Oxford Economics, the leading independent global advisory firm, today revealed that interest rate rises from the Federal Reserve, Bank of England, and European Central Bank could cost the construction industry $2 trillion globally by 2027 if high inflation persists and becomes de-anchored from central bank targets.
Its recent forecasts and research – the Global Construction Futures report in partnership with Aon and industry leaders across construction – examined the outcome of the current economic environment on construction which is sensitive to interest rate rises.
The findings show that current interest rate rises are having a disproportionate impact on the construction industry as access to finance becomes increasingly expensive.
In a scenario where cost and price pressures remain persistently elevated and de-anchored from central bank targets, monetary policy tightens more rapidly accompanied by marked rises in government bond yields and sharp falls in equity prices. Coupled with a drop in demand the construction industry globally could face a deepening downturn over the next five years, resulting in an accumulative impact of US$2 trillion.
In this scenario, average annual rates of growth in construction work done over a five-year period to 2027 in major economies would drop significantly:
- In the UK, from 1.9% per annum to 0.5% per annum
- The US would drop from 3.4% per annum to 2.5%
- Canada 2.9% to 1.8%
- Eurozone 2.2% to 1.3%.
Given the impact this will inevitably have on the wider economy, the research underscores the importance of balancing the need to control inflation and fears of entering a recession.
Jeremy Leonard, Managing Director of Global Industry Services at Oxford Economics, one of the study leaders for Global Construction Futures, said: “Clearly many factors, ranging from demographics to broader economic growth to government spending priorities, have large impacts on construction activity. But one dependable pattern that is visible in the data despite these crosscurrents is that large changes in interest rates signal eventual turning points in construction activity.
A scenario where long-term inflation expectations become de-anchored from central bank targets and costs and price pressures remain elevated will cause a significant blow out for construction.
The longer inflation stays significantly above 2% despite rapid central bank tightening, the more likely this scenario is not only having a global impact, but having one that is likely to persist well into the medium term resulting in an increase in borrowing costs. Inevitably, the availability and cost of financing is critical to the health of the market and policymakers seem to have forgotten this. Getting monetary policy normalisation right is critical if we’re to avoid a rude awakening.”
Graham Harle, Global Chief Executive, Gleeds, and industry leader involved in Global Construction Futures, said: “The Federal Reserve, Bank of England, European Central Bank and other rate setters need to keep a close eye on the construction sector – it will be disproportionally affected by mismanagement of inflation targets.
The construction and infrastructure sector is vital to the health of all economies around the world. It is a large employer and is essential to improving productivity and competitiveness of economies”.
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