Global Construction Outlook; Dutch elections, climate migrants, earnings season & a new Tomorrow podcast episode

Stumbling but still standing? The different segments of the #constructionsector (residential, non-residential, infrastructure) are revealing signs of #liquidity cracks, we looked into profitability and liquidity issues but also identified pockets of #growth opportunities. In our what-to-watch publication, we discuss the election scenarios in the #Netherlands in recessionary times – and the lengthy coalition negotiations we anticipate. We acknowledge the first agreement between two countries addressing the increasingly pressing issue of #climate #migrants from particularly flood-prone areas. And ‘this the season, #earnings season: a cloudy picture for debt-repayment in 2024 and mid-term debt sustainability albeit Q3 earnings leaning toward the positive. #Trade and pathways on how to green it are a recurrent topic very dear to us – a fresh episode of our Tomorrow #podcast with various of our experts on the matter.

Global Construction Outlook : Liquidity Cracks

The full report for you here.

We took a close look at the construction sector in Europe and in the US, diving into its different segments (residential, non-residential, infrastructure) and looking at profitability but also liquidity issues as insolvencies are picking up in the sector. Our key findings:

Residential construction is stumbling but still standing. As higher interest rates drive up mortgage costs, house prices have decreased significantly in Germany (close to -10% in Q2 2023) and decelerated in most other European countries and in the US. Residential building permits have also modestly declined in most countries for over a year now. In Europe, credit surveys suggest a dip in construction output similar to that of 2008 but survey data have already bottomed out and renovation activity remains supportive. In the US, new house builds are holding up, thanks to a tight supply of existing homes. Going forward, the sector should get a boost from the second quarter of 2024 as interest rates start to decrease and the macroeconomic backdrop improves.?

Meanwhile, non-residential construction is reaching for the sky in the US while Europe lags behind. The Inflation Reduction Act (IRA) and the CHIPS Act have resulted in a significant rise in non-residential construction spending in the US. Manufacturing construction in particular has been growing very rapidly over the last couple of years, with spending up +62%y/y in September 2023, led by computer, electronic and electrical manufacturing, which has nearly quadrupled since early 2022. In Europe, however, non-residential growth has been sluggish. Infrastructure growth in the US is also outpacing that of Europe and this divide is likely to continue into 2024 as we expect stronger growth in the US over Europe.?

Easing input prices are being somewhat offset by wage pressures but profitability remains solid. Prices of cement, concrete products and other soft products have decelerated. However, prices are still oriented upward: For instance, cement prices are still growing by over +17% y/y in the Eurozone. Wages are also growing as the sector grapples with labor shortages amid the still inflationary context. The latest data suggest wage growth for construction workers above +4% in all regions. Nevertheless, output prices are rising faster than input prices, both in the US and in Europe, supporting corporate profitability. Looking ahead, the outlook for both output prices and input prices is on the downside, which should preserve margins. However, the interest-rate burden will likely remain an issue, especially in Canada, Sweden, Norway and the US, where net gearing is above 75%.??

Liquidity remains the issue for smaller players as insolvencies pick up in the sector. The construction sector is mainly composed of SMEs that face a longer cash-conversion cycle. These companies have been quite exposed to rising input costs and financing issues amid rising interest rates and tightening financial conditions. As they are facing liquidity issues, an increasing number of construction firms in Western Europe are becoming insolvent, contributing to more than 20% of the national insolvency count when combining cases in pure construction and real estate activities in Germany, France, the UK and Italy.??

The full report for you here.

What to Watch this week

The complete stories for you here.

First, the Netherlands holds elections in a time of recession – The former government led by long-serving Prime Minister Mark Rutte collapsed in early July when the four parties of the ruling coalition clashed over an immigration bill. Ahead of the vote on 22 November, migration, housing, climate policy and inflation have emerged as the key themes. While polls suggest the New Social Contract party is leading the race (19%), no party is likely to win more than 30 seats, so forming the next government will take months of negotiations. Meanwhile, the economy recorded its third consecutive quarter of contraction in Q3. We expect activity to only gradually recover from Q2 2024, with overall GDP growth at +0.7% in 2024.

Second, a recent agreement between Australia and Tuvalu addresses the increasingly urgent issue of climate displacement – Australia has agreed to welcome up to 280 migrants per year from the small Pacific island, in addition to providing funds for land reclamation around the island’s capital and military aid. The agreement is a relatively small-scale example of the legal issues that will come with the massive human displacement caused by climate change. In our upcoming Climate Literacy Survey, respondents with higher climate literacy were more likely to believe that advanced economies should be responsible for the material damages caused by climate change. But it is sobering that 18% of our sample – and 31% of those that had below-average climate knowledge – chose to have no opinion over a phenomenon that will affect 1.2bn people in the next 30 years.

Third, is the Q3 earnings season - the calm before the storm? Easing input costs boosted companies' profitability in Q3, even as revenues entered a technical recession. But the positive earnings surprise is not clearing the clouds over the outlook for 2024-2025, when 20% of debt will need to be refinanced at higher rates. We calculate that US and Eurozone companies will see their interest coverage ratios drop by 1.5pps and 2.7pps, respectively, in aggregated terms. With the continued decline in earnings growth, this poses a dual threat to both debt-repayment capacity in 2024 and, more importantly, to medium-term debt sustainability. For now, we maintain our 2024 and 2025 equity return forecasts of 9% and 11% for the US, and 7% and 8% for the Eurozone, but remain very cautious with regard to the current market situation.

The complete stories for you here.

A fresh episode of our Tomorrow podcast on green global trade

Tomorrow podcast: Promoting trade in environmental goods and low-carbon technologies can be a powerful tool to combat the climate crisis. But there can be no green trade without green shipping; In this episode, we speak to Senior Economist?Jasmin Gr?schl?and Sector Advisor?Maria Latorre?about how to green global trade, one container at a time. The full report for you here, in case you missed it.