The latest International Monetary Fund assessment of the world economy was nothing if not blunt.
According to the IMF’s assessment, advanced economies would ‘limp along’; no recovery of any substance in the Euro area was in sight, with its peripheral economies expecting a sharp contraction; the US economy would remain sluggish amid tight fiscal conditions, tight financial conditions and weak household balance sheets; Japan’s prospects will dim as earthquake reconstruction work dies down; and global economic growth forecasts have been marked down to 3.3 per cent this year and 3.6 per cent next year.
For Australia, the news was not particularly great either, with the county’s growth rate expected to slow from 3.3 per cent this year to three per cent next year.
That said, it was not all doom and gloom. With high employment growth, solid consumption and macroeconomic policy easing, fundamentals in emerging economies remain sound and point to the continuation of good growth, the IMF says.
Importantly for Australia, economies in developing Asia – especially China – are expected to actually accelerate again, albeit marginally, on the back of accelerated approval for public infrastructure projects.
So what does all this mean for the Australian construction industry?
For starters, the Australian economy itself is a significant driver of stand-alone residential construction activity and also a large factor in demand for office, industrial and retail space. While expected growth of around three per cent next year can hardly be seen as a disaster, it does not exactly imply the kind of conditions that would underpin a home building recovery to the extent necessary to offset weak non-residential building activity and, further down the track, a pull-back in resource construction once the current backlog of projects is worked through.
As for the rest of the world, the bank’s reasonably upbeat commentary on China, where growth is expected to increase from 7.8 per cent this year to 8.2 per cent in 2013 on the back of government policy easing and strong investment, means that demand for Australia’s commodities will probably hold up at least for the immediate future. That may not mean any rush for new mines and related infrastructure construction projects, but it does mean that demand for the country’s resources is not completely tanking.
Nevertheless, financing for large-scale commercial and multi-residential projects is likely to remain tight amid continued uncertainty in Europe and the resultant impact on the global financial system – a situation which does not bode well at all for a non-residential construction sector already being impacted by a pull-back in public sector work.
Then there are commodity prices which, despite remaining high by standards of the past two decades, have dropped back by almost one-fifth (18.5 per cent according to the Reserve Bank of Australia) over the past year. These are naturally volatile and forecasting their direction is extremely difficult. Assuming that the weak global outlook and heightened instability continue to place downward pressure on commodity prices overall, however, the resultant easing of pressure on input costs such as raw materials and energy would continue to provide a short-term benefit to Australian builders through reduced pressure on costs.
Longer term, however, the pressures which these low prices, combined with the high Australian dollar and low demand, are placing on manufacturers who supply the construction industry raises the unwelcome prospect of a hollowing out in the domestic supply chain – a fear reinforced by the recent moves of steel makers to reduce capacity and the failing of Gunns in the forestry and timber industry.
To sum it all up, while the latest update from the IMF was a mixed bag, the overall message was probably negative from the viewpoint of Australian construction.