Angelica Donati, Head of Business Development at Donati S.p.A, takes a look at inflation post-pandemic.
Although price rises vary widely across the zone, inflation in the eurozone is now 4.1%, a 13-year high. According to the European Commission’s estimates, Europe’s inflation is expected to continue to record-high levels in the first half of 2022 and will last at least until the end of the year. As per other sources, the eurozone inflation is transitory and forecasts inflation will slow to 2% in 2022, but this remains to be seen.
However, the issue of global post-pandemic inflation is not only affecting the whole of Europe but also the US, and it is affecting multiple sectors, from the food industry to the automotive sector and the construction sector.
How construction is dealing with a new emergency
2021 was a year of rebirth for the construction industry. It was one of the main drivers of the post-pandemic economic recovery across Europe, with peaks of up to 15% growth in countries such as Italy and the UK.
That being said, in recent months the industry has been hit hard by another emergency: the drastic rise in commodity prices. The increase in the cost of hundreds of raw materials has had an impact on the entire sector globally, so much so that the price of construction materials jumped nearly 20% in 2021 according to Associated General Contractors of America.
The price of iron, for example, has increased by 243% in the last nine months, adding to the extensive list of construction materials that have risen sharply round steel serves as another example as its price increased by 250% in one year. In addition, other essential construction materials have risen sharply: the cost of copper has risen by 21.63%, aluminium by 35.76% and lithium by 98.92%, as well as fuels, electricity, timber, PVC, and concrete.
According to Associazione Nazionale Costruzioni Edili (ANCE), the anomalous dynamics of the prices of important raw materials are putting a strain on the construction sector that, after a long recession, is starting to show important positive signals, driven mainly by tax incentives on renovations and public investment. However, the current situation risks endangering the projects that are already underway and are producing negative repercussions on countries’ abilities (especially Italy’s, since it is the single biggest beneficiary of funds) to carry out planned investments under the National Recovery and Resilience Plan (NRRP) programme.
Health crisis and restart
Inflation is here to stay, and its effects will be felt all over the world. This spike is due both to the ongoing effects of the health crisis, which has caused a particular shortage of supply due to global lockdowns and logistics issues, and the consequences of the acceleration in 2021, which generated a sharp increase in demand. For example, one of the main drivers of inflation for steel, as indicated in the OECD’s December 2020 report, was the sudden increase in demand from the construction sector in China. This rebound triggered an upward effect on the price of raw materials and on the entire global steel supply chain. It should be noted that China accounts for over 50% of world steel production and consumption and, in particular, construction in China accounts for 40%.
Prices are not expected to correct at least until the end of 2022. In fact, further inflationary surges could occur, especially with regards to energy prices which are being boosted by geopolitical tensions in Ukraine. Governments cannot turn a blind eye to this, and companies cannot be expected to cover this extraordinary cost increase on their own.
Without a significant price list adjustment and a structural price revision mechanism for public works, it will be difficult for companies to tender for work in 2022. Government action to counter rising materials and energy costs in the short to medium term is essential to ensure that the resources of the NRPP don’t go to waste. Italy, and all other European recipients of funding, are on a strict deadline. The Recovery Fund monies must be deployed quickly and efficiently over the next few years. In order for this to occur, policymakers need to tackle the issue of inflation head-on.