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Global Construction

Summary Global construction output will outpace world GDP growth in the next decade as Asian emerging markets industrialise and the US registers a sharp cyclical recovery.

The world construction market is expected to grow by 65% from $7.3 trillion today to $12 trillion in 2020. Growth in China, India and the US will generate more than 60% of the $4.7 trillion increase in global construction output. The next decade will see an acceleration of the shift for construction towards dynamic emerging markets and away from low-growth developed countries.

China overtook the US as the world’s biggest construction market last year. By 2020 emerging markets will account for more than half of global construction output.

Emerging markets will be boosted by rising populations and rapid urbanisation. Growth of emerging mega cities such as Shanghai, Mumbai, Delhi and Cairo will require substantial investment in urban infrastructure to support rapid growth in urban populations.

Private investment will need to be attracted to help fund key infrastructure such as water, energy and transport in emerging market countries and developed countries where public debt is high. Higher savings rates in emerging markets will continue to provide the stimulus for investment to modernise and improve infrastructure.

China is the powerhouse of emerging markets’ growth. We expect China to continue driving global construction in the next decade as it invests in its own development and fuels economic growth in neighbouring Asian emerging markets. India will grow faster than China. Investment to meet the demands of a rapidly growing and urbanising population will see India overtake Japan as the world’s third biggest construction market by 2020.

The US will undergo a sharp cyclical rebound with growth in construction fuelled by double digit growth in residential and non residential sectors over the short term, before returning to normal trend growth in the medium term. Growth in infrastructure in the US is expected to be weak, particularly after the effects of the stimulus programmes have played out. Most developed countries, and particularly those in Western Europe, will register little construction growth over the next decade. Static or declining populations and aging consumers will limit economic growth and demand for new construction. Public spending which has formed a large part of construction investment in Western Europe and countries with large budget deficits will be forced to cut public spending.

Countries such as France and Germany as well as other Western European countries, including Netherlands, have higher quality infrastructure that does not need urgent upgrading. For countries like the UK and US with relatively poor infrastructure, public spending constraints will limit necessary upgrades unless governments can attract private investment. Populations in developed countries are stagnating and even declining in countries such as Germany, Italy and Japan. These countries also have shrinking working-age populations, which will inevitably constrain economic growth and construction output further. Countries such as the US, Canada, Australia and Sweden with more favourable demographic trends will have higher growth in construction.

Global Construction 2020 provides global and regional forecasts for infrastructure, residential and non-residential markets and analyses market dynamics in 45 key countries. The report is an invaluable resource for senior executives and policy makers seeking to understand the challenges and opportunities in the global construction market over the next decade. Global Construction Growth Will Outpace GDP

The global economic downturn damaged the construction industry badly. In each of the four years to 2010 construction growth underperformed global GDP. If construction had kept pace with GDP, output would have been about $140bn higher in 2010. Our earlier Global Construction report was published in autumn 2009, a year in which world GDP shrank by about 2% and construction output fell 2.9%. In 2010, growth was stronger than our relatively positive forecasts but our medium-term view remains intact. In the decade from 2010 to 2020 construction growth will outpace GDP each year. We estimate that this growth will increase construction output’s share of global GDP to 13.2% in 2020.

This expansion will be powered by emerging markets, led by China and India with strong contributions from Russia and Indonesia. The result will be an increase in emerging markets’ share of global construction output from 46% today to 55% in 2020. In developed countries the big generator of growth will be a sharp cyclical rebound in the US. Australia and Canada will be the other two major contributors to growth among developed countries. In total, these seven countries will account for three quarters of the increase in output to 2020. Environmental policy is likely to have an increasing impact on construction activity. About 50% of carbon emissions are generated by activities in buildings and climate change policy is already driving investment in lower carbon buildings.

China and India Will Drive Emerging Markets’ Growth Population growth, economic activity and urbanisation will power construction output in emerging markets as they invest in infrastructure and residential to support their economies and meet increased requirements for transport, energy, water and other utilities.

We expect Asian emerging markets to have the strongest growth due to their lower base of income per head, growing populations, larger savings and strengthening cross-border trade links. China will be the engine of global construction output. After overtaking the US as the biggest construction market in 2010 we expect it to remain the largest market in the decade to 2020. We expect China to continue investing in infrastructure and residential and to drive economic growth for Asian trading partners such as Indonesia. China’s demand for natural resources will also boost output in commodity-rich developed countries such as Australia.

India will grow faster than China. India’s growing economy, expanding population and burgeoning mega cities will help make it the world’s third largest construction market by 2020. With relatively stretched public finances, India is exploring options for private participation in infrastructure investment. South Korea’s construction growth will accelerate markedly in the next decade as residential rebounds and infrastructure grows. The country is investing in rail, airport capacity and renewable energy as well as in facilities for the 2014 Asian games which will be held in Incheon.

The US Will Recover Strongly The construction market in the US will rebound from the downturn, led by the large residential sector which suffered big declines in the last five years.

US residential will be boosted by growth in the country’s population of 320 million. This expanding population marks the US out from many other developed countries and will help construction growth significantly outstrip expansion in the wider economy. Healthy company balance sheets will also support a rebound in non residential as the world’s biggest economy picks up in the first five years of the decade. Non residential will be the strongest growth market in the US over the next decade Infrastructure was the only US growth sector in 2005-10. However, though US infrastructure ranks relatively poorly among developed countries, budget deficits will limit investment without increased private investment. Other Emerging Markets Will Outpace Developed Countries

Emerging markets outside Asia will grow less strongly but all emerging regions will substantially outpace developing countries and several non-Asian countries will enjoy high growth. Russia and Turkey will be Eastern Europe’s construction powerhouses in the next decade. Russia’s construction growth will significantly outstrip GDP growth as it invests in rail to transport natural resources and seeks to double energy output.

Russian construction will also be driven by rail, road and airport upgrades to prepare for hosting the 2018 FIFA World Cup. Poland and Ukraine will invest in infrastructure before hosting the Euro 2012 soccer tournament. Turkey’s population is growing and increased investment ahead of potential EU membership will boost construction output sharply and move it ahead of Poland as the region’s second biggest market by 2020.

Construction growth in South and Central America which is relatively more urbanised than other regions will be more muted but infrastructure investment will drive output, for instance in Brazil as it prepares for the 2014 FIFA Soccer World Cup and the 2016 Rio Olympics.

Construction growth is forecast to moderate in Middle East and North Africa. Growth in Saudi Arabia, with its young and expanding population, will increase, and expected change to mortgage laws will help drive growth in residential construction.

Egypt’s growth rate will decline from the high levels seen in the last five years but will remain relatively strong, with a rising population. With large public debts, Egypt has passed a law allowing private investment in traditionally publicly funded infrastructure but recent events may delay this development.

Markets such as Qatar, Libya and Algeria will finance most of their own investment from oil and gas revenues and Qatar will be the fastest growing market covered by our report.

Qatar’s planned growth will be accelerated by $100bn of spending on rail, roads, water and other infrastructure in preparation for hosting the 2022 FIFA World Cup.

Libya is building three new sports stadiums before it hosts the 2013 African Nations Cup, and Tripoli is a candidate to hold the 2017 Mediterranean games.

In sub-Saharan Africa, Nigeria will register rapid growth from an extremely low base. Like Nigeria, South Africa has a young and growing population. It will be the region’s biggest contributor to growth. Developed Countries’ Cyclical Recovery Will Be Limited

The after-effects of the financial crisis and lack of demographic dynamism will severely limit recovery in Western European countries.

In countries such as the UK and Sweden positive demographic trends will help residential construction rebound as credit conditions moderate. Greece will register growth, but this will in fact be a small recovery from the economic shocks felt by the country. Japan will return to growth but will be the slowest growing country in our report. Japan faces a severe combination of constraints affecting developed countries: an aging, declining population, muted economic growth and high public debt that will limit investment in its large infrastructure sector. Western Europe’s growth will also be weak, held back by a static population and planned budget deficit reductions. Australia and Canada will stand out among developed countries as growth is boosted by rising populations and infrastructure investment driven by demand for natural resources.