Recovery likely to be slow
by Gus Andall
Grenada has been hit hard by the global economic slowdown with the two mainstays of the economy, construction and tourism weakening significantly. The rate of job increases will determine the speed of recovery; still groggy from the recession over 30% of the workforce are now out of work, despite these difficult circumstances construction activity is expected to improve in 2011, the recovery is likely to be slow, reflecting the gradual improvement in the main source markets, particularly in the United Kingdom and United States.The most significant challenges for businesses in the construction sector were having to cut costs and lay off workers in response to the downturn in economy; the most surprising thing we've noticed in the past year was the drastic reduction in labour costs even though materials and other building supplies have not dramatically dropped in price. As suppliers cut production to match the weak demand, clients can be slower to pay as they try to manage their own cash flow. For businesses that borrow against accounts receivables to fund the work of new projects, the income stream from those receivables may be insufficient to fund the increase in workload.
However some companies have managed their businesses conservatively, so they feel well positioned to grow as the recovery takes hold, with strategic business planning; these companies have continued to pursue those objectives. Their workload projections are as strong as they have been over the past two years, these firms continue to selectively pursue projects with clients who need and appreciate the intense and high level of construction standards for which they are recognized. The fall in construction activity has not been uniform, not every contractor is desperate for work: some have relatively healthy order books, quite a few construction firms have experienced more favourable trading conditions than others. Why is that, is an interesting topic open for debate?
We believe the industry will continue to see weakness in building activity for most of the year ending 2010, but by middle of 2011 we can expect a slight upturn in new projects coming on stream, as homeowners and other organizations gain confidence in the economy and move to take advantage of lower labour costs as the industry begins to turn the corner, funding the increase in workload can become a challenge, the recovery may be more difficult to navigate than the recession, as companies become aware that it's more difficult to increase capital than it was to reduce expenses.
There can be as many hazards in the recovery as in the recession, for building companies, it's been said that more firms choke to death than die from starvation, as projects start to come on stream after a prolonged famine, there is always a temptation to take the first morsel that comes along, but we believe that those companies that have the willpower and access to resources will remain focused on their strategic goals would be in the best position to take advantage of the upturn in the economy.Government has promised a 25% tax reduction (on vat) off cement, steel and lumber, as part of its effort to stimulate the construction sector, however aggregates and other building materials have increased in price. The sector is now trying to regain its footing after downsizing to its lowest level for years, this sector is defined as one which embraces building materials and products; suppliers and producers; architects, engineers, machinery, installers, building contractors and finance.
The cost of preliminaries continues to be trimmed off construction prices which itself has been cut to the bone. To achieve this many contractors are often passing the responsibilities for preliminaries down the supply chain, staff have been sent home in the absence of work. Where contractors own machinery plant, often little or no cost is attributed to preliminaries, competitive tendering has established itself as the procurement route of choice as building clients exploit present market conditions, significant lump sum reductions are being seen as contractors make last minute cost adjustments in the hope of getting work.
In the private sector, capital investment intentions remain weak and activity in the commercial and residential construction sectors is slow. Clients should be aware that a low tender price can carry post-contract risks and they should make provision for a higher contingency allowance. However with so much already taken out of building costs it is unlikely that prices will fall anywhere near as much in the next 12 months, as has occurred over the previous year. At the same time the cost of building material is likely to rise as the economy comes out of recession.
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