Chile’s construction industry to fall by 6.5% in 2020 amid slow progress in the start and reactivation of projects

15 September 2020 (Last Updated September 15th, 2020 15:33)

Chile’s construction industry to fall by 6.5% in 2020 amid slow progress in the start and reactivation of projects

GlobalData has further cut its forecast for Chile’s construction industry, with output now expected to fall by 6.5% in 2020, down from the previous forecast of -4.5% in the June update and forecast growth of 4.0% before the coronavirus outbreak.

The slow progress in the start of new projects and reactivation of those that were already underway before the Covid-19 pandemic along with the decline in building permits, and higher unemployment levels are expected to limit the recovery of the industry in the second half of the year.

Data from iConstruye – a digital platform linked to the Chilean Chamber of Construction (CChC) – showed that the start of new projects fell by 75% between March and July of this year compared to the same period in 2019, with only 86 projects starting construction across the country in comparison to 346 projects during the same period last year. In July 2020, only seven projects started construction compared to 48 in 2019 while as of 20 August, the construction of only 11 projects had started.

Furthermore, 435 housing projects were still paralysed across the country as of 31 August because they were in areas that remained in quarantine, according to the CChC. These include 135 projects in the Metropolitan Region and 300 in the other regions. The CChC said that the affected projects make up for a total of 50,601 homes and employ over 208,000 people, and it would cost the industry more than $28.0 million per week.

Even though the government launched a pilot programme in early August to restart construction activities at communes in the Metropolitan Region that have entered the ‘Transition’ phase and get workers, who reside in areas that remain in quarantine, to return to construction sites, most projects in these transitional areas remain paralysed.

In terms of infrastructure, the CChC said as of 24 August, there were 37 private works affected nationwide by the pandemic and the containment measures with a total investment of $11.4bn, and which directly employ around 9,000 people. Some of the works include projects that were ready to start and projects that were already underway.

Moreover, separate data from the National Statistics Institute (INE) showed that total authorised surface area for residential and non-residential buildings fell by a year-on-year rate of 37.5% in May, compared to a drop of 52.8% in April while employment in construction fell by 30.6% in June compared to a drop of 23.5% in May.

Construction is one of the sectors in the country that has been the most affected by the Covid-19 pandemic. According to the Central Bank of Chile, construction output fell from a year-on-year growth of 4.7% in Q1 2020 to -20.4% in Q2 2020 as government’s measures to slow the spread of the virus led to the shutdown of most construction works, especially those of residential and non-residential buildings.

However, as containment measures become more flexible and construction activities gradually resume in the second half of the year, GlobalData expects Chile’s construction industry to slowly rebound to 3.5% in 2021 and reach an annual average rate of 4.4% in the remaining of the forecast period (2022-2024). Recent stimulus measures, rising global demand, and record-low interest rates should also support the industry in the coming years. Nonetheless, there are risks that violent protests could return on the streets as more restrictions are lifted across the country, which could result in lower investment in the sector and undermine government’s efforts to reactivate the economy and stimulate growth.

In June and July, the Chilean Government launched additional stimulus measures worth $12bn for the next two years, including a tax cut in corporate income to revive the economy and increase firms’ liquidity, one-off cash handouts, loans, mortgage deferrals and rent subsidies for hard-hit citizens. It also introduced a new law to allow eligible individuals to withdraw 10% of their pension early as part of a wider effort to increase domestic demand.

The latest data from the central bank’s Monthly Economic Activity Index is already showing a small improvement in the country’s economic activity in July, with the index registering a decline of 10.7% over the month compared to a decline of -12.4% in June and -15.3% in May. An improving external environment, due to the increased in demand from China, which has prompted a recovery of the price of copper, Chile’s main export, should also provide a boost to the economy.

On 2 September, the central bank announced it now expects Chile’s economy to contract between -4.5% and -5.5% this year and recover between 4% and 5% next year. This compares to the previous forecasts of -5.5% and -7.5% for 2020 and between 4.75% and 6.25% for 2021.