Global construction volume is on the up and the future is looking bright. But the industry faces more work with fewer workers. The challenge for the supply chain is how to convert this increased output into profit.
There is an expectation of increasing construction activity around the globe with a few exceptions, notably a reduction in the UK. Our survey shows that of the 46 markets examined 21 expect to warm up, 23 are set for stability with only two looking likely to cool.
‘Good news’ is a repeated undertone in this year’s survey. Underpinning this optimism is an accelerating global economy. In the ten years after the global financial crisis, growth among the major advanced economies has averaged half the pace of the previous ten years. This prompted an extended period of exceptionally low interest rates and sparked concern over stagnation and years of slow growth. But now the giant boiler rooms of the USA and European Union are once again fired-up and brightening global prospects.
There has been a significant demographic shift. The United Nations (UN) estimates that in the last three decades, one billion people have been lifted out of extreme poverty. (1)
Construction has been a major lever to unlock these higher living standards. It shapes the world in which we live, work and relax, increasingly so as nations urbanise. The UN also estimates that a third of the world’s population was urbanised in 1960, compared to just over a half currently and by 2050, two-thirds will live in urban areas. (2)
This progress, combined with technological advances and a more global outlook, means longer life spans and an expanding global middle class, which according to a forecast by Brookings Institute, will expand by 160 million people annually for some years. (3) This means an ageing population, growing aspirations and more income to achieve them.
The International Monetary Fund (IMF) forecasts global GDP to increase by 3.9 percent in 2018. The construction sector has a strong correlation with economic growth. When GDP rises above a moderate rate, construction’s share of the economy expands in greater proportion. While this is exciting news for the construction industry, it’s a potential game changer that could go either way. There may be big upsides for some players, but improved returns will be hard won.
With construction’s three sectors, natural resources, infrastructure and real estate all in global growth mode, there are clear warnings for us all if we plan on a traditional approach, relying on risk transfer pricing alone. The recent downfall of high profile contractors in busy markets as diverse as the UK and New Zealand shows that irrespective the market size or level of construction demand, things need to change.
A key measure is availability of skills and labour. This year’s survey shows skills shortages are prevalent across disparate markets. Just three of the 46 markets surveyed recorded a surplus. Skills shortages appeared in markets as different as Zurich, where labour costs USD104 an hour and Bangalore, with USD1.1 hourly.
A consequence of prosperity, global connectivity and growing aspirations, is a shrinking pool of cheaper migrant labour, on which historically construction has been reliant. So, with a surge of workload ahead, the global industry faces more work with fewer workers. Inevitably, this will increase upwards pressure on costs.
The average expected construction inflation across the markets covered is 4.3 percent, up on the 4.1 percent seen last year. Set against local consumer inflation rates, most markets will see modest rises.
While this might not seem an excessive increase, it is an average and at the beginning of increasing global demand. There will be price spikes in some markets, but not only in those ahead of the curve.
The less obvious but more profound conclusion from this year’s survey is that, regardless of the cyclical ups and downs, productivity will become an even bigger global issue for the construction industry. Despite the technical advances of the last generation, productivity in construction has barely improved.
We all have a responsibility to drive change. The industry needs to collaborate and establish new delivery models that set requirements and design to a commercial baseline that reflects the capabilities and realities of individual markets. To establish an acceptable level of certainty in project outcome, reward needs to be based on performance, not just on allocation and management of risk. Without this, the industry has every excuse not to change.
This content is part of the International construction market survey 2018
3. Global Economy and Development at Brookings, The Unprecedented Expansion of the Global Middle Class: An Update
www.brookings.edu/wp-content/uploads/2017/02/global_20170228_global-middle-class.pdf (accessed 30.04.2018)