Data from the RICS Construction and Infrastructure Survey indicates a more subdued environment across the Asia Pacific region to start 2019.
Looking back: Read the Q4 2018 summary
Data shows a mixed picture of workloads, as respondents in India, New Zealand and Hong Kong highlighted a modest increase in headline workloads while those in Malaysia, Sri Lanka and China noted a pullback. However, in net balance terms there appears to be evidence of a slowdown in activity.
The more cautious start to 2019 might be attributed to increased uncertainty in the global economy. IMF Managing Director Christine Lagarde recently highlighted the fragile state of the global economy, and the IMF's most recent World Economic Outlook highlighted a number of downside risks to global growth. Although some of these, such as trade and interest rates have subsided to a degree, they have not been completely eliminated.
Chinese stimulus eases
A "hard landing" in China is an example of one of the percieved risks to global economic activity. The Chinese government appeared to allay some of these concerns entering 2019, as it appeared that infastructure investment was being used to counteract slower growth in other segments of the economy. This survey picked up evidence of this in Q4 as respondents in China noted a substaintial pickup in infrastructure workloads.
However, this appears to be somewhat transitory as Q1 survey participants reported a slower pace of growth in Chinese infrastructure workloads. It appears that infrastructure investment is being used to stabilise, rather than stimulate growth and is unlikely to offer the same support to the broader economy as in previous cycles.
The Chinese situation is by no means unique. In Singapore, Australia and New Zealand, infrastructure workloads remain robust in an otherwise subdued environment, according to contributors.
Near-term pipeline mixed, longer-term robust
Construction demand was mixed in the near term across various markets. India, Sri Lanka and Malaysia were the outliers, as contributors in the former reported robust growth in new workloads, while new business enquiries in the latter two markets were said to have declined. In other markets, the near-term pipeline of demand was said to have either only increased marginally from the previous quarter or was little changed.
Despite a mixed picture in the near term, respondents across all Asia-Pacific markets covered by the survey expect activity to increase over the next twelve months. In net balance terms, India is expected to see the strongest increase, though activity in Australia, New Zealand and China is also expected to increase at a substantial pace.
Margin pressure a drag
Margins remained under pressure in Q1 and are expected to continue to deteriorate over the next year. Although markets that are expected to see a weaker expansion over the next year (Malaysia, Sri Lanka) are expected to see the sharpest deterioration in margins, even markets which are expected to see a firm increase in workloads, such as China, New Zealand and to a lesser extent Hong Kong and Singapore, see margin contraction.
Increased costs of materials is likely a contributing factor. Costs of materials are expected to increase across the region, with particularly sharp increases (in net balance terms) expected in New Zealand, Sri Lanka, India and Singapore. Perhaps unsurprisingly, a majority of respondents in these countries, as well as in China, Hong Kong and Malaysia, cited the costs of materials as holding back construction activity.
It does not appear that firms are able to fully pass on the higher costs of materials to customers. This is despite data showing that tender prices are expected to rise over the next year across all markets excluding Singapore and Malaysia.
Margin compression appears to be weighing on construction activity. A majority of respondents in every market noted that financial constraints were holding back activity, in Malaysia and Sri Lanka an excess of 95% of respondents highlighted this as a drag. This is despite access to credit remaining fairly accommodative in most markets outside Malaysia.