Global economic overview

Gary Emmett

Senior Consultant

The global economy has suffered a turbulent year defined by the ripple effect of China’s slowdown and the bursting of the oil price bubble amid a general decline in commodity prices. Monetary policies, politics and currency rates have also impacted on global economic growth in both overstretched and over-reliant markets.


The IMF’s latest forecasts show the global rate of economic growth is expected to increase. Current forecasts are however 0.1-0.2 percent lower than previous forecasts as several emerging issues are set to challenge growth trends.

The once predominantly manufacturing-led Chinese economy is becoming increasingly based on services and domestic consumption. This is causing the slowdown in national economic growth that has been widely considered inevitable for some time. Annual growth rates of up to 15 percent reflect a time when the Chinese economy was a lot smaller than it is today and were far from sustainable over the long term. More modest growth is expected over the coming years.

Chinese exports are down and the flow of raw commodities into China is slowing – both issues to which economies with strong trade links to China will need to respond.  

The dominant trend impacting confidence in worldwide economic growth is the global decline in commodity prices. Falling coal and oil prices have already begun to squeeze key exporting countries and regions such as Brazil, Australia and the Middle East. Falling coal demand is complicated by the trend towards alternative energy resources motivated by increased environmental awareness. While demand for oil has similarly dropped – with China playing a key role – falling prices have been exacerbated by a supply glut as the Organization of the Petroleum Exporting Countries (OPEC) attempts to drive the USA shale industry into unprofitability.  

An effect of the resources downturn on the construction industry has been the fall in the prices of key building materials such as steel, which is lowering construction costs in many markets.

  • 3.1% global growth in 2015
  • 3.4% projected global growth for 2016
  • 3.6% projected global growth for 2017

Monetary policies 

Looking beyond China and the commodities markets, monetary changes have been affecting global growth prospects. The USA is in the process of a gradual move towards a tighter monetary policy following a long period of highly accommodative quantitative easing. This is in contrast to several other major economies such as Japan and the EU, where attempts to stimulate further growth are seeing similar programmes maintained or even expanded.  

Together, these governmental monetary policy developments have been tightening external monetary conditions, affecting inter-country financial flows and driving down the currencies of many emerging economies.  

Modest growth  

Against this background of reduced growth in China and falling commodity prices, the importance of the USA and European markets as drivers of the global economy has increased. More modest growth forecasts are therefore to be expected, with USA growth still at only two percent and many parts of Europe still struggling with the aftereffects of the global financial crisis.  

This overall situation has stabilised the cost of manufactured goods. There have been only slight falls in China and Europe, and inflation in the cost of manufactured goods in the USA remains very low. The cost of imported machinery, plant and equipment will therefore remain benign for importers, except where prices are affected by currency depreciation in the importing country.  

Another positive upshot of this modest growth is that, given relatively high levels of excess production capacity, few economies are suffering a substantial inflation problem. For most of the world’s advanced economies, inflation is well below the levels at which central banks will consider interest rate adjustments.  

The ripple effect of China

Following a steady reduction in growth to 6.9 percent in 2015, the slowdown of the Chinese economy is having a significant ripple effect on its trading partners. This is particularly the case for resources economies such as Australia, Brazil, Canada, Chile and Russia, where lower commodity exports are slowing their economies, reducing investment levels and shrinking resources employment. These markets have been identified by the survey as having volatile construction costs.

For closely coupled Asian partners such as Hong Kong, Malaysia and Singapore, reduced trade levels with China are also having a knock-on effect on their construction industries. In our survey, Hong Kong and Kuala Lumpur saw their percentage increase of construction costs in the last 12 months fall by one percent, while Singapore stayed the same at 0 percent, compared with last year’s survey.

  • 6.9% China growth in 2015
  • 6.3% projected China growth for 2016
  • 6.0% projected China growth for 2017

Political upheaval  

There are a number of political factors contributing to financial uncertainty in 2016. These include what is shaping up to be one of the most fractious presidential election seasons in recent history in the USA. Meanwhile, Britain is also experiencing its own political uncertainty on whether it will remain part of the European Union. This decision will have considerable implications for the future of Britain, Europe and the wider global economy.

The impact of currency  

Foreign exchange markets have been extremely volatile across 2015, with commodity markets the main drivers of rate fluctuations.  

The falling demand and prices of commodities has unsurprisingly seen the currencies of heavily resources-focused markets such as Australia, Brazil and Russia, as well as the African economies, depreciate most sharply.  

Major developing economies such as India and China have fallen only slightly against the US dollar, while developed economies such as Singapore, South Korea and Western Europe maintained the strength of their currencies due to several shared economic growth drivers. The currencies of Hong Kong and the Middle Eastern countries are pegged against the US dollar so experienced no volatility.  

The strength of the US dollar itself continues, with the US Dollar Index relatively stable across 2015 following substantial growth in late 2014.

  • 7% AUD fell against the USD from 2015
  • 29% BRL fell against the USD from 2015
  • 19% RUB fell against the USD from 2015

The volatility of an over-reliant market

Over-reliant construction markets generally form part of economies that are heavily reliant on mineral and oil resources, including Perth, Santiago and São Paulo and parts of the Middle East. Recent falls in commodity prices have impacted these economies, lowering their exchange rates, reducing employment, and creating a downturn in their construction markets. However, there are exceptions to the rule. Certain markets, for example Moscow, are classed as over-reliant but are still seeing major cost inflation. This is happening because there are underlying imbalances in the market, with the supply chain not right-sized to meet demand. There are also macro-economic factors such as sanctions, import prices and currency devaluation that are driving strong cost inflation. Due to the volatile nature of these markets, this may change very quickly.