It may have felt like a long time coming, but global construction got into its stride in 2017 as the economic backdrop brightened and boosted optimism. The USA is enjoying rapid economic growth, European markets are catching up and China continues to surprise. The growing confidence this brings is a much-needed tonic for the construction industry as it tackles the challenges of a rapidly evolving world.
A decade on from the global financial crisis and the world economy is finally reaching cruising speed. 2018 looks positive for employment, business profits, investment and construction.
It was hard to identify a dominant trend in the global economy and construction in our 2017 international construction market survey. Steady as she goes was probably the closest we could get. This year it is easier, and the tone is more upbeat. We see prospects for the global economy as being the most positive in this decade. This translates into much better prospects for construction.
This more upbeat take on the global economy appears to mirror a similar mood at the International Monetary Fund (IMF). Its latest two global growth forecasts, in October last year and January this, were revised upwards as economic growth outpaced expectations in most regions. The IMF currently forecasts global growth for 2018 at 3.9 percent, reflecting increased global economic momentum and the expected positive impact of recent US tax policy changes.(4)
Indicators of business confidence are up in Australia, China, Europe, Japan and USA, illustrating the broadly synchronised pick-up in growth. 120 economies accounting for three quarters of world GDP enjoyed a rise in year-on-year growth rates in 2017. Big advanced economies like Germany, Japan and the USA all outpaced expectations along with the emerging economies of Brazil, China and South Africa.
In the USA GDP escalated at an annualised 3.2 percent in the last quarter of 2017 and this solid growth is expected to continue throughout 2018. Business profits are surging. USA housing prices appear to finally be back to 2008 levels. Unemployment has fallen from 10 percent in 2009 to 4.1 percent in 2018.
This recovery is close to the longest in US history. At some stage it must end. However, recently passed tax cuts should encourage business investment and consumer spending, pushing the downturn beyond 2018. By then the US administration will be returning to election mode and eager to inject money to avert any potential downturn.
China’s faster than expected growth has been driving a resurgence in commodity prices and benefitting resource-rich economies, such as Australia, Brazil and South Africa. China is pushing ahead with major infrastructure investments along the route of the old Silk Road. This is driving construction as well as providing a stimulus to some of China’s sluggish state-owned enterprises, setting China on a growth path that is stronger for longer.
This new mega project called “One Belt and Road” stretches from China to Europe. It is a massive construction and engineering feat with highways, high-speed rail, logistics and technology. Its impact on construction is equivalent to another Chinese economy at the start of its rapid expansion.
Meanwhile, the European economies are strengthening, although further behind in the business cycle. The EU economy grew at 2.6 percent at the end of 2017. France, Germany, Ireland, Italy and the Netherlands all experienced stronger growth in the second half of 2017. Spain’s economy continues to grow above 3 percent. The Spanish unemployment rate has declined from 23 percent in 2015 to 16 percent at the end of 2017. Italy’s unemployment is at a five-year low at 11 percent. France’s unemployment is 8.9 percent. These figures illustrate European growth is only now starting to get into its stride.
In a relatively short period the UK has fallen from being a top performing economy in the G7 to be vying for bottom spot with Italy and Japan, with annual GDP growth in the UK at 1.8 percent in 2017 and forecast to slow further.
Since the Brexit vote, the economy may have fared better than many commentators suggested, but the uncertainty generated is having a dampening effect on businesses and consumers, not helped by a fall in sterling leading to higher inflation and an erosion in real earnings.
There are positives. Exports are up, helped by a fall in sterling and manufacturing appears to be buoyant. The banking system is stable and access to credit remains favourable. Importantly, greater global growth can act to offset cooling in UK domestic demand.
Despite posting growth for the year, construction output has stuttered in recent quarters, with negative growth seen in Q2 and Q4 of 2017. However, slower growth is not the only issue for construction. Skilled labour is a worry. A heavy reliance on EU workers is a cause for concern as the Brexit negotiations progress. There is little slack in the labour market. Unemployment is close to historical lows and construction unemployment is even tighter.
Looking at the wider backdrop to global prospects, business conditions are good. Worldwide corporate profits are generally higher. This includes the corporate sectors of Australia, China, Germany, Japan, the UK and USA.
Most key indicators appear positive. Generally, interest rates remain low and expansionary. While the need for monetary stimulus has receded and thoughts are turning to normalising interest rates, the mood is to proceed cautiously. Meanwhile, wage growth is low, reducing risks of a breakout in wage-push inflation. And inflation generally remains low.
Oil prices are recovering, raising optimism in the oil and gas sector. Brent crude went above USD60 as the Organization of the Petroleum Exporting Countries (OPEC) cut production. Higher global growth is set to redress the oil supply demand balance quicker and prompt new investments in oil and gas.
There seem to be few obvious roadblocks on the horizon to derail higher growth in 2018, except for a potential dent in global trade, caused by the USA reassessing its terms of trade with the rest of the world. It is difficult to gauge the impact. It may prove to be more posturing than actual policy. It may not.
This caveat aside, we believe there is a high probability that growth will continue to surprise.
A more positive business environment should support an evolution in construction that is both underway and inevitable, as the industry seeks to cater for rapidly shifting demands related both to business cycles and structural changes.
The residential apartment construction cycle that provided a big boost to many economies during 2016 and 2017 is shifting focus. Nevertheless, high house prices in many regions is generating a strong wealth effect, stimulating consumption and driving growth.
With job creation and productivity in mind, governments are boosting infrastructure spending. The effect is telling when it appears that now there are too few tunnel-boring machines and teams to cover the tunnelling work coming up.
Meanwhile, the diffusion of disruptive new technologies into every corner of the global economy is continuing to fuel growth of global businesses, such as Airbnb, Amazon, Google and Uber. This is driving construction activity as demand for building grows.
There is strong growth in and potentially stronger in demand for data centres. These rapidly growing corporates urgently require new operational centres. Logistics warehouse and distribution centres are also needed to service booming online sales.
On the flip side, opportunity also lies in refreshing and repurposing “the built legacy”, such as retail refurbishment allowing major bricks-and-mortar players to compete with global online giants through developing alternative retail and leisure experiences.
Longer term, demographic and wealth effects are changing how people behave. Businesses today increasingly deliver experiences, as the emphasis shifts from purely product to personal experiences. This greatly supports the market for global spectacles, which prompts major construction works.
Global events such as the 2018 World Cup in Russia lead not only to the construction of major sporting venues, but also new and upgraded infrastructure such as roads and rail. Meanwhile, Chinese tourists and cashed-up baby boomers nearing retirement are travelling in rapidly rising numbers, driving investment in leisure and hotel developments and airports.
For many years the world has also been demanding a cleaner environment and this has created a major shift in construction practices and investment, not least in the energy sector. This is prompting a global refresh of power generation facilities and ancillary industries based on renewable technologies. Green-power utilities are investing heavily.
Meanwhile, even the money we trade with is changing. Banking is under pressure from global non-bank players, bitcoins and electronic payments. Cash is being phased out in favour of electronic payments, further driving the growth of data centres.
The world is changing quickly and construction is integral to that change. The good news is that both the change and the economic factors that drive it are currently very favourable to the construction sector.
USA - A massive infrastructure plan is taking shape for announcement in 2018, which includes extensions to federal grants, incentives and permitting simplification to encourage local programmes.
There are plans for an additional 1,600km of highway around Buenos Aires. The International Development Bank has approved USD280m in funding for the Agua Negra Tunnel project to connect Chile and Argentina across the Andes. Brazil is upgrading 1,100km of railway as part of its USD40bn 2018 transport budget.
UK - The Infrastructure and Projects Authority (IPA) estimates the next decade will see around £600bn of public and private investment in infrastructure. Major projects in the pipeline include the HS2 high-speed railway and the Cambridge-Oxford expressway.
France - The massive Le Grand Paris project which is underway includes four new metro lines connecting seven strategic and economic centres, encompassing 70,000 new homes, 68 new stations and 200km of rail network at a total cost of USD31bn.
Kenya - The nation’s airport network is being upgraded, adding three more international standard entry points in Isiolo, Lake Turkana and Lamu.
Indonesia - Work is underway on 850km of new roads within in their USD30bn 2018 roads budget, which includes new sections of the Trans Sumatran highway, expected to be completed in 2019.
Australia - Major road and rail projects are underway in Melbourne, Perth and Sydney, with Brisbane soon to follow suit. New driverless trains will eventually carry an extra 100,000 passengers a day in and out of the Sydney central business district (CBD).
India - There are plans to invest USD109bn on roads and highways over the next five years.
This content is part of the International construction market survey 2018
4. International Monetary Fund, World Economic Outlook