Strategy | Management | Consultancy

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k n o w l e d g e c e n t e r

2017

Global Regional Analysis

2 | Global

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Contributor: Kim Hegarty, Orla Creedon

©Linesight 2017

Contents

Geopolitical uncertainty – a major concern to the global economy 3

Carrying out business throughout the world 6

Macro indicators 7

Level of economic activity 7

Market size of top global construction markets 7

Share of construction spending by regions 2020 8

Global growth forecasts for 2016 and 2017 8

Global inflation % 2016 9

Oil production/consumption statistics 9

Indices 10

Index of international construction costs at January 2017 10

Top international contractors and design firms 11

Top 20 international contractors 11

Top 20 international design firms 12

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Geopolitical uncertainty – a major concern to the global economy

The year 2016 has been tumultuous to say the least, with a number of unexpected political decisions looking set to shape the global economy over the coming years. Kim Hegarty, Associate Director reviews.

The Brexit referendum result and the US presidential election have dominated international media discussion over the last year, and this is expected to continue for the foreseeable future. Fundamentally, both have created uncertainty, which is likely to negatively impact GDP for a number of economies.

Brexit

The UK economy has performed better than anticipated following the Brexit referendum. Estimates from the Office of National Statistics suggest that GDP grew 0.5 percent in the third quarter of 2016 when compared to the second quarter of 2016, and was 2.3 percent higher than the same period in 2015. This is a far cry from the expected recessionary scenario many feared after the referendum; the outcome of the referendum would appear not to have affected the pattern of growth in the economy. However, this growth is largely driven by consumer spending and the services sector, with construction growing by 0.1 percent in 2016.

Sterling has depreciated against the euro, and this is supporting the UK economy in the short term through higher exports. Nonetheless, it is likely that there will be negative impact in the form of import inflation over the coming years. The growth experienced at the end of 2016 is unsustainable if based on a consumer spending spree, and with consumer borrowing increasing at a rapid rate, the Bank of England is concerned about the formation of a debt bubble.

The full impact of Brexit will not be realised for some time, with the negotiation process for leaving the EU just beginning. The general consensus is that it will take several years before agreement is reached on the terms of the exit and this will have a considerable impact on the common market. Ultimately, the long term effect of Brexit on the UK economy will be determined by the kind of trade agreement negotiated by the EU and the UK.

A tumultuous time for the EU

The EU is facing a challenging period with the two-speed economy, with countries like Ireland recording significant GDP growth while Italy, with its banking system under duress, has yet to face the full consequences of the global financial crisis. The European Central Bank (ECB) is attempting to boost the economy with a stimulus package of quantitative easing, and while lower interest rates may be helping to boost the weaker economies, it also has potentially negative impacts. The Trump administration has accused the ECB of maintaining a grossly undervalued euro, which helps exports and economies such as Germany, in particular, benefit from an unfair trade advantage. However, the ECB asserts that Germany’s large trade surplus

Both the Brexit referendum result and the US presidential election have created uncertainty, which is likely to negatively impact GDP for a number of economies.

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is based on economic competitiveness and not currency advantage. Such is the strength of the German economy that German politicians and German members of the ECB’s Board campaigned, in vain, for a higher interest rate policy that would instead strengthen the euro.

The European project is facing a challenging period, not only with the Brexit referendum, but with elections due in Germany, the Netherlands, France and possibly Italy this year. Anti-EU sentiment is coming to the fore with the rising popularity of anti-EU political figures, such as Marine le Pen in France. This could be a very tumultuous time for the region, with many unknowns giving rise to economic uncertainty.

President Trump

The new President of the United States and his administration have stated their intention to provide a boost to the economy by means of a more expansionary fiscal policy, based on tax cuts and increased infrastructure and defence spending. This has led to an improved outlook in consumer sentiment, which was clearly indicated when the Dow rose significantly after the outcome of the election was announced. This subsequently went on to break through the 20,000 mark after a sharp increase in infrastructure stocks, when President Trump reaffirmed his commitment to build a wall along the Mexican border.

The administration is, however, also implementing protectionist policies, with one of the first orders to be drafted titled “Auditing and Reducing US Funding of International Organizations”. Furthermore, Trump has stated that they plan to pull out of the Trans-Pacific Partnership (TPP) and re-negotiate the North American Free Trade Agreement (NAFTA). He had indicated that he intended to pick a trade fight with China by recognizing Taiwan - a policy which many warned against due to the size of the Chinese economy. He has recently backed down from this policy by agreeing with the One China policy, which forms the bedrock of US China diplomatic ties.

The approach of the administration is creating a lot of uncertainty for the longer-term economic outlook. The President is seeking to create more jobs in the US, particularly in manufacturing, with his promise to bring jobs back to the rust belt. While the US may seek to lay blame for less manufacturing jobs on Mexico and China, most economic commentators are of the belief that the loss of manufacturing jobs is largely attributable to changes in the manufacturing processes, as well as advances in technology.

In the long run, the policy of increased spending on infrastructure, together with the promised reduction in corporation and income taxes, is likely to be counterproductive, resulting in an increase in the government deficit.

Oil prices

Since mid-2014, oil prices have been in freefall, as supply outpaced demand, hitting a low of US$30.70 per barrel (Brent crude oil price) in January 2016. Since then, prices have been slowly improving, and with the announcement of OPEC’s deal to reduce production for six months in late 2016, it is hoped that this will mark an end to the two-year flooding of the market. The oversupply, which caused prices to plummet, impacted negatively on the global economy in recent years and inflicted significant economic damage to some producers.

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This volatility has had a serious effect on the construction industry in the Middle East in particular, with many infrastructural projects being cancelled or delayed, and other projects being impacted by a significant decline in confidence.

The future of Chinese growth

Over the last 35 years, GDP growth in China averaged an astounding 12 percent per annum, as the country moves from a centrally planned economy towards a market-based economy. The growth over this period was largely driven by a surge in large-scale infrastructure projects, as China became a significant entity in international trade.

The OECD expects the Chinese economy to grow by around 6.2 percent in 2017. With the ongoing urbanization of China, the principal driver of GDP in 2017 will be personal consumption, facilitated by a stable labour market and steadily rising incomes.

However, a potential housing bubble poses a major risk to the economy at present. Cheap credit has fuelled an increase in debt and a booming housing market. With an enormous accumulation of debt in China over the last ten years, it remains to be seen whether the remarkable Chinese growth rate of the past can be sustained.

Source: OPEC; IEA

Average monthly UK Brent crude oil price per barrel

Price in U.S. dollars per barrel

0

10

20

30

40

50

60

Jan 17Dec 16Nov 16Oct 16Sep 16Aug 16Jul 16Jun 16May 16Apr 16Mar 16Feb 16Jan 16

30.7 32.18

38.2138.2141.58

46.74 48.2544.95 45.84 46.57

49.52

44.73

53.32 54.58

48.25

Volatility in oil prices and the impending Chinese housing bubble pose significant threats to the global economy, given their scale and potentially far-reaching impacts.

6 | Global

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Carrying out business throughout the world

Doing business and investing in construction in unfamiliar territories can be a daunting prospect. The World Bank Group publishes a schedule of information on how difficult it is to carry out business across the world in their annual Doing Business Report. The 2016 report has been reproduced in the table below. The UK and the USA are included for comparative purposes. Singapore scores well.

Economy

Ease of Doing

BusinessStarting a Business

Dealing with Construction

PermitsRegistering

Property

Trading Across

BordersEnforcing Contracts

Resolving Insolvency

Singapore 2 6 10 19 41 2 29

Hong Kong 4 3 5 61 42 21 28

Republic of Korea 5 11 31 39 32 1 4

United Kingdom 7 16 17 47 28 31 13

United States 8 51 39 36 35 20 5

Australia 15 7 2 45 91 3 21

Germany 17 114 12 79 38 17 3

Ireland 18 10 38 41 47 90 17

Malaysia 23 112 13 40 60 42 46

Poland 24 107 46 38 1 55 27

United Arab Emirates (UAE) 26 53 4 11 85 25 104

Netherlands 28 22 87 29 1 71 11

France 29 27 20 100 1 18 24

Bahrain 63 73 19 25 82 110 88

China 78 127 177 42 96 5 53

Vietnam 82 121 24 59 93 69 125

Indonesia 91 151 116 118 108 166 76

Kingdom of Saudi Arabia (KSA) 94 147 15 32 158 105 169

India 130 155 185 138 143 172 136

Source: World Bank Group – Doing Business 2016 Report

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Level of economic activity

Market size of top global construction markets

India Japan IndonesiaUSWestern EuropeChina

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2025 20302020201520102005

Source: Global Construction Perspectives and Oxford EconomicsNote: $bn, 2014 prices

Macro indicators

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Share of construction spending by region 2020

Source: I H S Global Insight

76

5

4

3

2

1

1.

2.

3.

4.

5.

6.

7.

North America 17%

Latin America 4%

Western Europe 24%

Eastern Europe 5%

Asia 46%

Middle East 2%

Africa 2%

Global growth forecasts for 2016 and 2017

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Global inflation % 2016

Source: Trading Economics

-1

0

1

2

3

4

5

6

7

8

9

Saudi ArabiaIndia ChinaEuro Area US

DecSepJunMarDecSepJunMarDecSepJunMar

2014 2015 2016

Oil production/consumption statistics

Source: International Energy Agency

85

88

91

94

97

100

Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

2013 2014 2015 2016

World Oil Demand World Oil Supply

mb/d

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Index of international construction costs at January 2017

Based on February 2017 Exchange RatesIndexation based on Ireland Average = 100

Source: Linesight

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25

50

75

100

125

150

175

200

Hon

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Japa

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Car

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Swed

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Switz

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USA

Can

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Fran

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Sing

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Aust

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Irela

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Ger

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Spai

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Chi

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Italy

Hun

gary

Rom

ania

Pola

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Mal

aysi

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epub

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Indi

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Indices

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Top 20 international contractors

Based on total firm contracting revenue

2016 Rank 2015 Rank Firm Revenue $ bn

1 2 CHINA STATE CONST. ENGINEERING CORP., China 115.082 1 CHINA RAILWAY GROUP, China 112.673 3 CHINA RAILWAY CONSTRUCTION CORP., China 96.014 4 CHINA COMMUNICATIONS CONST. GROUP, China 68.355 5 VINCI, France 43.456 7 POWER CONSTRUCTION CORP. OF CHINA, China 39.347 6 ACS, Spain 38.578 10 CHINA METALLURGICAL GROUP CORP., China 33.149 8 BOUYGUES, France 28.2210 12 SHANGHAI CONSTRUCTION GROUP, China 26.0511 9 HOCHTIEF AG, Germany 25.6012 11 BECHTEL, U.S.A. 23.3713 22 ODEBRECHT ENGENHARIA E CONSTRUÇÃO, Brazil 17.1114 17 HYUNDAI ENGINEERING & CONSTRUCTION, S.Korea 16.4715 18 OBAYASHI CORP., Japan 16.1816 14 SKANSKA, Sweden 16.0317 16 STRABAG SE, Austria 15.5618 15 FLUOR CORP., U.S.A. 14.3019 24 KAJIMA CORP., Japan 14.1120 20 TECHNIP, France 13.54

Note: 2016 ranking is based on 2015 contracting revenueSource: Engineering News-Record

Based on contracting revenue from projects outside home country

2016 Rank 2015 Rank Firm Revenue $ bn

1 1 ACS, Spain 32.072 2 HOCHTIEF AG, Germany 24.523 3 BECHTEL, U.S.A. 19.264 4 VINCI, France 17.965 5 CHINA COMMUNICATIONS CONST. GROUP, China 16.886 13 CONSTRUTORA NORBERTO ODEBRECHT, Brazil 14.947 6 TECHNIP, France 13.448 9 STRABAG SE, Austria 13.389 7 BOUYGUES, France 13.3710 8 SKANSKA, Sweden 12.6911 11 POWER CONSTRUCTION CORP. OF CHINA, China 11.3512 10 SAIPEM, Italy 10.2013 14 HYUNDAI ENGINEERING & CONSTRUCTION CO., S.Korea 10.0314 17 CHINA STATE CONST. ENGINEERING CORP., China 8.7315 12 FLUOR CORP., U.S.A. 8.0516 15 FERROVIAL, Spain 7.5817 16 SAMSUNG C&T CORP., S.Korea 7.0218 28 JGC CORP, Japan 6.1819 21 PETROFAC, UK 6.1520 23 CHINA RAILWAY GROUP, China 6.04

Note: 2016 ranking is based on 2015 contracting revenueSource: Engineering News-Record

Top international contractors and design firms

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Top 20 international design firms

Based on total firm revenue

Based on contracting revenue from projects outside home country

2016Rank

2015 Rank Type of firm Firm Revenue $ bn

1 1 EA AECOM , U.S.A. 7.632 3 EC POWER CONSTRUCTION CORP. OF CHINA, China 6.313 2 EAC JACOBS, U.S.A. 6.074 4 E WSP GLOBAL, Canada 4.805 8 EC CHINA COMMUNICATIONS CONST. GROUP, China 4.146 4 EC WORLEYPARSONS, Australia 3.887 7 E ARCADIS, The Netherlands 3.808 10 EC CH2M, U.S.A. 3.429 6 EC FLUOR CORP., U.S.A. 3.2410 5 EC AMEC FOSTER WHEELER, U.S.A 3.1711 14 EA ATKINS, U.K. 2.7112 12 EC SNC - LAVALIN, Canada 2.6913 11 GE FUGRO, The Netherlands 2.6014 13 EC CB&I, U.S.A. 2.4815 15 EA DAR AL-HANDASAH CONSULTANTS, Egypt 2.4116 19 EC CHINA RAILWAY CONSTRUCTION CORP., China 2.3117 20 E MOTT MACDONALD, U.K. 2.2418 16 E TETRA TECH, U.S.A. 2.2319 17 EAL STANTEC, Canada 2.2220 18 EC BECHTEL, U.S.A. 1.96

Note: 2016 ranking is based on 2015 revenueKey to Type of Firm: A - architect; E - engineer; C - contractor; P - planner; L - landscape architectSource: Engineering News-Record

2016Rank

2015Rank Type of firm Firm Revenue $ bn

1 6 E WSP, Canada 4.032 3 E ARCADIS, The Netherlands 3.473 2 EC WORLEYPARSONS, Australia 3.464 5 EAC JACOBS, U.S.A. 2.935 1 EA AECOM, U.S.A. 2.716 4 E FUGRO, The Netherlands 2.467 8 EA DAR AL-HANDASAH CONSULTANTS, Egypt 2.418 7 EC FLUOR CORP., U.S.A. 2.129 14 E MOTT MACDONALD GROUP, U.K. 1.5610 15 EC TECNICAS REUNIDAS, Spain 1.5111 12 EC SNC - LAVALIN INTERNATIONAL, Canada 1.4712 9 EC AMEC FOSTER WHEELER, U.S.A 1.4513 10 EAC CH2M, U.S.A. 1.3614 16 E ARUP, U.K. 1.2915 18 EA ATKINS, U.K. 1.2816 19 EAL STANTEC, Canada 1.2017 13 EC BECHTEL, U.S.A. 1.1718 21 E RAMBOLL GROUP, Denmark 1.1619 22 EC CB&I, U.S.A. 0.9820 17 EC KBR, U.S.A. 0.92

Note: 2016 ranking is based on 2015 revenueKey to Type of Firm: A - architect; E - engineer; C - contractor; P - planner; L - landscape architectSource: Engineering News-Record

Hoban House Haddington Road Dublin 4, IrelandT: 353 1 661 4711 Gerard Campbellgerard.campbell@linesight.com Derry Scullyderry.scully@linesight.com Paul Boylanpaul.boylan@linesight.com