There are clear signs of a retreat in stock markets, of lower house-price inflation, and falls in many developed economies, where cheap credit, tax cuts and speculation have inflated the price of assets.
As a potential economic slowdown is expected, there are increased uncertainties in the political sphere, which have potentially powerful economic impacts. Brexit and the implications not just for the UK but Europe, trade wars, USA government shutdown and political tensions, climate change fears rising with the perception that natural disasters are increasing, mass migrations of disenfranchised people and a rise of populist leaders, to name a few.
During 2017, global GDP reached USD80trn according to the World Bank. Of this, the group of 20 largest economies (G20) accounted for 77 percent. This same group saw five percent growth in construction during 2018, equivalent to USD315bn taking their combined expenditure on construction to USD6.2trn.
By far the largest contributor to the GDP of the G20 came from the USA, contributing 31 percent of the G20's combined GDP and 41 percent of the construction, according to World Bank data. The country also contributed 24 percent of global GDP or USD19.4trn. The next largest economy is China with USD12.2trn or 15 percent of global GDP.
The International Monetary Fund (IMF) has warned that downside risks are increasing, saying a disorganised Brexit and a faster than expected slowdown in China were potential triggers for a global slowdown.
Moving into 2019, the strength of the USA, China and European economies in particular are of concern.
Growth in the USA peaked at 4.2 percent (annualised) in the second quarter, slowing in the third and fourth quarter. By the final quarter of 2019, an expectation of higher interest rates and weaker earnings, especially in the tech sectors, caused a 16 percent sell-off in shares on the Dow Jones exchange, which affected stock markets worldwide.
The USA has now experienced more than 37 quarters of GDP growth since the global financial crisis (GFC). This number is approaching the previous upswing duration from 1989-2001 which lasted 42 quarters before falling.
US house prices last year surpassed the previous record high on the Case Shiller 20-City index of 207 set in late 2006. Consumer spending is the most important component of the USA's GDP. High house prices not only provide consumer confidence, but also increase the ability to borrow and make major purchases.
At the end of 2018 there were several sources of concern for the US economy. The Fed raised interest rates in 2018, which caused a ripple effect through the markets.
The imposition of tariffs, the government shutdown and a slump in stock markets raised fears among business and consumers. Faced with worsening confidence the Fed has resisted further monetary tightening in 2019, which is causing the indicators to improve.
Despite this, our survey shows the construction sector is especially strong in the USA, with overheating and record high levels of construction costs in the tech cities of the West coast.
120 economies accounting for three quarters of world GDP enjoyed a rise in year-on-year growth rates in 2017
Turning to China, its slower growth of 6.5 percent reflected escalating trade tensions with the USA caused by the imposition of tariffs on steel and aluminium and further threats of USD200bn of tariffs on manufactured exports. This prompted exports to fall by 4.4 percent year on year. The economy is on a long-term transition from the investment-led growth of the past to growth being led by services and domestic consumption.
Nevertheless, these sectors suffered a setback in late 2018 and early 2019. Sales of cars and smartphones were down, and revenues in the real estate and retail sectors fell as tighter borrowing conditions affected consumer demand.
Finally, there is concern regarding China’s massive debt overhang from the construction of infrastructure and state-owned enterprises. The overall size of the debt and China’s ability to generate enough income to repay it bears down on business confidence, leading to lower Chinese demand for imports, of which further impacts on the global economy.
Growth in Europe also appears to be slowing. During 2017 and early 2018 growth rates in Germany, UK, Spain, Italy, Greece and France increased to levels that suggested Europe was finally on its way to a sustainable recovery following the GFC. However, in the second half of 2018 rates began to fall across all regions.
The German economy is particularly concerning. It shrank by 0.2 percent in the final quarter of 2018, recording only 1.1 percent growth for the year. Weaker demand for cars, capital goods and industrial machinery from China is hitting German exports.
New emissions standards and testing has also slowed the German car industry. With so much of European industry connected to supplying the German export machine, a slowdown may have far-reaching effects.
The disruption caused by Brexit is another major concern. With Brexit’s final details still stuck in political turmoil, there are fears over the scale of any potential disruption to cross-border supply chains and how this might inhibit consumers and businesses getting the goods they need. Even when Brexit is resolved, both the UK and Europe are likely to see a further slowdown in growth in the short term.
Around the world, 2018 proved a significant year for tangible signs of climate change. It was the fourth hottest year on record, with temperatures a full 1oC above temperatures in the late 19th century.
In October, the Intergovernmental Panel on Climate Change (IPCC) indicated that the time window was closing to carry out necessary actions to prevent the temperature of the planet increasing by more than 1.5oC. The IPCC report said: “Limiting global warming by 1.5oC will require far-reaching transitions in land, energy, industry, buildings transport and cities.”
In 2018, volatile commodity price movements affected construction costs and investment confidence. A glut of oil has been caused by overproduction in OPEC and the emergence of the USA shale oil sector as a global supplier. With oil prices lower, in the region of USD60/barrel, a reduction in fuel prices and delivery costs for materials is positive for construction activity.
The prices of copper, nickel and steel, which are all used in building materials, eased down a little in the second half of 2018. Copper prices affect the cost of electrical cabling. Nickel affects stainless steel prices.
However, trade tariffs on steel are imposing additional costs on USA contractors that use a high proportion of steel.
For now global construction remains a solid performer. Our 2019 survey indicates there is considerable momentum in the global construction sector, helping to mitigate the effects of weaker, late cycle economic growth.
With construction projects generally spanning multiple years, once started, construction projects are likely to keep going. There are many instances where large projects, such as the natural resources sector, transcend economic cycles, often continuing during a downturn and delivering into a recovering market.
The global construction sector is still warming up, with 28 percent of markets potentially hot or overheating by the end of 2019
Strong growth in construction will help support economic growth, reducing the potential of a major downturn. This would cushion some of the negative impacts on the sector and help maintain favourable conditions for business.