Despite a slow start to the year, the second half of 2016 saw confidence return to the global economy. Europe and China exceeded economists’ growth expectations, and commodity prices have increased, but political uncertainty persists and several markets remain in recession or near-recessionary conditions as poor productivity continues to be a hindrance to further economic growth.
Falling oil and steel prices were symptomatic of a faltering commodities market at the start of 2016 as cheap Chinese steel flooded the global economy and oil production outstripped demand. This dented the resources supplying economies and subsequently led to a drop-off in commodities shipping and global trade.
The knock-on effect of this for the construction industry in commodity-reliant markets was quick to follow.
Regions such as Singapore and Kuala Lumpur, which rely heavily on servicing the oil and gas sectors, have suffered and our survey predicts these markets will continue to cool over 2017. The copper-dependent Chilean and oil-focused Omani markets also continue to suffer from the after-effects of the commodities crash. Santiago and Muscat are expected to cool over the next 12 months as a result.
This collapse of global commodity prices led the 13 OPEC members and other major oil-supplying nations to an agreement to limit the supply of oil in an effort to force prices back up, something that is having moderate success.
An increase in spending on national infrastructure and real estate investment in China, as well as anticipated fiscal easing in the USA, is also helping strengthen the price of metal and easing market concerns about a continued decline in commodity prices, as well as giving a boost to the construction industry in these regions.
The IMF now estimates that global growth is going to increase over 2017 and 2018, with its latest forecasts predicting global economic growth of 3.5 percent over the course of this year, up from 3.1 percent in 2016.
The IMF revised their forecasts upwards for advanced economies as a result of a better-than-expected performance over the second half of 2016. This is driven by a recovery in the manufacturing sector and reduced drag from inventories, and anticipated fiscal stimulus from the new Trump administration in the USA.
China is also expected to benefit from further governmental monetary stimulus, and its near-term growth prospects have been increased by 0.4 percent to 6.6 percent for 2017.
This brought an increased sense of economic stability to the global marketplace, allowing businesses and governments to once again take decisions on long-term projects and investments.
Global growth is expected to increase over the coming years, driven on by an improvement in the American economy. China’s continued growth is forecast to slow through to 2018 as the Chinese government continues the shift to a more service-based economy, but this will still outpace other major markets.
Growth in the eurozone will remain sluggish over the next two years, but this forecast is still more optimistic than previous forecasts from the IMF – although this could be derailed by the effects of the UK leaving the European Union.
As long-term investment returns to the agenda in advanced economies the construction industry can expect an increase in the number of construction projects coming to market over the coming months and years.
Some larger developing economies including Brazil, India and Mexico have undergone a slowdown in growth during 2016. Mexico may be affected by a more protectionist USA led by President Donald Trump, but this will depend upon the extent to which measures are able to pass Congress.
India’s slowing growth is to some extent self-inflicted through reducing the paper currency in circulation and the introduction of GST. However these reforms may start to boost growth through greater transparency.
Brazil could also experience a boost to its economy as improved commodity prices add to export earnings.
Enduring low interest rates across many economies is fuelling the construction of apartment projects but there are fears that the market is overheating.
The apartment construction cycle is notoriously short in nature, and the construction industry is wary of the sector peaking.
There are indicators of opportunities in other asset classes. The manufacturing sector grew at the fastest rate for three years at the end of 20165.
Infrastructure investment is expected to increase in many regions and improving commodity prices are helping increase growth in the mining industries. Further growth in the technology sector is driving demand for data centres.
Despite the likely cooling off of the apartment sector, a third of the markets surveyed are expected to be warmer by 2018 compared to just a quarter of markets in our 2016 survey. This is a good indicator that confidence is improving in the construction industry.
In the UK, the triggering of Article 50 and the start of the country’s exit from the European Union is creating political and economic uncertainty that spreads far beyond the confines of Europe.
The outcome of the EU membership referendum in 2016 instantly sent the pound falling by close to 20 percent, but the economy has not taken as big a hit as many expected.
Meanwhile in the USA, President Donald Trump signed a number of executive orders calling to abolish or make sweeping changes to trade agreements with a number of traditional trade partners.
While these executive orders are not law, they certainly indicate the intention of the new President. Trump is also threatening a “big border tax” on American car companies manufacturing vehicles in Mexico, claiming credit for Ford cancelling a USD1.6bn plan to build a new plant in San Luis Potosi, and instead invest USD700m to expand a factory in Flat Rock, Michigan.
This is all symptomatic of a more protectionist stance from the USA as Trump promises to put “America First”.
Ultimately, this uncertainty could threaten confidence and lead to volatility and slower global growth. As a result fewer investment decisions could be made, leading to a reduction in the number of business-backed construction projects across many regions.
Labour costs could also be placed under pressure with stricter border controls in advanced economies and restricted flow of labour.
On a more optimistic note, President Trump promised certain deregulations that could spur on more investment and growth, particularly in the financial sectors. A major spending plan for infrastructure is promised that would create major opportunities for construction in the USA.
It is not just Europe and the USA that are facing political uncertainty. Important elections are taking place across Asia and Africa, and the results will shape the future of their regions.
Despite these uncertainties, the global economy is still expected to grow over 2017, and for most regions this means increased construction costs as markets heat up.
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