Global construction prospects 2023

This review is for the period covering 2022-2026, analyzing anticipated construction growth during this time.

The global construction market is expected to increase by 11.8 per cent in 2022, reaching USD 15.20 trillion from USD 13.60 trillion in 2021. The market is expected to reach USD 22.87 trillion in 2026 at a compound annual growth rate (CAGR) of 10.8 per cent, according to Business Wire.

The RICS Global Construction Monitor outlines that activity across most markets continued to fall during Q3 2022 as concerns of a global recession widened. It is reported that the elevated cost of building materials proved to be the most pertinent issue restricting market activity.

However, the same report indicates that from a global perspective, construction employment levels are still rising and outlines that some regions, most notably the Middle East and Africa, are witnessing a rebound in activity during 2022 that has the potential for these regions to mitigate some of the effects of a global recession.

As reported by Oxford Economics, the global rebound in construction activity is set to continue over the coming years, supported by a wave of publicly funded infrastructure projects.

North America

GDP from construction is expected to reach USD 713 billion across North America with the US accounting for USD 602 billion. For the US market, this equates to circa 2.62 per cent of all GDP generated from within the US economy. The remaining output value of USD 112 billion relates to the Canadian market, which accounts for 5.63 per cent of total Canadian GDP.

Emerging from coronavirus restrictions, the construction markets of the US and Canada have been hampered by rising commodity prices and interest costs, in addition to supply constraints during 2022. Consequently, there has been a rise in uncertainty and a decline in investor confidence across both regions amid widening fears of a global recession in 2023.

A recent publication by GlobalData reports that the US construction market was valued at USD 2 trillion in 2021 and is projected to achieve an AAGR of more than 3 per cent during 2023-2026.

Moving forward, the industry expects to see ongoing investment in infrastructure and energy markets as government-backed programs in the form of the Infrastructure Investment and Jobs Act (IIJA) gain momentum. Equally, it is expected that increased spending towards ‘Net Zero’ targets will create opportunity and growth during 2023 and beyond. During 2022, the US government put in place a USD 1.5 trillion support package for improvements across the infrastructure network.

During 2022 the main areas of activity for the construction market were within the residential, transportation and oil/gas sectors, with an emphasis on green infrastructure projects and also the retrofitting of existing residential stock across the country. The Canadian government introduced the Growth Plan which is a USD 7.5 billion plan for the period 2020-2023 aimed towards the creation of green infrastructure and energy projects to generate economic growth. As a result, the Canadian construction industry is expected to grow by 4 per cent during 2022 and by an average of 2.2 per cent during 2023-2026, according to Business Wire.

Latin and South America

GDP from construction is expected to reach USD 65.5 billion across Latin and South America with Mexico accounting for USD 55.7 billion. This equates to circa 4.31 per cent of all GDP generated from within the Mexican economy. Chile accounts for USD 3.4 billion of the overall construction market (1.07 per cent of GDP). Peru accounts for a further USD 2.5 billion (1.12 per cent of GDP) with Colombia contributing USD 2.3 billion (0.73 per cent of GDP). The construction markets of Brazil and Argentina make up the remaining output.

Economic growth across Latin and South America is expected to decline during 2022 and remain low for several years. Similar to other global regions the local economies of Latin and South America have been dampened by high inflation and increasing interest rates. It is projected that growth will decline to 2.5 per cent in 2022 with further reductions expected in 2023 to a level of 1.9 per cent, according to World Bank, Global Economic Prospects (2022).

The direct economic impact of the ongoing conflict in Ukraine has been limited within the region, however the contagion of global inflation and increasing interest rates has caused a ripple effect on the local economies.

It is noted that weaker global demand will have an adverse effect on the region through reduced export potential. With local economies being highly dependent on fertilizers to aide agricultural production, and with the region being reliant on imports from both Ukraine and Russia, there are concerns that increasing prices or lower supply will have an impact on the agricultural sector across the region.

Against an economic back drop of lower growth projections and higher interest rates across the region, there is also a growing level of concern that economies with significant levels of public debt may struggle to contain costs and meet ongoing obligations.

Inflation within the region has risen sharply in recent times due to several global factors and given that long-term inflation issues have hampered growth in the past, inflation is seen as a significant ongoing risk within the region. This remains a challenge that will need to be monitored and managed carefully to navigate a passage towards sustainable and balanced growth.

Economies within the Latin and South America region are expected to recover from 2024, with growth of 2.4 per cent projected by the World Bank.

Europe

GDP from construction is expected to reach USD 201.9 billion across Europe with Germany accounting for USD 53.7 billion. This equates to circa 1.27 per cent of all GDP generated from within the German economy. Following Germany, the UK accounts for USD 38 billion of the overall construction market (1.19 per cent of GDP). France accounts for a further USD 28.6 billion (0.97 per cent of GDP) with Italy contributing USD 22.5 billion (1.07 per cent of GDP). The construction markets of Russia, Spain, Netherlands and Turkey make up the remaining output.

The economic growth rate within Europe is expected to decline by 3 per cent during 2022, according to World Bank, Global Economic Prospects (2022). Mirroring economic performance in other jurisdictions the economies of European countries have been impacted by events in Ukraine, turbulence within financial markets and post coronavirus recovery issues surrounding rising inflation and supply constraints.

Most notably Europe and its economies have been heavily impacted by the ongoing conflict in Ukraine. From travel restrictions, disruptions to food supply and rising inflation, all of which have resulted in a decline of economic activity and growth during 2022. As a result, construction industries across

Europe have seen projects being put on hold due to supply issues, inflation on commodities and shortages of labour, resulting in a weak market and low investor confidence. The ongoing conflict in Ukraine poses a significant risk to the general economic outlook across Europe for 2023 and further escalation could result in a widening recession across the region.

According to a recent RICS Global Construction Monitor publication, it is noted that all market segments across Europe have witnessed a degree of contraction during 2022, mostly as a result of higher energy prices, coupled with weakening market confidence. Upon closer review of the European market, Germany appears to have been impacted the most, followed by France, Italy, Spain and the Netherlands. On a positive note, there were indications that the markets of Romania, Switzerland, the UK and also Ireland are looking more positive in terms of infrastructure projects.

Building on the allocation from the EU’s 2021-2023 long-term budget to the Next Generation EU (NGEU) in the form of loans and grants, most markets across Europe are focusing future growth on greener infrastructure projects, digital transformation, EV recharging networks and investments in renovation of older buildings to become more energy efficient.

Economies within the region are projected to grow by 1.5 per cent in 2023, dependent on the ongoing conflict in Ukraine, as projected by the World Bank.

Africa

GDP from construction is expected to reach USD 11.3 billion across Africa with South Africa accounting for USD 6.1 billion. This equates to circa 1.45 per cent of all GDP generated from within the South African economy. Following South Africa, Tanzania accounts for USD 2.3 billion of the overall construction market (3.38 per cent of GDP). Nigeria accounts for a further USD 1.3 billion (0.29 per cent of GDP), with Kenya contributing USD 1.2 billion (1.09 per cent of GDP). The construction markets of Zambia and Ghana make up the remaining output.

In recent years, Africa’s economies have generally remained resilient. Sound macroeconomic policies have enabled the continent to remain close to expected growth projections, however, it is projected that growth will decline to 3.7 per cent in 2022, according to World Bank, Global Economic Prospects (2022).

Africa’s overall economic performance remains one of the fastest growing continents. Ethiopia, Ghana and Côte d’Ivoire are three of the fastest growing economies globally in terms of increased GDP. Africa’s growth is further helped by several East African countries contributing collectively through increased exports and cross-border trade to grow the region’s economy.

There is an ever-growing need to finance infrastructure on the continent. Several countries are now prioritising this, recognizing the importance of industrialisation to not only maintain growth in their economies, but to also diversify through the exportation of goods and services. This has consequently created jobs that are needed for an increasing younger population. A developing industrial sector on the continent will require more infrastructure investment, particularly in power, water and transportation services that are already over stretched.

Economies within the region are projected to grow by an average of 3.9 per cent across 2023-2024, as predicted by the World Bank.

Asia

GDP from construction is expected to reach USD 111.3 trillion across Asia with China accounting for USD 823 billion. This equates to circa 4.64 per cent of all GDP generated from within the Chinese economy. Following China, Japan accounts for USD 215 billion of the overall construction market (4.35 per cent of GDP) and India accounts for a further USD 32 billion (1.01 per cent of GDP). Indonesia accounts for USD 18 billion (1.52 per cent of GDP), with South Korea contributing USD 16 billion (0.89 per cent of GDP). The construction markets of Malaysia, Kazakhstan and Cambodia make up the remaining output.

Like most regions across the globe, economic activity across Asia is expected to fall back during 2022, for similar reasons witnessed across other regions. Like Latin America, the Asian region has experienced a limited direct impact from the conflict in Ukraine due to the low levels of trade between the regions. However, the impact of rising food, energy and financing costs, together with the worsening fears of a global recession, has been seen across the continent. It is projected that growth will decline to 6.8 per cent in 2022, according to World Bank, Global Economic Prospects (2022).

The region is facing downside risks in the form of job losses, resulting from the financial constraints impacting the wider economy, and more significantly, the impact of the rising cost of debt servicing, a consequence of rising interest rates. It is understood that further increases in commodities will add further to the increasing cost of food supply across Asia. Another specific risk within the region relates to energy dependency as many economies are reliant on importing energy from other economies that are facing the same challenges of rising prices and supply constraints.

As noted from a recent RICS Global Construction Monitor publication, the construction activity index for India remains strong. General activity in Malaysia remains stagnant, however, of notable interest is that activity within the Malaysian infrastructure market is showing signs of double-digit growth, which would indicate that other market sectors in Malaysia are in decline. Looking closer at the Chinese market, which represents the largest market in the region, it is noted that market activity has fallen back significantly, mainly due to prolonged coronavirus lockdowns during 2022.

Despite, the persisting local and global challenges the economies within the region are projected to grow by 5.8 per cent in 2023, as projected by the World Bank.

Australasia

GDP from construction is expected to reach USD 28 billion across Australia and New Zealand, with Australia accounting for USD 25 billion. This equates to circa 1.62 per cent of all GDP generated from within the Australian economy. The remaining output value of USD 3 billion relates to the New Zealand market, which accounts for 1.20 per cent of total New Zealand GDP.

Following the establishment of a USD 11.2 billion National Reconstruction Fund, the Australian construction industry is expected to benefit from increased activity through the provision of finance. This is in the form of loans, equity investment or guarantees across various sectors with the aim of achieving sustainable growth. As a result, the Australian construction industry is expected to grow by 4.3 per cent during 2022 before moderating at 2.3 per cent from 2023-2026, according to Business Wire.

The government of New Zealand introduced the National Land Transport Programme which is a USD 24 billion plan for the period of 2021-2024. The programme is aimed towards the creation of an improved transportation system serving the country.

Included within the plan are public transport, road maintenance and improvements and walking/cycling routes. In addition, the market is active with on-going energy, infrastructure and residential projects. As a result, the New Zealand construction industry is expected to grow by 10.8 per cent during 2022, according to Business Wire.

International construction cost inflation

Source: Based on AECOM Indices for UK, UAE; ENR USA Construction Cost Index; Singapore Building Construction Authority, Hong Kong Architectural Services Dept (Public Sector), Euroarea Eurostat Construction Output Index, India CIDC Construction Cost Index, AIQS Building Cost Index.

As building costs soar and economic uncertainty continues, double figure construction cost increases have been seen globally in 2022. The adjacent graph is a representation of quarter-on-quarter changes in construction costs across several construction cost indices in differing locations.

What this graph demonstrates is that the effect of construction inflation began to be felt internationally towards the beginning of 2021. This is around the time when the outfall of the pandemic induced economic and supply restrictions began to hit market pricing.

Surges in prices are expected to be subdued in 2023, and while construction output is still rising overall, the industry is seeing greater fragmentation in output and activity speeds across nations.

New and existing projects are feeling the effects of this new, higher cost of purchase environment. New projects are beginning to see viability and budget setting processes affected, especially those marginal projects already grappling with the high inflation landscape. Capital-intensive projects are likely to face greater hurdles given the risks associated with new-build projects and the ongoing pressures on budgets that are applicable to both public and private sectors. Projects that are more advanced are expected to be less affected as major purchases are typically in place and project viability established. However, funding and budget pressures in other aspects may lead to spill-overs into existing projects and their funding phases. Combined with the harmful effects of inflation on existing budgets and projects, the ripples flowing from this fiscal event is expected to continue in the construction industry for some time.