Question and Answer

Unknown Speaker

You're listening to The Economics & Country Risk podcast from S&P Global Market Intelligence. In each episode, our experts will provide you with the where, how, and when to make decisions that transform your business. In this episode, our experts provide regional insights into construction markets around the globe. You will hear from our global construction team at S&P Global Market Intelligence, Jeannine Cataldi, Associate Director, Amandeep Bara, Senior Economist. Neo Sibiya, Senior Economist and Shing Tyan Lee, Senior Economist. And now over to Jeannine.

Jeannine Cataldi

Good morning, good afternoon, and good evening. My name is Jeannine Cataldi and we're going to be looking at some of the key themes in 2024 across the different regions. And now I'm going to turn it to Shing Tyan Lee, who's going to take us through the outlook and some key themes for the Asia Pacific region.

Shing Tyan Lee

Thanks, Jeannine. The near-term economic outlook for the Asia Pacific region generally remains positive, supported by recovering market demand in emerging markets and India and a rebound in the tourism industry and a gradual easing of inflationary pressure. Headline inflation is showing signs of moderation in the region, and we may see an earlier than expected rate count in Asia Pacific.

But we are still seeing some important headwinds, including the global economic uncertainty and a slowdown in mainland Chinese economy. And despite those challenges, construction spending in Asia Pacific is expected to experience a healthy growth.

Next, we move on to the key themes for Asia Pacific. We look at mainland China construction sector. Given the weak property market, mainland China’s construction growth will still be lifted by infrastructure sector and the infrastructure investment is expected to stay robust under the 1 trillion Yuan sovereign bond, which was issued in 2023, but will be used in this year.

And we expect a broad fiscal spending in this year, covering the budgeted spending. Sovereign bond and local government special bond will be expensed from 2023. However, compared with comprehensive fiscal using, the limited expansion of spending will concentrate on the most frugal, and demanded sectors.

Meanwhile, the real estate market is still starting a downtrend. In response, the government has further shifted its housing market policy to the supportive side, including reducing mortgage interest rates and provide financial support to developers to complete unfinished pre-sold housing project. We expect the housing market to remain weak in this year. And across the Asia Pacific, we can see 2 different scenarios when it comes to residential market.

First, Hong Kong. The housing market continues to face challenges as buyers are cautious in the rising interest rate and the complex external environment. The policy relaxation had no impact on the housing market and to drive purchasers, developers started offering double-digit price discount to clear inventory. The transaction volume for residential dwellings peak in March where the rebound was weak and short lived.

The slowdown in sales has also discouraged developers from buying new land. The number of loans approved in 2023 has shown a downward trend. Weak demand remains the main issue in the Hong Kong residential market. We are not expecting a significant rebut in home prices due to the government plans to build subsidized sales flat in the next 5 years, which will dampen the demand in the private housing market.

So we believe that the weakening of property market will continue in the near term with how prices expected to fall in 2024. And in contrast, Australia's housing market continues to defy expectations. Since the property market bottomed out in early 2023, the property prices have been rising ever since despite the aggressive rate hikes from the Reserve Bank of Australia.

Growth has been driven by record levels of net overseas migration and tight rental markets, but shrinking home building approvals and rising material costs are constraining housing supply. The continued fall of building approvals alongside with the elevated population growth, exert outward pressure on both house prices and rents.

And also an expected cut in interest rate in this year could fit into improved consumer sentiment, which we'll likely to see a spread in activity and create another house price upswing. And last but not least, another noticeable trend is the growing of e-commerce and diversification away from mainland China boosted the industrial sector.

The growing number of companies are looking to move their operations due to a number of reasons, including increasing labor costs and the trade tension between the U.S. and mainland China. Some of the countries that are benefiting from the shift include Vietnam, India, and Malaysia.

For example, the Indian government has taken a number of steps to encourage foreign investment into the country, including reducing taxes and regulations on businesses, investing in infrastructure such as roads, ports and airports and some investor-friendly policies.

And furthermore, Southeast Asian economies like Malaysia, Thailand and Vietnam have multiple free trade agreements signed. And as a result, we expect to see an upward trajectory path for the industrial sector in Asia Pacific in the near term.

The industrial sector is expected to witness the highest construction spending in the nonresidential segment at $780 billion in this year. And that's all for Asia Pacific. I'll pass to Neo to talk about Middle East and Africa.

Neo Sibiya

Thank you, Shing Tyan. I will start off with the key themes for 2024 in the Middle East and Africa region. The MENA region experienced a large drop real GDP decline or slowdown in 2023, which is attributable to falling oil output in the GCC countries. Oil production cuts are anticipated to last until 2025, straining growth in the region. The ongoing attacks in the Red Sea add a layer of potential data risk impacting MENA oil exporters.

Looking at the non-oil sector growth, it continues to be solid. However, it likely weakened at the end of 2023 and will continue to weaken in the first half of 2024. The Israel-Hamas war expected to continue, and it will probably last through most of 2024. Looking at Egypt, its external liquidity crisis remains unresolved, although there are new reforms that are expected as firms subsequently facing both rapid input costs, input cost inflation and the pullback in customer spending.

Given the tense regional environment and Egypt's important role for regional geopolitical stability, our analysts expect enlarged IMF financing that will likely trigger further support from regional allies and the EU. Turning to the Sub-Saharan Africa region, there are some positive factors impacting regional economic activity in 2024.

These include some structural changes, such as improved electricity supply in South Africa, exchange rate at fuel subsidy reforms in Nigeria and some start-up large projects like the liquefied natural gas production in Senegal. These structural reforms or changes, combined with lower inflation and interest rates are projected to support expansion in 2024 in the region. On the downside of things, debt vulnerabilities remain in the region.

Borrowing and debt accumulation levels, while Sub-Saharan African countries have become unsustainably high, leading to several defaults on external debts by countries like Ghana. While in Kenya, Nigeria, debts just is currently severe and remain so during 2024 for both external and domestic liabilities.

Although interest rates may fall in 2024, countries experiencing these debt metrics face reduced capital and financial inflows and limited access to global financial markets in 2024, which leaves them with the external liquidity under significant pressure. This increases risk of contract revision for domestic state projects, potential shortages of imported materials as well as essential imports and economically driven popular protest.

Another thing to look out for is South Africa's elections. Usually, elections are associated with uncertainty and the recent polls show that the ruling party may receive a declining share of folks in this year's election. Another also downside factor to look at is the El Niño weather condition. The risks where food supply chain disruptions and potentially higher food inflation for longer than we currently forecast. Kenya has a host of projects, some already underway and a bulk of which are transport project.

Construction in Senegal will remain boosted by the Dakar's Port City project that is being developed in preparation for the 2026 Youth Olympic Games, this will lead the start of large-scale projects such as LNG production would boosts Senegal's total construction.

South Africa is expected to be the least performing market in 2023, although still in contractual phase, saw the largest upward revision in this forecast round compared to a previous one as official data came in stronger than expected and there's prompted an overall upward revision in construction growth.

It is expected that South Africa will rebound in 2024 and the Middle East and Africa region, owing to diversification efforts in Saudi Arabia and stronger investment particularly in energy, including renewable energy and developmental projects in Sub-Saharan Africa. Infrastructure is now projected to grow in 2023 and 2024. Transport will likely support growth in 2023 and then will be overtaken by the water and sewer subsegment in 2024.

Construction spending in the region will -- over the next 5 years be ranked the fastest-growing construction region in the world during this period. With that, I will pass it over to my colleague, Amandeep to take you through Western Europe and Eastern Europe.

Amandeep Bara

Thank you, Neo. So I'll go through the outlook for Western and Eastern Europe as well as the key themes that we expect over the year. Starting off with Western Europe, if we take a look at the ECB's latest bank lending survey, it shows that lending conditions to France in the commercial real estate, construction and residential sectors tightened significantly in the second half of last year.

And Euro area banks expected further tightening of lending conditions in the first half of this year, which does suggest a further hit to construction demand and activity across the Eurozone's construction firms will continue to face challenges from high construction costs, even though material pointers have fallen down significantly in recent months as well as issues regarding availability of skills.

Some of these factors, especially the macro factors have already affected new pipeline of new work as we've seen in the recent construction PMI service compiled by S&P Global, the Eurozone PMI survey, which covers Germany, Italy and France as well as a separate U.K. construction PMI survey showed that new orders continue to decline towards the end of last year. Building permits for both residential and nonresidential declined in the first 3 quarters of last year across the Eurozone.

Similarly, in the U.K., data for new orders have been pretty much grim and the decline in the first 3 quarters of last year with declines across almost all sectors of construction in the U.K. So given the weakness in these forward-looking indicators of activity does suggest that the downturn in Western Europe is far from over.

Having said that, central banks in the region are expected to begin rate cutting up from mid this year, especially the ECB and the Bank of England, and this should support a revival in demand and activity towards the end of the year, but more so in 2025. They are growing risks on the horizon, particularly relating to political uncertainty surrounding the upcoming elections as well as prospect for renewed cost pressures, which may be exacerbated by the disruption to shipping in the Red Sea as well.

In terms of our construction forecast at market level, we expect the construction spending to decline across 10 Western European countries this year, and that includes some of the major markets, including U.K., Germany, France, and Italy.

Also all Nordic countries are expected to see a decline this year with Sweden leading the way where the shop is decline for around 6%. Elsewhere, Spain, Greece, Portugal, we'll see a continued expansion in the near term, that's largely due to EU funds, particularly from the EU Recovery in New Zealand facility. Turkey additionally will benefit from reconstruction effort following massive earthquakes last year. At a segment level, our residential will remain the largest drag on overall industry growth this year.

That reflects some of the land effects of higher borrowing costs tied to credit conditions as well as the deterioration in some of the forward-looking indicators of activities such as building permits, new orders, also housing stats have fallen away sharply in recent quarters across the key markets. In terms of nonresidential structures, again, that segment will feel a pinch from some of the macro headwinds as well as political uncertainty.

Meanwhile, infrastructure will remain a bright spot in the near term. However, we have lowered our growth forecast again, and that's largely due to the latest cancellation to major transport projects particularly involved in rail in the U.K. as well as the impact of any political uncertainty and physical tightening. Moving on to Eastern Europe. Unlike Western Europe, the outlook in this region is going to be relatively positive.

However, the growth forecast for this year indicates a softer expansion than we previously anticipated as we've again lowered for Russia. And that's due to, again, the country feeling the effects of Western sanctions as well as the effective tight monetary policy in restrictive credit conditions. The Russian bank is also increasingly focusing on defense spending this year.

Also elsewhere, residential weakness is expected to persist in some markets, physical consolidation measures, election uncertainties will also act as headwinds for the industry overall this year. Having said all of that, the EU Recovery funds will remain supportive as well as reconstruction efforts in Ukraine, which would provide a stream of work in the near term.

Central banks in the region have also begun monetary easing and with this expected to continue and also widely across the Eastern Europe region would you expect this to stimulate demand and activity in many markets this year and also in 2025. In terms of activity, spending at a segment level, all sectors are expectedly to continue growth.

Residential, however, will report the weakest expansion this year, again, due to weakness lingering in some markets like Romania, Hungary, which we'll see a continued decline in residential construction spending this year due to sharp declines in building permits as well as elevated construction costs.

In the non-res segments of construction, activity will be supported by EU Recovery funds as well, political uncertainty may act as a headwind as well as delays cannot be ruled out, especially in terms of EU Recovery funds. Poland and Hungary, however, should benefit from some of the disbursements from the EU.

Some of the key themes to watch in 2024. already covered some. The first, 2 policy rate cuts are expected across Western Europe from mid-2024. This should help stimulate a recovery in investor appetite as well as activity later on this year, but more so in 2025. In Eastern Europe, Central Banks of Poland, Hungary, and Czech have already begun more to ease in the second half of last year and further rate cuts are expected across the region in the first half of this year as other countries also join in.

This should support activity levels throughout the year. This year, we're also expect to see major elections happen in the European parliament, also in the U.K. as well. And this is like to create additional uncertainty for the construction industry. Investors may move to sidelines are holding off any investment or spending decisions, which are weigh and growth prospects overall for this year. House prices are expected to climb further in Western Europe.

Looking at the latest data, house prices in the eurozone declined for a second consecutive quarter in annual terms in the third quarter of last year. Given low transaction volumes, weak lending, mortgage lending activity, S&P Global Market Intelligence expect further declines going forward with a peak to trough decline of around 4% by the end of this year.

In the U.K., house prices levels have also been on a downward trend, and we expect further declines going forward, of around 10% from peak to trough. This should overall weigh on investment prospects in the residential segment across Western Europe. Finally, energy efficiency has been a focus over the past year and will continue to do so in the near term. I will now hand it over to Jeannine for North America.

Jeannine Cataldi

Thank you, Amandeep. So I'm actually going to start with Latin America, South America. And some of the key themes that we're looking at for this region for 2024. The first one is going to focus on slower economic growth across the region. According to our global economics team, it's assumed that the post-pandemic recovery in the region is over. Coming out of the pandemic, this region had some very strong growth. And this is now going to taper off to a more trend pattern.

The region is also going to be impacted by slower global growth. Tighter financial conditions are causing weakness. You're going to see some the slowing in some of the key export markets for this region, including mainland China, the United States and also Europe. This is going to have this impact on exports, which will then have a follow-on impact to the countries and their export revenues. This slower growth is also going to have an impact on construction activity, particularly on the public side.

Another factor in this, too, coming in this slower economic growth is declining prices for some of the natural resources that are exported out of South America, including copper and food products. These declining prices on this side are also going to have an impact on revenues, what's coming in and honestly, what can be spent and put out for different programs. Another factor that's going to affect economic growth is also El Niño.

It's going to have some impacts in the Latin America region. There's going to be flooding, droughts. This is going to have far-ranging impacts across the region. On one area is the potential for increased inflation coming off of that. Now a second key theme for this region is going to be more inflation with the headwind of El Niño potentially causing rates to increase again. But the Latin America region was one of the first to start monetary easing and rate cutting. We expect that to continue into 2024.

We expect these rate declines to benefit consumer and business confidence. We expect that this will start to provide a boost to investment. Again, there is a headwind related to El Niño, but we don't think that it will have an impact in the sense of making this inflation go too much higher. If anything, it might slow the rate of decline. And the final big theme, I think, that we're looking at here is this energy transition and supply chain area.

The Latin America region is key for some mining renewables and hydrocarbons, particularly lithium. These critical minerals are being sought. And some of the investors in these areas and some of the buyers of these minerals are mainland China, the U.S., European Union. There's a lot of interest in this area, and we expect to see some activity in this. There's also a benefit to several markets in this region, including Chile and Peru, Mexico as well, but we'll talk Mexico when we talk North America.

But in the U.S., they have the Inflation Reduction Act and one of the components of that with critical minerals and mining was markets that have free trade agreements with the U.S. can benefit from that legislation. So those markets, Chile and Peru should see some pickup in activity related to that as well. I do want to take a few moments to talk about Argentina. This is the only market in the region that for 5-year growth is going to see declines. This market is in a recession.

They just recently had a new president come in with an economy that has significant macroeconomic imbalances, liquidity constraints, debt issues. This President has a plan of a lot of corrective actions, not certain on how long it's going to take to get them implemented or what the overall impacts in Argentina would be.

This is the one market in South America that we don't expect to see any inflationary relief in 2024. We do expect that inflation in Argentina is going to remain at triple-digit levels for the coming year. Construction spending in this market is going to be tight, particularly on public investment as the new President works to make large fiscal cut to get some of the debt issues under control.

So Argentina is going to be the outlier market for this region for 2024 and probably going a little bit further ahead in probably '25 as well. Overall, for the region, this is just the next couple of years' outlook. We do see that '24, there is a bounce back. It's not strong, but it does get stronger in 2025, and this is just going to come as pressures recede and overall global growth starts to strengthen, which is what we're expecting in 2025.

Moving to North America. These themes all kind of tied together for North America. But one of the key themes is the easing of interest rates. This should push a moderate slowing of inflation and it should also help, particularly with the residential markets across the board. The United States, we are expecting residential to kind of level out in the coming year as rates come down, demand should start to pick up. In the United States, the residential market is going to be a mix.

We're going to start to see a strengthening of single-family, but a weakening of multifamily, which has been overbuilt in recent years. So we do expect there to be that switch of growth, which will lead to overall more muted growth rates. In Canada, they're dealing with higher housing costs, weaker renovation spending. It just essentially, we do expect the residential market in Canada to remain weak to begin 2024.

Looking at infrastructure, infrastructure and nonresidential structures across the region are kind of tied in the United States. We see that funds from the Infrastructure Investment and Jobs Act are going to continue to drive growth.

You're going to see quite a bit of spending in roads, power, transportation. We expect this to get stronger in 2024, 2025. We do expect peak spending from this Infrastructure Act to occur in the 2024-to-2026-time frame. And again, some of the most easily direct benefits are going to roads, and there will be power transportation. We're also seeing a big boost to infrastructure spending in Mexico.

We revised up our numbers for Mexico for 2023, and we expect that to carry over into 2024, particularly as there are elections midyear in Mexico, and the expectation is that these funds are going to be pushed very, very aggressively in the first half of 2024 to get public investment taken care of before there is an election and potentially, a new administration. And then nonresidential structures, again, the manufacturing side is a big one.

The United States, we've seen close to a 200% year-to-date increase in the computer electronic manufacturing segment. This is a segment that has your EV battery plants, your solar panels, your semiconductors that has had a huge boost from this. We do expect it to moderate in 2024, 2025 in the sense that spending has kind of hit that peak, now it's going to cobble of, everyone's going to kind of take a breath, regroup and then see what else is needed going forward.

And I did mention the Inflation Reduction Act, but there's a lot going on with manufacturing and renewables, and this is going to have an impact across the region as well. Another factor that's having a big role in North and South America is nearshoring activity coming back to Mexico, particularly. A lot of activity coming back to the United States.

We do expect this to continue for several more years, and this is being helped by all of this legislation that's happening, producers and suppliers wanting to get closer to the markets that they are serving. So we do expect nearshoring activity in Mexico to pick up, and we do expect activity in the U.S. to continue for a bit longer. Commercial, I do want to touch on this one.

Through November, office spending in the U.S. on a nominal basis is up 7%. Inflationary crushers have brought that down quite a bit in terms of real spending, but moving forward, we do expect a lot of moderation in this segment. We're starting to hear anecdotal evidence from companies that they're going to scale back investment in this area in the United States because return to office has not been as strong as expected.

So there is some push back in terms of office construction. There's a lot of conversions going on with vacant space. And I think the office market is still in limbo in terms of return to work and what companies are going to need going forward.

For North America residential is going to be weaker for the next few years. The dip in structures in North America in 2025 is just driven by this moderation in growth after strong growth in '23, and then leveling off in '24. And infrastructure, this has to do with some of this peak spending coming. I have a feeling that this 2025 rate for infrastructure will likely come up a little bit in future forecasts. And that actually brings us to the end of our time today.

Unknown Speaker

Thank you for listening to the economics and country risk podcast. -- connect with us on LinkedIn and Twitter, and don't forget to subscribe to the podcast, so you never miss an episode.