Silence before the storm for construction and industry

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Silence before the storm for construction and industry

The Dutch economy appears to be in good shape, but it appears to be quiet before the storm, say ABN-Amro economists. They predict that construction and industry (as well as the leisure, food and retail sectors) will experience an economic shock later this year.

Commodity and energy prices are very high, interest rates are rising rapidly, consumer confidence has deteriorated sharply and there is still corona debt on the balance sheet. In addition, the economy could be hit hard by a shortage of gas, economists note. It could lead to bankruptcies, the bank warns.

The industry will be hit hard by high energy prices and a possible gas shortage, by inflation and deficits, rapidly rising interest rates and to a lesser extent corona debt. Consumer spending has only a limited impact. Construction suffers to a slightly lesser extent from the same problems, except that inflation and lack of problems can cause major problems there.

Corona debt

Corona debt seems to be a somewhat unknown problem. The Corona aid measures have ensured that most companies could survive the decline in their turnover without the problems. Still; the number of bankruptcies is still 50% lower than the 2019 average.

The aid measures have been phased out since April this year and deferred taxes are to be repaid from 1 October; a total of 21 billion euros. Although the companies will have 7 years to do so, ABN-Amro expects that it may cause problems for some companies. “It is obvious that the number of bankruptcies will increase in the coming months,” the researchers write.

Industry

For the industry, the problems come fourfold. The industry will be hit by the sharp rise in energy and commodity prices. A possible recession will affect the demand for industrial products. Rising interest rates make the shareholding more expensive. However, the biggest risk for the industry is the possible shortage of gas due to the reduced supply from Russia.

The government may decide to put large gas consumers on rations so that they can temporarily use less or no gas at all. Industrial sectors in particular use a lot of gas, so it is obvious that these need to be rationed. The food industry and the greenhouse horticulture are expected to be spared. Large industrial companies in energy-intensive industries may be the first to be hit by a ration.

Barley

A lot of gas is needed in the production of a number of building materials, such as asphalt, glass, brick and aluminum. As a result of the constantly rising energy prices, the prices of these building materials have also risen sharply in the recent period. In May 2022, for example, the price of aluminum was 61 percent higher than a year earlier, the price of ready-mixed concrete was 16 percent higher and the price of glass and glassworks was 14 percent higher.

ABN-Amro assumes that commodity price increases are temporary. However, many construction projects have already been postponed as a result. In April 2022, the allocation of permits for new commercial buildings and homes was 28 percent lower than the year before.

Ongoing projects that have been entered into at a fixed price entail an additional risk for contractors. It follows from Cobouw’s construction monitor that half of the contractors, installation companies and finishing companies are only to a limited extent able to share price increases with their customers. Builders are also less able than before to enter into long-term contracts for materials. Margins, which are already not large in the construction industry, are further jeopardized as a result.

Energy conversion

The only positive is that rising energy prices can boost innovation and energy conversion. Construction companies are looking for smart solutions to limit the number of transport movements or to switch to alternative fuels or electrification of equipment and means of transport.

Gas prices are also a reason for consumers and businesses to accelerate energy transition, stimulating the demand for sustainability projects. This ensures full order books with installation companies and suppliers of solar panels and an increasing need for insulation materials.

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