Most obviously, developments in China, India and elsewhere impact demand for Australian resource production and thus resource construction. The global economy also affects the Australian economy itself, which in turn has implications for the demand for housing , commercial, retail and industrial space. Furthermore, financing conditions around the world have a flow through impact upon the ability of funding for significant developments. Finally, the world economy affects prices for energy, capital machinery and equipment and construction inputs.
With that in mind, the latest outlook from the World Bank has significant implications.
Though the bank expects the overall world economy to pick up in 2014 and 2015, it expects overall GDP growth of a sluggish 2.3 per cent last year to remain virtually unchanged this year at 2.4 per cent. Even this is subject to downside risks such as a stalling of progress on the Euro area crisis, fiscal issues in the United States and a sharp slowing of investment in China.
Though the Australian economy itself remains sound overall – the Reserve Bank expects growth of 3-4 per cent this year – the weak global economy does not do the country’s construction industry any favours.
Fortunately, there is better news closer to home, with growth in China expected to rise from an estimated 7.9 per cent in 2012 to 8.4 per cent this year. Growth in East Asia as a whole is anticipated to rise from 7.5 per cent last year to 7.9 per cent this year, albeit with notable risks associated with China’s unsustainable levels of investment.
Though this will not reinflate the mining boom nor significantly prolong the resource construction boom, it is encouraging news nonetheless.
In terms of financing availability, the bank noted another mild positive in that European concerns have eased in the past six months on the back of assurances from the European Central Bank it will do everything within its power to preserve the Euro. That, coupled with the commencement of the European Stability Fund and negotiation of a package of measures with Greece, will allow for a €34.4 billion loan instalment in December. Because of this, financial markets have stabilised somewhat – a situation that is conducive to a moderate easing in difficulty of financing for large developments.
That said, new concerns have arisen as a result of current issues with the US debt ceiling. Should policy maker negotiations in this area break down, yet more financial turmoil is possible.
In terms of commodity prices, the news is reasonably good with the Bank expecting oil prices to be capped in the near term amid ‘price induced demand restraint’ and stated intentions of releases of strategic reserves in some rich nations such as the US, UK and France – indeed, the Bank actually expects a 2.9 per cent fall in prices throughout the year – and stable prices for most commodities including metals. Assuming the dollar continues to hold its own, this means any increases in construction input costs should be modest.
In short, the latest update on the world economy is a mixed bag for the Australian construction industry.
China’s continued success is a plus, but world growth of less than two and a half per cent is nothing to get excited about.