The year 2019 was a roller-coaster, when hopes overcame disappointments and fears. During the early months, many analysts, economists and investors believed the U.S. and global economies would be in recession by the fourth quarter. At year-end, economic projections and overall sentiment turned to a more optimistic track. The anticipation of global stabilization and economic recovery was fuelled by the softer monetary policies introduced by many central banks, including the Federal Reserve, and positive developments in the U.S.-China trade conflict.
In December 2019, GlobalData published the Q4, 2019 update of its Global Construction Outlook to 2023, where it’s analysts projected global construction growth for 2019 will go down to 2.6 per cent, the slowest pace in 10 years. The significant decrease in growth anticipation, to a large extent, resulted from a slowdown in developed economies: the U.S., U.K. and Australia.
At the same time, higher growth of construction activities in the Asia-Pacific region, MENA and Sub-Saharan Africa contributed to the improvement of the forecast in the long-term. GlobalData projects a recovery in global construction growth to 3.1 per cent in 2020 and further increase and stabilization of the growth rate to around 3.4 per cent during 2021-2023.
The expected recovery of construction output in the Asia-Pacific region starting from 2020 depends on an increase in infrastructure investment by the Chinese government, as China is the largest player in the region. To counter the deceleration of the country’s GDP growth, which in 2019 decreased to six per cent, the Chinese authorities are fast-tracking their infrastructure spending.
Chinese government investments in infrastructure projects are likely to be even more sizable this year due to the negative effects the country’s economy will suffer as a result of the coronavirus. Recent measures to contain the virus, announced by the Chinese and other governments, include the temporary shutdowns of production facilities and offices, halts placed on air traffic, large scale quarantines, etc.
The negative effect of the coronavirus on the Chinese economy is likely to be limited in time. According to Christopher Dembik, Head of Macro Research at Saxo Bank: “The economy will recover very fast in Q2 fueled by high inflow of liquidity from the People’s Bank of China, via open market operations, and further fiscal stimulus (both tax cuts and public spending) that could be announced by the end of February. Due to the importance of real estate investment and consumption in terms of contribution to GDP, we believe the fiscal stimulus will predominantly target the real estate sector and demand.”
Infrastructure investment growth will continue this year in South-East Asia countries, with significant support from private funding. The projected annual construction growth of 6.4 per cent for 2019-2023 makes the region a global leader in infrastructure development.
Construction activity in MENA (the Middle East and North Africa) in the long-term will correlate with oil price dynamics. Recently, OPEC, plus partner countries, began using production cuts to regulate market oil prices. If continued, this approach should support stable and relatively high market prices for the commodity. Also, funding from the recent Saudi Aramco IPO will likely result in increased construction investment in the region. At the same time, investments in infrastructure projects in Qatar have levelled.
Sub-Saharan Africa is another region with high investment in infrastructure. GlobalData expects annual construction growth in the region to remain around six per cent for the next four years. Nigeria and Ethiopia are two countries that have particularly noticeable positive developments. Nigeria, as one of the leading global oil producers, is trying to improve its economy through massive government investment in infrastructure. At the same time, Ethiopia continues to enjoy robust economic growth from services and the agricultural sector, which spills over into rapid development of the country’s infrastructure.
As with any forecast, GlobalData’s long-term outlook could change as a result of ‘black swans’ — i.e., unexpected negative events of high magnitude, as well as major changes in long-term trends.
One of the obvious risks to global construction growth today is the coronavirus. The spread of the virus might significantly, though temporarily, decrease economic activity in China as well as limit global manufacturing, trade and travel. A consequence of all this would be damage to oil demand, resulting in pressure on the commodity’s price and a potential slowdown of infrastructure development in the Middle East, Russia and other areas with energy-dependent economies. A worldwide economic slowdown could also trigger a debt service problem in ‘emerging’ countries due to the disruption of global demand from Chinese consumers. The countries in South-East Asia with major trade links to China look particularly vulnerable.
At the same time, geopolitical risks such as an escalation of tensions between the U.S. and Iran, as well as negative developments in the next phase of the U.S.-China trade conflict, also represent potential threats to the global economy and construction output growth.
Dmytro Konovalov has over 10 years of experience in equity research and analysis for global markets at leading international financial institutions.