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Executive Summary:
The recent major damage/leaks and disruption of the Nord Stream gas pipeline under the Baltic Sea have amplified fears of major natural gas shortages in Europe. Was this sabotage and if so, who was responsible for this? This will increase problems for European industry, especially in Germany and its citizens with the cold winter months ahead.
It looks like lower growth and higher inflation are in our future for at least the next 3 to 9 months and possibly longer. The global economy is slowing down as sky-high inflation, energy oil price spikes, supply chain challenges, the war in Ukraine, and lending rate increases continue to impact economic growth and construction activity as we move into 2023.
The global real GDP growth forecast is trending lower. 2023 is expected to grow slowly by 2.4% to 2.8%. Extreme inflationary difficulties seem to have intimidated many Owner/Operating companies. Many of these companies have delayed future CAPEX capital investments for the next 6 to 12 months.Â
Inflation is increasing in just about all countries. This could be a serious problem for the construction sector in 2023. Increased construction labor/material costs and shortages of key construction materials remain a problem. Construction materials and supply chain issues are causing price spikes, shortages, and delivery delays.Â
For more than 12 months, the international construction industry has faced the following challenges:
- Supply chain issues/interruptions, causing delivery delays. (China is still imposing COVID lockdowns).Â
- High oil and gas prices (gasoline/petrol and diesel costs have just about doubled in the last 6 months).
- With sky-high inflation, most countries are facing this predicament. Â
- Construction material cost increases and shortages.
- The shortage of skilled construction labor and sub-contractors.
- The ongoing Russia – Ukraine conflict.
- Asia’s possible flash points South China Sea – China – Taiwan and North Korea.
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The vast majority of construction bulk materials, such as timber/plywood and OSB, steel products (rebar and structural steel), copper products, roofing, cement, concrete, and plumbing and electrical components have started to decline from their high prices experienced back in the 1st and 2nd Q of 2022, some of these bulk construction materials have declined by as much as 25%, unfortunately, most construction bulk materials and to some extent, construction-related equipment, such as HVAC components, pumps, electrical equipment, is still 5% to 15% or more expensive than 12 months ago.
US unemployment climbed to 3.8% in September. Look for this number to increase from 4% to 4.5% in the upcoming 3 months. US construction-related unemployment is between 5.5% and 6.5%.
The US Federal Reserve has started to vigorously increase interest rates to combat the 8.9% inflation rate, this will impact the US home builders/commercial construction sector and will cause a contraction of the US construction sector.
Construction inflation/escalation in the USA is between 8.8% and 9.2%, Canada is seeing between 7.7% and 8.2%, an 18-year high, and Mexico is seeing between 8.7% and 9.2%, a 20-year high. This could be a problem as we transition into 2023.
The civilian death count in Ukraine has exceeded 5,600 since the start of Russia’s invasion. The invasion of Ukraine has caused considerable damage. Many ports, rail/bus stations, and airports have been closed or destroyed, and numerous private and public buildings, roads, and bridges have been destroyed.
Look for transportation/ocean and domestic freight costs to increase significantly in the next 3 months.
4th Q of 2022 Construction Outlook for Major Countries:
Countries | 4th Q 2022 % GDP Growth | 4th Q 2022 Inflation % | 4th Q 2022 Unemployment % | Comments on Construction in 4th Q of 2022 Future Spending Activity |
USA | 1.3 – 1.7 | 8.4% to 9.4% | 3.8 | It appears the USA will face lower growth and higher inflation in the next 3 to 9 months and possibly longer. Energy, oil, natural gas, and diesel costs have increased substantially, which will result in a slow downed and delayed commencement of some capital projects. The US housing construction market, a huge employer of construction-related professionals and workers, is forecast to slow down significantly as the US Federal Reserve increases lending rates to combat inflation. |
CANADA | 2.9 – 3.3 | 7.5 – 7.8 | 5.5 | Increased energy costs are impeding some capital construction projects from moving forward. Russia – Ukrainian hostilities & high energy prices will test the Canadian Construction industry. Look for construction-related inflation increases in the next 3 to 6 months/escalation rates and construction material pricing spikes/shortages. Continuing higher oil prices will positively impact Canada’s Alberta oil patch. |
BRAZIL | 1.9 – 2.2 | 8.8 – 9.1 | 9.6 | The ongoing skyrocketing inflation/escalation that is impacting food, energy, and commodities prices is a huge challenge to the Brazilian economy and the construction sector. Inflation/escalation inflation in Brazil is running over 9% which of course impacts construction costs. Supply chain issues/interruptions continue in causing delivery delays of key material to project locations. |
UNITED KINGDOM | 3.2 – 3.6 | 9.9 – 10.2 | 3.7 | The UK pound to a record low against the US dollar on 9/26/2022 on growing worries on the subject of the stability of the UK economy, this could further increase inflation, oil & many imported items are priced in US dollars. The UK pound has fallen by 8.5% to 11%against the US dollar in the last 9 weeks. Energy, oil, natural gas, and diesel cost increases have curtailed and delayed the commencement of some capital projects in the UK in the last couple of months. Inflation is close to 10% and could go higher if oil/petroleum prices continue to increase. BREXIT terms & conditions remain a continuing problem. |
GERMANY | 0.9 – 1.1 | 7.9 – 8.1 | 3.2 | The recent major damage/leaks and disruption of the Nord Stream gas pipeline is especially concerning to Germany’s industry and construction sector. Was this a pipeline defect or sabotage? Increased energy costs and natural gas shortages from Russia is the # 1 issue facing the German economy and construction sector. |
FRANCE | 1.9 – 2.6 | 5.5 – 5.9 | 7.5 – 7.7 | Energy, oil, natural gas, and diesel cost increases have caused a slowdown and delayed the commencement of some capital projects Ongoing Russia – Ukrainian confrontation has caused serious problems for the French Economy & Construction sector, with spiking inflation/escalation rates and construction material pricing increases/shortages. |
RUSSIA | minus 1.3 – 1.9 | 13.9 – 14.6 | 4.1 | A long-drawn-out Russian offensive on Ukraine has had serious economic consequences The Russian Ruble is currently the world’s strongest performing currency. The Russian Ruble has been resuscitated by enhanced crude oil exports to both China and India. The Russia – Ukrainian war will negatively impact the Russian Construction sector and could cripple the industry, sanctions, the closure of export markets, skyrocketing inflation/escalation rates, and construction material pricing spikes/shortages will be in place for possibly many months. |
JAPAN | 1.4 – 1.9 | 2.4 – 2.9 | 2.4 – 2.8 | Japan’s construction industry, for the sixth year, continues to experience slow or minimal growth in its civil/infrastructure, home building, commercial, institutional, and industrial sectors, perhaps mirroring Japan’s steadily declining population. |
CHINA | 3.3 – 3.6 | 2.2 – 2.7 | 2.5 – 2.8 | China is beset by some stark economic and construction-related challenges as we transition into 2023. Millions of Chinese citizens in more than 40 cities/regions have been instructed to remain at home under partial or full COVID lockdowns. China’s construction industry is experiencing a rapid slowdown from just 6 months ago, a slower growth rate appears to be the norm as we move into 2023. The halcyon days of record-breaking construction growth appear to be over. Just how many highways, bridges, and high-speed rail projects can be financed and built? Look for China to expand its overseas infrastructure financing/loans and construction presence and activities in Asia, Africa, and South America. |
INDIA | 5.9 – 6.9 | 6.9 – 7.3 | 7.9 – 8.6 | India’s construction industry continues to experience continuing growth. India has a considerable need for new civil engineering/highways, bridges, and other transport and power-related projects in the next 3 to 18 months. |
4th Q 2022 Prices at a Glance:
- Forecast Cost of a barrel of Crude Oil $95 – $115
- Forecast of Euro / US $ Exchange Rate 0.95 – 1.00
- Forecast of UK Pound / US $ Exchange Rate $1.00 – $1.10
- Forecast of Copper per pound $3.50 – $3.75
- Forecast of Gold per Ounce $1,670 – $1,775
- US Construction Material Inflation (Basket of 10 construction materials) 4.9% – 9.9%
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Compass International is considered by many to be the global leader in providing construction cost data. We partner with many of our clients to train their staff on Conceptual & Detailed Estimating methods, Validate Estimates, and turnaround problem CAPEX projects.
Executive Summary:
The Global Construction sector is positioned for a recovery from the last 2 to 3 lackluster years. The Global Construction Industry is resilient and forecast to reach $11 trillion by the year’s end in 2023 and to hit $13 trillion by 2026.
The countries that are seeing increased/enhanced construction activity include Saudi Arabia, China (getting back on track after the COVID-19 shutdowns), India, Vietnam, and some of the smaller SE Asian nations.
Artificial Intelligence (AI) continues to be the new hot topic that construction professionals are talking about. How will AI impact current and future Engineering, Procurement, and Construction (EPC) practices? How it will be implemented/utilized in the construction industry in the near and long term future? Many construction professionals have concerns that in 1 to 5 years it may lead to significant redundancies/downsizing and the decreased need for Project/Construction Managers, Engineers, Planners, Estimators, Quantity Surveyors, and the like. Time will tell.
Look for additional Oil and Gas capital projects project in the 2nd half of 2023 and beyond. The forecast is that the world will require between 60 and 80 million barrels of oil a day, increasing to 100 million barrels a day by 2027. However, are these future growth projections valid, when we consider EV utilization and vehicle growth projections?
For some good news, it looks like the US will not experience an economic recession as we transition into the 2nd half of 2023 and 2024.
The 1st half of 2023 has been a difficult period for most countries’ construction sectors. The 2nd half of 2023 will see the first step in a new growth cycle, especially in the Industrial (EV-related projects, lithium extraction and refining, oil and gas facilities, call centers, microchip facilities, and logistic centers) sector, together with increased infrastructure and commercial construction projects, these new capital projects will aid the construction industry in recovering from its 2 to 3-year decline. The good news for the US construction sector continues, we have seen numerous announcements of plans to build Electrical Vehicle Manufacturing/Battery Facilities, Semi-Conductor/Computer Chip Facilities, Call Centers, Logistical Centers, and Fulfillment type facilities in many regions across the USA.
An issue may arise with lithium suppliers/manufacturers advising global lithium supplies may not be sufficient for the huge demand for future EV vehicles and battery requirements. Lithium battery manufacturers are raising concerns related to future shortages of rare metals, price increases, and their ability to supply sufficient EV battery components to satisfy the need to move away from carbon-related oil/gas energy. It appears that some major oil/gas companies are jumping on the bandwagon and entering the lithium production market. Do these companies see the writing on the wall for the demise of oil product usage perhaps in the next decade or two?
Construction-related E/A firms and Construction related companies appear to have sufficient future work and bidding opportunities in front of them for the 2nd half of 2023 and beyond is the feedback we are hearing. However, 6 months from now it might be a different story.
The recent failures of 2 mid-sized banks in the US and a major European bank have raised questions and possible risks for many construction-related organizations. This could cause some capital projects to be delayed or canceled.
Unfortunately, close to 100,000 employees in US-based tech/IT companies have been let go in huge job cuts so far in 2023. Expect this trend to continue in 2024. The future growth of AI applications is a problem for these IT-focused employees.
The US labor market is very strong at this time with a 3.5% unemployment rate resulting in 6 million individuals without work. This extremely low percentage rate has not been seen for more than 40 years.
A new nuclear power plant located in Georgia, USA will be operational in May. This is a major milestone for the US nuclear industry that may lead the charge for more nuclear facilities to be constructed in the coming years. The US currently operates 90+ nuclear reactors that generate as much as 20% of the electrical needs of the country. Nuclear power assists in reducing global warming by providing reliable clean/carbon-free electricity. However, escalating interest/lending rates and rising construction material costs, together with a scarcity of skilled workers and sub-contractors may be a major challenge and could slow down construction schedules on these new significant capital projects.
The life science construction sector (Pharmaceuticals/Bio/Medical Devices) continues to be reasonably strong (perhaps somewhat slower than a year or two ago, back when COVID-19 was rampant), with a number of major capital expansions ongoing or in the pipeline.
US construction labor challenges continue. There is a shortage of skilled construction workers such as electricians, welders, pipe-fitters, and millwrights. Baby boomers (individuals reaching 55 years of age) are retiring at record numbers. Recent college graduates/young workers are not entering the construction industry in the numbers needed to sustain a growing construction sector. These younger workers are attracted to other industries such as IT, business, etc. These and other industry sectors look more attractive and less demanding to these individuals.
The Canadian infrastructure (mining as well as oil and gas) construction sectors are experiencing a pick-up as we move into the 2nd half of 2023. Canada’s inflation rate is high, at more than 5%. Look for this rate to start to moderate in the next 6 months. A number of electric vehicle facilities, EV lithium battery, and auto assembly facilities have recently been announced, which should provide an active period for the Canadian industrial construction sector for the next eighteen months.
In Mexico, Tesla recently announced it will build a major electric vehicle factory on a 4,000-acre facility close to Monterrey. The construction cost is forecast to be in the $5 billion range. This Mexican facility is projected to produce 500,000 EV vehicles in the next 3 years, with perhaps 250,000 of these ending up in the US Many parts suppliers and vendors will also build facilities close to this new Tesla factory. Mexico’s inflation rate is high at more than 7.1%. Look for this rate to start to moderate in the next 6 months.
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Inflation is remaining elevated in just about all countries however, it is starting to moderate in most countries.
For the best part of 24 months, the global construction industry has faced the following challenges:
-  The ongoing Russia – Ukraine conflict and the recent coup attempt by Wagner Group is a continuing problem.
- Â In Asia, there are a number of possible flashpoints, including the South China Sea, China, and Taiwan. North Korea continues to fire off missiles and the India vs. China border standoff continues.
- Â There is a possibility of a US/European banking and economic crisis in the next 3 – 6 months.
- Â The shortage of skilled construction workers and sub-contractors.
The vast majority of construction bulk materials, such as timber/plywood and OSB, steel products (rebar and structural steel), copper products, roofing, cement, concrete, and plumbing and electrical components have started to decline from their high prices resulting from the global pandemic. Some of these bulk construction materials have declined by as much as 15% to 20%. Unfortunately, most construction bulk materials and, to some extent, construction-related equipment such as HVAC components, pumps, and electrical equipment are still 5% to 15% more expensive than 12 months ago.
Look for transportation/ocean and domestic freight costs to stabilize and moderate in the next 6 months.
2nd half of 2023 Construction Outlook for Major Countries:
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Countries | 3rd Q 2023 % GDP Growth | 3rd Q 2023 Inflation % | 3rd Q 2023 Unemployment % | Comments on Construction in 3rd Q of 2023 Future Spending Activity |
USA | 1.3 – 1.9 | 4.2% to 5.1% | 3.4 | There is some good news for the US industrial construction sector. We have seen numerous announcements of plans to build electrical vehicle manufacturing/battery facilities, semiconductor/computer chip facilities, call centers, and fulfillment-type facilities in many regions across the country. It appears that the US will not experience a recession as we transition into the 2nd half of 2023. An issue may arise with lithium suppliers/manufacturers. Advising global lithium supplies may not be sufficient for the huge demand for future EV vehicles and battery requirements. The vast majority of construction bulk materials, such as timber/plywood and OSB, steel products (rebar & structural steel), copper products, roofing, cement, concrete, and plumbing and electrical components have started to trend downwards from 6 months ago. |
CANADA | 1.8 – 2.5 | 4.2 – 4.7 | 5.1 | The forecast for the Canadian construction sector is that market conditions are returning to a more normal period after 2 to 3 years of challenges related to COVID-19, high inflation, energy increases, material shortages, and supply chain issues. The Canadian infrastructure, mining, and oil and gas construction sectors are experiencing a pick-up as we move into the 2nd half of 2023. Canada’s inflation rate is more than 4.5%. Look for this rate to start to moderate in the next 6 months. |
BRAZIL | 1.6 – 2.2 | 4.1 – 4.4 | 8.4 | The Brazilian construction sector is estimated to be $110 billion or close to 6% of the country’s GDP Brazil’s political and economic situation appears to be improving in the last couple of months. Brazil’s construction industry is forecast to expand by 4% to 6% in the next 3 years. |
UNITED KINGDOM | 0.2 – 0.5 | 7.9 – 9.2 | 3.8 | Construction-related inflation in the UK is forecast to remain high at 8% to 9% in the 3rd Q of 2023. The UK’s construction sector is estimated to be $390 billion or close to 7% of the country’s GDP. Look for slow but steady growth in 2024. The construction sector could increase to $400 billion to make the UK the 7th largest construction market.  The UK pound remains weak against the US dollar on growing concerns regarding the stability of the UK finances, this could further increase inflation, oil & many imported items are priced in US dollars. The UK pound has fallen by more than 6% against the US dollar in the last 6 months. |
GERMANY | 0.1 – 0.4 | 5.9 – 6.3 | 2.9 | The German Construction sector is experiencing the start of a recovery as we move into the 2nd half of 2023. The German chemical industry is extremely dependent on Russian gas supplies, the jury is still out on how this will culminate in the next 6 months. The German government has allocated billions of Euros for the expansion of Germany’s infrastructure. This includes new and refurbished highways, bridges, ports, and rail facilities. Germany’s inflation rate is very high at between 5.9% to 6.3%%. Look for this rate to start to moderate in the next 6 months. |
FRANCE | 0.8 – 1.1 | 4.8 – 5.3 | 6.4 – 7.1 | The French construction sector is poised to see the start of a recovery as we move into the 2nd half of 2023. The French government is projected to increase future expenditures on new and refurbished roads, bridges, ports, airports, and rail facilities. This points to 2023 – 2024 being a much better year than the previous 5 years. |
RUSSIA | minus 0.5 – 1.5 | 1.7 – 2.6 | 3.4 | The Russian ruble fell to 86.50 rubles to the US dollar, a 16-month low, a day after the recent failed military coup attempt by the Russian mercenary army the Wagner Group. The recent attempted coup has added more challenges for Russia to solve. The cost of lives and resources must be of concern to the average Russian. How long can this conflict can continue is the question. The Russian – Ukrainian war has negatively impacted the Russian construction sector. Sanctions, closure of export markets, skyrocketing inflation/escalation rates, and construction material pricing spikes/shortages will be in place for possibly many months. The USA, European Union, UK, Canada, Japan, South Korea, and Australia have leveled tough sanctions/penalties on Russia with possibly more to come as a result of their hostilities against Ukraine. Russia will have to deal with the severe sanctions that could disrupt its economy and construction sector. Many US and European construction-related companies have moved their operations out of Russia. |
JAPAN | 1.2 – 1.4 | 2.9 – 3.6 | 2.4 – 2.7 | Japan’s construction industry is forecast to grow by 1.5% to 2.5% in the 2nd half of 2023 from the previous year. Japan’s construction industry continues to experience sluggish or minimal growth for the 6th year, in civil/infrastructure, home building, commercial, institutional, and industrial sectors, perhaps mirroring Japan’s steadily declining population. |
CHINA | 3.9 – 4.6 | 0.3 – 0.6 | 5.1 – 5.5 | China is back, the 12 month struggle with COVID is in the rear view mirror, its full speed ahead, perhaps!!! Supply chain interruption issues are vastly improving with China recently terminating its ridged COVID lockdown policy. China estimates 2023 an economic growth target of between 4% and 5% down considerably from previous halcyon years excluding the recent COVID years. China’s economy and construction sector was assumed on the ropes after China’s Government mandated zero COVID policy was in effect. Many China experts were forecasting minimal economic growth, multinational manufacturing companies were thinking of relocation to other Asian countries, well these dour forecasts may be overstated. The rigid COVID measures have now been suspended and economic and construction activity has started to pick up once again. China’s Government reported inflation of 0.3% to 0.6%i s very low compared to other major countries, this rate is possibly open to interpretation similar to the low COVID casualty rate reported by China. |
INDIA | 5.8 – 6.2 | 4.4 – 4.9 | 7.9 – 8.3 | India is experiencing a construction boom and is forecast to see annual growth in its construction sector of 8% to 11% in 2023 and 2024. Ten years ago the majority of major US & European industrial / manufacturing companies were directing there CAPEX capital investments into China. However with all the recent political posturing, territorial disputes & COVID related shutdown issues China has experienced a slowdown in foreign capital investment. We are seeing more US & Western European capital investment shifting into India. India is now viewed now as the place to build new manufacturing / production facilities.  India’s military confrontation and standoff with China in the northern Himalayan region is troubling situation, with both countries military positioned in close proximity to each other, both countries are claiming sovereignty over the disputed border area and it looks like no country is backing down. |
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3rd Q 2023 Prices at a Glance:
- Â Forecast Cost of a barrel of Crude Oil $75 – $85
-  Forecast of Euro / US $ Exchange Rate 0.93 – 0.97
-  Forecast of UK Pound / US $ Exchange Rate $1.18 – $1.28
- Â Forecast of Copper per pound $3.85 – $4.05
- Â Forecast of Gold per Ounce $1,950 – $2,000
-  US Construction Material Inflation (Basket of 10 construction materials) 3.3% – 3.9% – Average 3.7%
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