Construction output growth in China to slow in the wake of coronavirus outbreak

19 February 2020 (Last Updated February 20th, 2020 11:21)

Construction output growth in China to slow in the wake of coronavirus outbreak

Prior to the outbreak of the COVID-19 coronavirus in Wuhan, Hubei province, GlobalData had been predicting a steady slowdown in the pace of growth in construction in China, owing to the expected continuation of government efforts to shift the economy away from one dependent on investment. However, the drastic measures taken since January to contain the spread of the virus have brought economic activity to a halt across much of the country, and as a result, GlobalData has revised down its construction output growth forecast for 2020, from 5.1% to 4.1%.

China’s construction industry typically slows down around the Lunar New Year period, which in 2020 occurred in late January, but the return to normal levels of activity has been delayed owing to quarantines and travel restrictions. Although initially focused on Hubei province, as of mid-February the Chinese Government had imposed further restrictions on movement to varying degrees across most provinces. Hubei province alone accounts for 7% of total construction output.

GlobalData’s central forecast is based on a positive scenario that the outbreak will mostly be contained in the second quarter of 2020, such that restrictions on travel will be eased thereafter. It is expected that work on construction sites will then ramp up quickly in the second half of the year, recovering some of the lost output since late January.

It can also be expected that the government will accelerate the disbursement of funds for infrastructure investment to prop up the industry and support the economy, while the monetary authorities are set to loosen policy by cutting interest rates. Growth during the remainder of the forecast period is expected to remain just above the 4% level. However, given the uncertainty as to how persistent the spread of the virus will be, downside risks to the overall forecast for construction activity are high.

Construction work on major commercial projects in key cities is expected to be greatly disrupted in the short term, reflecting the restrictions on travel and the reported closure of construction sites in urban centres. GlobalData has therefore revised downwards the forecast for growth in commercial construction in 2020 to 4.7% from 6.7% previously.

The disruption caused by the epidemic is likely to be prolonged in the leisure and hospitality buildings sector, reflecting the likely downturn in both domestic and foreign tourism, which could reduce investment in new hotel projects. The residential sector is facing a high risk of a sharp downturn, with major developers reporting a drop in new sales since the outbreak of the coronavirus, which has raised the risk of a liquidity crisis.

In mid-February, one of the largest developers, Evergrande, announced that it would cut prices by up to 25% for new properties in an attempt to drive up sales. Although works on institutional buildings in general will be subject to similar disruption as in other buildings sectors, the intense focus on building new hospitals and other healthcare facilities to deal with the COVID-19 crisis suggests that the sector will pick up at a slightly faster rate than previously expected. The government is under pressure to ensure that efforts to contain the spread of the virus do not severely damage the economy.

In February, in a speech to the Politburo’s Standing Committee, the president Xi Jinping stated that large-scale projects, especially those in manufacturing, should be starting construction on time. Despite these pronouncements, GlobalData expects the pace of growth in industrial construction to slow to 3.6% in 2020 (compared to 5.1% previously), which represents a sharp deceleration from growth of 7.8% recorded in 2019.