Even as the global economy starts to slow, the construction sector remains strong. Our survey suggests there is enough activity to help cushion the worst impacts of any global economic downturn.
There are reasons to be positive. This year’s survey shows the global construction sector is in a strong period, with 18 markets from nine countries describing the construction market as hot or overheating compared with just eight markets from six countries in 2018. None of the hot or overheating countries are forecast to cool in 2019. Five are expected to keep warming up.
By 2020 there could be 24 markets described as hot or overheating compared with 18 today. This is based on the high number of locations where the survey indicates the market is getting warmer.
This significant optimism in the global construction sector gives us great confidence that the coming slow down in the global economy is unlikely to lead to a global recession in the next 18 months. This is in line with the IMF who are predicting a slow down rather than a full blown recession.
Looking deeper, 23 locations describe their construction markets as warming up. Yet only five markets are expected to get cooler. The warming regions are evenly spread across the globe, in Africa, South America and the Middle East, where last year’s survey found a disproportionate number of markets described as cold or lukewarm.
There are 35 locations (out of 64) from 18 countries where the market is described as warm, hot or overheating and of these only one market is forecast to cool a little on 2019. This is Kuala Lumpur, a country highly dependent on oil exports and trade with China, both of which are currently under pressure. Of the remaining 34 markets, 21 are forecast to stay the same and 13 are expected to warm up in 2019.
Only five of all 64 regions are expected to cool in 2019, Kuala Lumpur, Harare, Seoul, Stockholm and Istanbul. The number of countries described as lukewarm is set to fall dramatically from 21 to 14, with most moving into the warm category.
Eight markets globally are described as cold. These are Johannesburg, Perth, Moscow, Istanbul, Northern Ireland, Muscat, Riyadh and Doha. Other than Northern Ireland and Istanbul, these are markets with a high natural resources exposure.
Perth, Muscat and Riyadh see a brighter future with their markets set to warm up in as the early stages of a recovery in the minerals and oil and gas sectors encourage growth and construction.
Elsewhere, as in the case of Istanbul and Moscow, global geopolitics are perhaps the main driving force behind the lack of incentive to invest, which is keeping the market cold.
Turning to the UK, current construction markets can best be described as “unexciting”. Perhaps the markets have already factored in Brexit. Northern Ireland remains cold. Scotland, UK South and London are lukewarm. UK Central and UK North are warm. Of the six UK regions in the survey, five are expected to stay the same and one (UK Central) to warm up.
The rate of construction cost inflation in London is less than half of that recorded before the UK voted to leave the European Union - down from 5.1 percent before the referendum in 2016, to 2.1 percent recorded in 2018.
High cost escalation in London had become an accepted norm as a result of continued investment in new construction projects. This escalation, albeit at a lower rate than previous years, is partly underpinned by rising labour costs fuelled by a shortage of workers. The average hourly construction wage in London has now hit £35 (USD46.1), 41.4 percent higher than the global average.
With two-thirds (65.6 percent) of the global markets we surveyed currently reporting a trade labour shortage, concerns over the availability of labour and restrictions of movement after the UK exits the EU are exacerbating the strain.
We asked our experts to describe their local construction market as cold, lukewarm, warm, hot or overheating. Comparing market heat provides useful insight relating to the strength of competition in the construction supply chain and likely cost pressures.
As a rule, we would expect hot or overheating markets to have higher price inflation. As the demand for construction services or materials increases against a relatively fixed supply, prices increase.
When a market is cold, the whole supply chain must compete more vigorously to win work or a supply contract and this encourages lower prices. We should see the evidence all along the supply chain with rising labour rates, rising materials costs and rising costs of construction in hot markets.
There are exceptions to the rule. For example, even in cold markets higher prices of materials, perhaps caused by rising international commodity prices, can push up construction costs.
Similarly, where a country is dependent on a high proportion of imported materials any fall in the exchange rate would also lead to inflation in overall construction costs.
Three regions experienced exceptionally large construction cost increases in 2018. These were:
There were several hot or overheating markets where construction costs were increasing as might be expected in a construction boom. These were:
You can explore market conditions in more detail in the heatmap in our app.
This year we have prepared a weighted average construction cost inflation, weighting each country by its GDP. This removes the impact of very high inflation in smaller countries or regions skewing the overall average excessively.
On this basis, using this improved method, average global construction cost inflation was 4.9 percent in 2017, easing in 2018 to 4.2 percent.
Using the same weighted average technique, we now expect cost escalation in 2019 to nudge down to 4.1 percent in 2019.
Despite global construction growing by 5.0 percent during 2018, construction costs increased at a slower rate than in 2017. The principal reason for this comes from China and the USA. Both the USA and China experienced slower construction cost increases.
Nevertheless, there are 20 markets where construction costs are increasing and are likely to be higher in 2019. In most cases the difference is quite minor. A matter of an additional 0.5 percent or 1.0 percent. In some cases, however, construction costs look set to jump a little more.
You can explore construction cost inflation in more detail in the heatmap in our app.