According to the Rider Levett Bucknall (RLB) 2nd Quarter 2019 International Report, the strong growth the global construction sector has seen over the past 10 years may be hindered by several global uncertainties.
RLB Global Chairman Stephen Mee commented, ‘Key directors of our firm across the globe have identified some key challenges. These include the slowing of the global economy, more conservative central bank decisions resulting in tighter credit conditions, ongoing trade tensions between the US and China and uncertainty in the terms of the United Kingdom’s ‘’Brexit’’ have all been identified as contributing factors. Despite these threats, the perception across the global construction market remains positive’.
RLB’s current construction market activity cycle highlights this sentiment. This edition has seen a further movement of sectors from the trough zone to the mid and peak zones of the activity cycle. One third of sectors are now in the peak zone, with 48% in the mid zone.
Construction escalation running at two speeds
The positive movements within the global market activity cycle are reflected in construction escalation forecasts which appear to be running at two speeds in 2019 and 2020. Globally, 42% of offices are forecasting escalation to be higher in 2019 than 2018, with 45% forecasting lower levels.
The IMF’s current forecast for global inflation is 3.6% for 2019 and 3.5% in 2020. Twenty-nine cities within the group are forecasting annual uplifts in construction costs higher than the global inflation forecast, while 28 cities forecast lower rates of construction cost growth.
North Asia escalation slowing
Across North Asia, significant movements are being seen in the region around Hong Kong where construction cost deflation of between 2% and 3% is forecast for 2019. Most cities in the region are forecasting a slowing in escalation across 2019, with the exception of Hong Kong and Macau. This mirrors the anticipated fall in GDP growth across the region in 2019 and 2020.
Southeast Asian cities have been recording low levels of cost growth over the past few years, and Ho Chi Minh City and Jakarta are forecasting the highest rate of TPI growth, with 3% for 2019.
Infrastructure work underway in Melbourne and Sydney
Both Melbourne and Sydney have revised their escalation forecasts for 2019, up by 0.5% respectively. Since Q4 2018, most other cities have lowered their 2019 escalation forecasts by similar margins. As future building work is anticipated to fall during 2019, both Melbourne and Sydney are seeing significant infrastructure work underway, which is maintaining the pressure on costs.
New Zealand’s escalation highs experienced during 2017 are retreating to levels not seen since before the earthquake rebuilding surge. Expectations are that escalation rates are stabilising across the country and are forecast to fall in each city during 2019.
Economy plateauing in the US
The United States is seeing a softening in escalation in 2019 and beyond, seemingly due to the plateauing of the economy. The fall in escalation predicted in our last report from 2018 levels has not been as steep and the current forecasts for 2019 are higher than previously reported. Many experts are anticipating a construction slowdown in the second half of 2019 due to the fading impact of the tax cut stimulus and an overall tightening in monetary policy.
Canadian construction cost growth appears to have peaked in 2018 and is predicted to fall from those levels between 2019 and 2022.
Uncertainty clouds the UK
Stephen continued ‘Uncertainty still clouds the UK, especially London, which appears to be impacted the most by the Brexit uncertainty. The 2019 escalation forecast for London remains at only 1.0%, significantly lower than other centres across the UK.
And finally, mainland Europe and Ireland regions are trending towards a more even level of escalation in 2019 and 2020 rather than the two speeds that have been historically reported.’
Commenting on China, Stephen added ‘The Chinese government has started to show more tolerance to its credit growth and to inject money into the economy. Such stimulus is expected to lead to steady growth in the near future, benefitting the construction industry within China and its territories.’
The construction industry in Singapore, Vietnam, Malaysia, Indonesia and other Asian countries has been mixed over the past number of years, with most regions on the rise and more sectors in the growth phase of the market activity cycle.
Australia’s future construction funded by government spending
Australia is seeing the effects of the government’s emphasis on rail, road, airport and other major infrastructure related projects that commenced during 2018 or are scheduled for commencement in 2019 such as the Sydney Metro. Much of Australia’s future construction growth will be funded by increased government spending on public facilities and infrastructure projects. The slowdown in the commencement of multilevel residential developments is a concern for the industry across the country.
Middle East strengthening as South Africa growth slowing
Stephen said, ‘Middle Eastern countries are pinning their hopes on oil prices remaining in the USD 55 to 65 a barrel range, and if that’s the case, 2019 should see strong growth in construction activity. The Middle East’s construction sector has shown a strengthening during 2018 and is forecast to continue this trend into 2019.’
Both South Africa and Nigeria, Africa’s two largest economies, are forecast to experience slow or limited growth in 2019, with perhaps Nigeria performing better than South Africa. A shortage of skilled workers both in construction and manufacturing will continue to stymie South Africa’s economic growth for 2019.
Download PDF: RLB Global Construction Market Intelligence Report Q2 2019
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