 in foreign labour dormitories could also exacerbate the shortage in manpower especially for the construction sector, said Mr Gan.
Having said that, his full-year forecast for the sector is a tiny but positive 0.7 per cent year-on-year growth.
"There may be pent-up construction momentum after the lull in H1 due to contractual deadlines," he said.
Mr Gan's full-year forecast for the economy is -2.5 per cent; manufacturing -3.8 per cent, and services -3.1 per cent.
DBS senior economist Irvin Seah expects the construction sector to contract by almost 2 per cent for 2020. In 2019, the sector was recovering from a low base, following two years of slowdown.
Total nominal construction output in 2020 was projected to increase to between S$30 billion and S$32 billion, from the estimated S$28 billion in 2019, the Building and Construction Authority said in early January.
The anticipated further pick-up in total construction output in 2020 was supported by the improved construction demand since 2018, following a slowdown in 2015-2017.
When construction picks up again, tender prices will decline, said one consultant.
According to Ho Kong Mo, Surbana Jurong's Threesixty Cost Management managing director, ongoing construction works have been impacted by the global pandemic which has resulted in the suspension of works, shortage of manpower and disruption of materials supply, in particular pre-cast concrete components which are mainly 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 at April 8, the World Trade Organization has forecast global trade growth to decline by up to a third in 2020.
"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 Mr Ho, adding that he anticipated a downward trend for tender prices.
According to an industry outlook report by Threesixty Cost Management, contractors will adopt prudent cost control measures to focus on conserving cash flow over the next two years and earnest cost-cutting measures to lower cost, overheads and margin in the current gloomy economy.
In addition, for new projects out for tender this year, the report that was issued last month said tenderers are likely to adopt a more conservative and cautious approach to mitigate the risks.