IHS Global Construction ExecSummary Feb2014 140852110913052132

2013 IHS

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IHS Economics

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Global Construction Outlook: Executive OutlookFourth-quarter 2013 ihs.com

IHS Economics

Global OutlookGlobal construction spending increased in 2013, as it fin-ished the year up 2.4% over 2012 levels. The much-antic-ipated acceleration in growth did not occur, and in fact the rate of increase slowed slightly from the 2.5% in-crease the previous year. But, all in all, it was not a bad year for construction, particularly in light of the head-winds faced during the year. The global economy faltered in 2013 as the political stalemate in the United States and a slowing of growth in China heightened uncertain-ty in those countries and spilled over into their trading partners. But as the year ended there were more posi-tive signs for 2014. The US Congress passed an omnibus spending bill and seems to have backed away from the

game of chicken that led to the government shutdown and the recurring approaches to default. In China, the government has reinvigorated stimulus programs, par-ticularly infrastructure initiatives, and has stabilized the growth outlook. And in Europe, the northern-tier coun-tries have begun to emerge from recession with brighter prospects for growth. As these major players see better days ahead in 2014, so too do their trading partners. As such, we expect a brighter year for global construction, with spending to increase 4.7% with all regions and all sectors enjoying at least some modicum of growth. And the construction that will be completed this year will lay a firmer foundation for even greater growth going for-ward. Cheers! Happy New Year!

Total Construction Spending Growth by Country, 2012-17(Compound annual percent change, real 2010 US dollar basis)

Created on 12 Dec 2014 for Susan Minio

Fourth-quarter 2013 2 2013 IHS

IHS Economics | Global Construction Outlook: Executive Summary

Over the next few years construction spending will heat up, with most of the countries outside of the Eurozone expected to enjoy growth.

Global economic outlookWorld growth will accelerate gradually in 2014. The world economy is likely to emerge from its extended soft patch of the last two years, thanks to the easing of the twin headwinds of private-sector deleveraging and public-sector austerity. This will be especially true for the developed economies. In many of the emerging economies, growth is also likely to be a little stronger in 2014, as they (once again) enjoy export-led growth to the United States, Europe, and China. That said, the global growth rebound is likely to be quite modest. IHS expects 2014 growth of about 3.1%, compared with 2.3% in 2013. The good news is that the upside surprises about growth may more than balance out downside surprises, provided some of the more daunting risks facing the world econo-my (e.g., an oil shock) do not materialize.

US growth will slowly speed up. The US recovery lost steam in 2013 because of massive fiscal tightening. The drag from fiscal policy (estimated to have been about 1 percentage point of GDP growth) will probably be far less over the coming yearespecially in light of the mid-De-cember budget deal made by the US Congress. This will allow the underlying strengths of the economy to be-come more visible. These include continued strength in housing (despite the recent run-up in mortgage rates) and the ripple effects of the unconventional oil and gas boom. IHS also expects that the pace of capital spending will gather momentum, making it one of the engines of growth in 2014, although this growth will remain sub-dued relative to cyclical recoveries in the past few de-cades. Steady growth of consumer spending will also help to support the US expansion, with real GDP expect-ed to increase in the 2.5% range in 2014, after a meager 1.8% gain in 2013.

The European recovery will proceed, but at a very slug-gish pace. Despite some signs of weakness, the nascent Eurozone recovery will have staying power. A multitude of factors will support growth (0.8% in 2014), including very accommodative monetary policy, stabilizing labor markets, less emphasis on austerity by EU officials, im-proved spending power because of ultra-low inflation, better competitiveness in the peripheral countries, and more confidence in the ability of Eurozone politicians to manage the sovereign-debt crisis. Even with these posi-tive trends, some countries (e.g., Greece, Italy, and Spain) will struggle to achieve positive growth. On the other hand, both Germany and the United Kingdom will grow faster in 2014 than they did in 2013.

Chinas growth rate will be sustained. After hitting a low point in early 2013, Chinas recovery reaccelerated

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Global Construction Spending


2013 IHS 3 Fourth-quarter 2013


thanks to the governments mini-stimulus. IHS ex-pects the pace of Chinese growth to quicken a little from 7.7% in 2013 to around 8.1% in 2014. Further moderate stimulus will be applied if growth falls below 7.5%. Much stronger stimulus will be forthcoming if growth falls be-low 7.0%. The bigger growth challenge for China will be over the medium term, as the country deals with the daunting problems of an aging population and the conse-quences of rapid credit growth, including a new housing bubble and rising debt levels. Whether China can avoid the middle-income trap is one of the bigger uncertain-ties facing the global economy in the coming decade.

Other emerging markets will also perform a little bet-ter. The global environment facing emerging markets will be more growth-friendly than it has been in the last three years. US and Chinese growth will be a little stronger and the Eurozone will no longer be a drag on the world economy. This means that emerging-market ex-ports will again become a source of growth. IHS expects that real GDP growth for these economies will strength-en from 4.7% in 2013 to 5.4% in 2014. Implicit in these forecasts is the expectation that the 2014 tapering of US monetary policy will have a relatively minor impact. Nevertheless, a return to the very rapid growth rates en-joyed in the boom years of the 2000s is unlikely, unless the governments in these countries enact more structur-al reforms that raise productivity, allocate capital more efficiently, and, thereby, boost potential growth.

Unemployment rates in the developed world will re-main high. The unemployment rate in the advanced economies will only decline from 8.1% in 2013 to 7.8% in 2014. Technology-driven productivity improvements in both the manufacturing and services sectors will contin-ue to erode the demand for labor. Firms aggressive cost-cutting efforts will continue largely unabated in 2014, heightening pressures on many governments to imple-ment corrective pro-employment policies. In the United States, the unemployment rate is expected to decline from 7.4% in 2013 to 6.6% in 2014as much from weak-ness in labor-force growth as from genuine employment growth. The issue of discouraged workers could become a major political issue in the 2014 congressional elections. In the Eurozone, unemployment will remain near its re-cord highs, elevating this issues importance relative to continued emphasis on austerity.

Commodity prices will go nowhere and inflation will remain a low-level threat. During the coming year, gradually strengthening demand for most commodities will be balanced out by either higher production or am-ple inventories. This means that the movement of com-modity prices in 2014 will be essentially the same as in

2013they will go nowhere. Tame commodity markets, along with excess capacity in labor and product markets, will keep 2014 Consumer Price Index (CPI) inflation be-low 2% for the advanced economies. A growing risk is that inflation could continue to fall, as it has since 2011. Price pressures will also ease in the emerging world. IHS expects that the recent rise in emerging market infla-tionthe result of the taper panic from May to August 2013, which pushed down exchange rates and pushed up imported inflationwill reverse.

The US Federal Reserve (Fed) will start scaling back its stimulus, while other central banks will likely wait or provide more stimulus. The Fed is expected to be-gin scaling back its bond purchases no later than January 2014, while leaving interest rates unchanged until early 2015. Similarly, IHS expects the Bank of England to wait until the second half of 2015 to raise interest rates. On the other hand, given continued weakness in Eurozone growth, the European Central Bank may feel compelled to do its bit by engaging in another round of Long-Term Refinancing Operations (LTROs). In late 2013, some emerging-market central banks began raising rates; but as inflationary pressures ease, they will likely put policy on hold or (in a few cases) ease.

Fiscal headwinds will ease. With the US federal spend-ing sequester now replaced by a fiscal compromise worked out between the Democrats and Republicans, IHS ex-pects the drag from US fiscal policy to ease considerably in 2014. One manifestation of this will be an unchanged federal budget deficit (at just under US$700 billion) from 2013 to 2014following a sharp decline from around US$1.3 trillion in 2011 and US$1.1 billion in 2012. A sim-ilar easing of fiscal pressures will be evident in Europe. After having been slashed during the past three years, the budget deficits in many of Western Europes econ-omies will fall more gradually over the coming year, as they near more-sustainable levels relative to GDP. Many of the crisis economies of the Eurozone will be given a little more time to meet their fiscal targets.

The US dollar will strengthen against most currencies. Two important trends will push the dollar up against most of the worlds key currencies. First, US growth will be strengthening and growth differentials with other ad-vanced economies will be sizable. Second (and possibly more important) is the near certainty that the Fed will be removing stimulus sooner than most other major cen-tral banks. This will weigh down on the euro and the yen. It will also push down the currencies of emerging mar-ketsespecially those that have precarious balance-of-payment conditions. Because financial markets have al-ready anticipated a Fed tapering, the impact of the actual




tapering when it happens could be smaller than what happened in the summer of 2013. The Chinese renminbi is the only major currency that will probably appreciate against the dollar in 2014.

There will be more upside risks than downside risks facing the global economy. In recent years, the US, Eurozone, and Japanese central banks have exhibited a proactive approach to managing crises (despite facing vo-cal domestic debates), and have thereby removed some of the impediments to future economic growth. This has contributed to a shift in the balance of risks from neg-ative to neutral. Over the next year, we are likely to be

more surprised on the upside than the downside. There will certainly be no shortage of potential downside risksinstability in the Middle East and North Africa, more fiscal drag, more disappointing news from emerg-ing markets, etc. At the same time, we could see stron-ger-than-anticipated growth in the United States, the United Kingdom, and Germany. Emerging markets such as China, India, and Brazil could also do better than pre-dicted. Stronger growth in some of the worlds key econ-omies will also help bring about a broader global rebound.

(Source: IHS, Global Executive Summary, December 2013)

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Global construction segment detail Real 2010 Real 2010 Real 2010 Real 2010 Market Size 2013 US Dollar Growth US Dollar Growth US Dollar CAGR* US Dollar CAGR* (Billions of 2010 US$) 2013 (Percent) 2014 (Percent) 2012-17 (Percent) 2012-22 (Percent)

Total 8,194 2.4 4.7 4.1 3.8 Residential 2,997 2.6 4.4 3.9 3.6 Infrastructure 2,700 3.0 5.2 4.3 4.2 Transportation 1,256 2.3 6.1 4.7 4.5 Public Health 191 1.3 4.5 3.8 3.5 Energy 1,253 4.1 4.5 4.1 4.1 Nonresidential Structures 2,497 1.5 4.5 4.0 3.7 Office 388 3.0 5.3 4.7 4.0 Commercial 557 2.5 4.7 4.3 3.7 Institutional 489 -1.3 4.2 3.2 3.4 Industrial 1,063 1.7 4.2 3.9 3.7 Chemicals 141 6.9 5.5 5.8 4.8 Food Processing 119 2.3 5.3 4.8 4.4 Utilities 103 -0.9 2.5 1.2 2.0 Electrical and Electronic Products 90 -3.0 2.2 1.8 2.2 Petroleum Refining 79 5.1 -0.4 2.6 3.1 Communications 61 -2.0 3.1 2.1 1.7 Transportation Equipment 95 2.8 4.3 4.1 3.0 Other 376 1.2 5.4 4.7 4.4*Compound average annual growth rate




Construction overview

Review of the quarterly data (based on data available for 34 of the 69 GCO countries)

Total construction spending gained a bit of momentum in the third quarter, increasing to 1.6% year-on-year (y/y) growth, up from 1.4% y/y growth in the second quar-ter and year-over-year growth of just over a 0.5% in first quarter of the year. In China, third-quarter construction spending growth slowed to 2.8% y/y. The slowdown is largely due to the Chinese governments policy to tight-en the housing market to prevent further market froth-ing. Housing sales have cooled, leading to a slowdown in housing starts and completions. On the Eurozone front, the third-quarter construction spending declines slowed to a 2.6% y/y decrease, from a revised 4.4% y/y decrease in the second quarter as the region gradually emerges from recession. Year-on-year growth in the United States was estimated at 4.8% as the shutdown of the federal govern-ment affected the availability of third-quarter data. This was an acceleration from the 3.7% y/y growth in the sec-ond quarter.

Construction outlook

As 2013 came to a close global construction spending was on track to show a 2.3% increase for the year. These re-sults were positive, given the numerous headwinds the markets had faced over the year including a spending se-quester, government shutdown and continued congres-sional budget bickering in the United States, a tempo-rary growth slump in China, the continued malaise in Europe, and the residual impact of troubles in the major economies on the emerging markets that rely on them as markets for their imports. Despite these bumps in the road, by the end of the year most markets showed signs of strengthening. As a result, the outlook for 2014 looks bright with construction spending expected to grow 4.7% on a global level with all regions and all sectors en-joying increases.

There will be wide variations in growth among regions and sectors. The fastest-growing segment will be resi-dential construction in North America as the US housing market continues to recover from its prolonged slump. Western European residential construction will see

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the smallest uptick, increasing 0.9%. Even this modest growth is welcome news in a sector that plummeted at a 3.6% compound annual growth rate between 2007 and 2013 and in an economy that continues to struggle.

The crisis in Western Europe has also taken a toll on Eastern European construction markets, where spend-ing declined almost 5% in 2013 with a number of factors contributing, including a softer energy price outlook, the completion of infrastructure stimulus in Poland, and the winding down of spending in Russia for the 2014 Sochi Olympic games. We expect construction spending in the region to rebound in 2014, increasing 2.3% as the glob-al economic recovery gains traction. Bulgaria, Romania, and Slovakia, which suffered more dramatic spending declines, will enjoy the strongest growth in the coming year. Infrastructure spending in Poland will be buoyed by the inflow of transfers from the European Union, help-ing to offset declines in other construction segments. Russias prime minister has proposed a development plan for the countrys Far East region with 10 trillion rubles to be allocated toward infrastructure through 2020.

Asia-Pacific will enjoy the strongest growth in 2013, up 5.5%, on top of a 5.8% gain in 2012. In the wake of a slow-ing economy the Chinese government has shifted to a growth-support policy stance that has underpinned a re-bound since mid-2013. The policy shift has reinvigorat-ed investment in infrastructure, spurring construction spending in that sector. Offsetting the infrastructure gains, though, is a slowdown in residential construc-tion as government policies to forestall a housing bub-ble have cooled home sales and in turn has slowed res-idential construction spending. Longer term, it is likely Chinas era of double-digit construction growth has come to an end as it moves to the next phase of develop-ment and emphasizes consumer demand as the engine of future growth and stability. In Japan, Prime Minister Shinzo Abe has decided to allow a scheduled increase in

the consumption tax to go forward. To offset the nega-tive effects of the tax hike the prime minister will intro-duce a stimulus package to help increase capital expen-ditures and public works. Construction spending growth will slow in 2014, however as the post-Fukishima recon-struction effort begins to wind down. Reconstruction in the wake of Typhoon Haiyan, the powerful tropi-cal storm that struck Southeast Asia in November, will boost construction spending in the Philippines over the next few years. The Asian Development Bank estimates reconstruction costs to exceed US$8 billion.

South America, which saw construction growth mod-erate in 2012 and 2012, is expected to see spending in-crease in 2014 as its trading partners recover. Spending will accelerate through 2015. Canal expansion and devel-opment of port infrastructure along with high-rise lux-ury apartment buildings and hotels needed to develop its tourism sector will continue to support construction spending in Panama. Brazils preparations for the FIFA World Cup and Summer Olympic Games are coming up against their deadlines. After 2015 the growth will con-tinue, but at moderating rates. Brazils growth has been restrained by a variety of factors including insufficient investment in infrastructure. The government program designed to accelerate growth has prioritized investment in infrastructure projects, which will support construc-tion spending in the post-Olympic period.

The projection for 2014 construction spending in the Middle East and Africa regions calls for a 3.8% increase in construction spending. Political tensions in the re-gion and the prospect of softening oil prices have some-what dampened the near-term outlook for private con-struction spending in the Middle East, but many of the regions governments have committed fiscal support to improving housing and infrastructure investment to ad-dress socioeconomic issues that led to the discontent that ignited the Arab Spring uprisings beginning in 2011. In the United Arab Emirates, the development of non-oil activity and easing credit conditions have supported growth in residential and nonresidential structures con-struction while the government has maintained support for infrastructure and development projects despite flat-tening growth in oil income. Similarly, the Saudi Arabian government has put forth budgets that focus on housing and infrastructure investment as they attempt to keep their domestic economy humming in the face of a lethar-gic global economy and declining oil prices. The South African government has committed to spending 845 billion South African rand (US$109.74 billion) on infra-structure development through 2015 including construc-tion of power plants, transportation network expansion and upgrade, and new water and sanitation systems. The

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countrys lack of infrastructure has constrained its abil-ity to grow its export sector.

The five-year outlook sees global construction spend-ing increasing at a 4. 1% compound annual growth rate (CAGR) between 2012 and 2017. Asia-Pacific will con-tinue to lead the way with a 5.8% CAGR. While its of-ficial growth targets will be lower, China will contin-ue its development, with an emphasis on interior and western provinces leading to 7.4% CAGR through 2017. Indias five-year outlook has been lowered from 7.6% to a still strong 6.2% CAGR as the government struggles to achieve the majority necessary to pass much needed eco-nomic reforms.

North America, driven by a long awaited revival of mar-kets once the United States negotiates its way back from the debt issues that have been fueling the political stale-mate, is slated to enjoy 4.9% CAGR. There are some signs of progress being made with the passing of the omnibus spending bill. Additionally, the private sector seems to be paying less attention to issues in Washington and not allowing the political games to have as much impact on business confidence. As a result, we see growing evidence of a willingness to invest and create jobs which in turn is releasing pent-up demand for housing. Despite the strong growth, spending levels in North America will re-main far below those enjoyed prior to the market crash. South American construction will also enjoy a 3.4% CAGR over the next five years. Growth will be strongest in the 2014-15 period as Panama brings the canal expan-sion to completion and Brazil prepares for the influx of visitors to the World Cup and Olympic Games. Growth in the region will soften in the post-games period.

Eastern Europe is expected to average 1.5% construction spending growth through 2017. Russia will continue to dominate with more than 50% of the regions construc-tion activity during the next five years, although smaller countries such as Romania and Hungary will begin to en-joy healthy construction growth as exports pick up once the Eurozone economies stabilize. Russias spending has been helped by preparation for the 2014 Winter Olympics and 2018 FIFA World Cup games, spurring construction of both infrastructure and structures such as stadiums, hotels, and retail buildings. Poland, whose construction sector had weathered the recession well thanks to an in-frastructure rebuilding program, will see construction spending growth begin to fall off as the program begins to phase out and weakness in the European market lim-its investments in the near term.

Spending in the Middle East and Africa will continue to be healthy, increasing 3.7% over the period. Infrastructure

will set the pace. Spending in Western Europe will sig-nificantly lag the rest of the world for a number of years, with a modest 1.0% CAGR in construction spending an-ticipated between 2012 and 2017 as the regions sovereign debt crisis forces further austerity programs on govern-ments and makes private investors hesitant to spend.

The outlook beyond 2017 calls for a more subdued growth in all regions. Spending in South and Central America will slow as the preparations for Brazils international sporting events are completed and the Panama Canal ex-pansion draws to an end, leaving the region with a mod-erate 2.4% CAGR during 2017-22. Asia-Pacific will stay atop the growth charts although growth will regress to-ward the global average, posting a 5.3% CAGR. Growth rates in North America are expected to fall off to a 1.2% CAGR after the rebound in the middle of the decade. This outlook has been raised from last quarter as the effects of the shale gale are now expected to be longer lasting than initially thought. Spending in Western Europe will begin to come to life, posting annual gains of 1.6%, trail-ing the emerging markets but a significant improvement over the declining or anemic rates of the past five years.

Sector construction spending

Residential

Residential construction was the weakest of the con-struction segments in the years immediately following the market collapse, in large part because the collapse of the housing bubbles in many countries and the mort-gage foreclosure crises were significant contributors to the global recession. In the wake of the global financial crisis and housing-market collapse, an overhang of hous-ing in many of the mature economies led to a collapse in prices of existing homes and stifled new residential

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Total Construction SpendingLong-Term Growth by Region(2010 US dollars, CAGR)

** AP - Asia-Pacific, EE - Eastern Europe, SA - South and Central America, MEA - Middle East and Africa, NA - North America, WE - Western Europe




construction spending. Globally, residential construc-tion growth resumed in 2010, although the increases have been modest, with growth rates remaining well be-low 5% in most of the world.

The sector, particularly in the United States, has begun to rebound. Globally, residential construction increased 1.7% in 2012 and a healthier 2.6% in 2013, led by a 11.5% surge in North American residential spending. North American residential construction is expected to enjoy double-digit increases in the 11% range through 2015 as builders attempt to satisfy the pent-up demand for hous-ing created as the improving employment outlook moves household formation rates back toward historical norms. The outlook for 2014 calls for a 4.4% increase in residen-tial construction globally. Western Europes sector has bottomed out and a 0.9% increase in residential construc-tion will mark the regions return to growth. Over the next five years, global residential construction spending will increase at a healthy 4.0% CAGR. Significantly, the North American residential sector rebound will be in full force, with average annual growth of 7.9%. The robust growth rates will overstate the actual level of activity, as the rates will be off of historically low levels. In fact, over the 15-year forecast horizon, North American resi-dential spending will remain more than 20% below the pre-crash peak of $7.1 trillion that was realized in 2005. After the anomaly of North America, the Asia-Pacific re-gion will enjoy the healthiest increase in residential con-struction during 2012-17 with a 4% CAGR. The Middle East and Africa region follows with 3.1% growth, with Latin America coming next at 2.8%. Residential con-struction spending in Eastern Europe will average a 1.4% CAGR. Western Europes expected growth will come in at a 0.6% CAGR, lagging the world but beginning to show signs of life.

The Asia-Pacific region, which prior to the global finan-cial collapse was the second-largest residential construc-tion market, behind Western Europe, has become the

largest accounting for 43% of residential construction spending in 2013. By 2022, Asia-Pacific will account for 50% of all residential construction spending.

Nonresidential

Nonresidential structures

Global spending on nonresidential structures increased a modest 1.5% in 2013 as the uncertainty in Europe and the United States continued to hold investors back in those

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regions, the effects of which spilled over to their trad-ing partners around the globe. The deceleration in China eased as the government reinvigorated investment pro-grams, though growth in nonresidential structures spending there was 6.4% in 2013 and will remain well be-low the double-digit annual increases recent past. While the Eurozone crisis is not over, it has been contained, and the 1.4% decline in structures construction in 2013 should mark the bottom as spending is expected to post a 2.3% increase in 2014. In the United States, the political stalemate regarding the deficit while not truly resolved has seen progress made with the passage of the 2014 om-nibus spending bill. If any reassurances came out of the 2013 debacle that included a 16-day partial shutdown of the US government and brought the country to the brink of default on its loans, they are that the sky did not fall, the United States did not default, and much business went on as usual. In fact, business as usual appears to be enough to quell fears, particularly in light of improve-ments in the outlook for housing and some positive data coming in on employment. That said, structures con-struction in the United States, which declined 3.5% in 2013, is expected to enjoy a healthy 5.3% rebound..

Through 2017, global spending on nonresidential struc-tures construction will increase at a compound annu-al rate of 4.0%. Growth will be strongest in the Asia-Pacific region, although at 5.7% it is well below the 9% compound annual growth rate experienced in the re-gion over the past decade. Asia-Pacific will be led by China with a 6.6% CAGR and India with a 6.2% CAGR. Canal expansion in Panama and preparation for the 2014 World Cup and 2016 Olympics will foster a 3.7% CAGR in Latin America. The Middle East/North Africa region will see a 3.9% CAGR. Eastern European structures spending will continue to be muted by the lingering effects of the Eurozone crisis, with expected growth of just 1.2%, and Western Europes rebound will be a bit faster at a 1.5% CAGR, although coming off of a very low base.

Globally, the strongest growth will be in the construc-tion of office structures, which will increase at a 4.7% CAGR through 2017. Commercial structures will enjoy a 4.3% CAGR increase and spending on industrial struc-tures will grow at a 3.9% CAGR. Institutional structures will see a moderate increase of 3.2% as lingering public budget issues restrain investments.

Infrastructure

Global infrastructure spending increase 3.0% in 2013, led by the Asia-Pacific region, experienced a 5.8% gain as governments, particularly in China and Japan, turned to more stimulus spending, particularly in the form of in-frastructure construction to reinvigorate sagging econ-omies. Infrastructure construction growth will be peak-ing in Latin America over the next couple of years as Panama completes the canal expansion and Brazil comes up on the deadlines to host the World Cup and Olympics. Latin American infrastructure construction, which in-creased 3.3% in 2013, will see 5.2% and 7.4% increases in 2014 and 2015, respectively. Beginning in 2016 infra-structure spending growth will fall sharply to less than 1.5% annually. Western Europes infrastructure spending

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is expected to have bottomed out in 2013, with a 0.7% decline, and spending growth is expected to return to positive territory beginning in 2014 though increas-es will be modest (below 2%) and will be coming off of a low base so levels will remain depressed for some time. Eastern Europe suffered a 6.3% decline in infrastructure spending in 2013 as falling energy prices dampened the growth in energy infrastructure spending. Growth will resume in 2014 as demand for Eastern European exports strengthens with the global economy. North American infrastructure spending increased a modest 1.0% in 2013, bolstered by strong growth in Canadian energy in-frastructure spending, and will enjoy a healthy 3.1% in-crease in 2014, again led by spending in the energy seg-ment. Infrastructure spending growth will continue to be healthy in the Middle East and Africa, where growth was 3.1% in 2013 and will accelerate to more than 4% for the next several years. While energy infrastructure has dominated the region, the transportation and pub-lic health components will see faster growth in the fu-ture as declining global energy prices dampen the out-look for producing nations and they move to diversify their economies and build the infrastructure to support the changes.

Globally, infrastructure construction will see a 4.3% CAGR through 2017. Transportation infrastructure will enjoy the healthiest increases, with a 4.7% CAGR during the period. Energy infrastructure spending will grow at 4.1% over the period as the shale revolution continues. Public health infrastructure (water and sewer) will see a 3.8% CAGR.

Changes to the forecastResearch into the source data used for the Canadian Provincial Construction Model, which is used to create the GCO forecast for Canada, revealed that series used for infrastructure construction spending include spend-ing on development of mines and wells in the mining and petroleum industries. Inclusion of such spending is not consistent with the spending series used in the GCO model. Using other data series we were able to back out those expenditures at the national level, resulting in lower spending estimates for Canada. The data used to back out the mining and drilling expenditures are not available at the provincial level. As such, the sum of con-struction spending of the provinces as reported in the Canadian Provincial Construction table will not agree with the spending level reported for Canada in the stan-dard GCO tables.

Data revisions that have been implemented this quarter include

Costa Rica: The data used to calculate shares of infra-structure, residential, and nonresidential structures have been updated. This will affect both the historical and forecast periods.

Denmark: Revision to exchange rate in the global macro data base resulted in minor revised US dollar-based data for Denmark for the years 1990-98.


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Asia-PacificEastern Europe

MiddLe East and AfricaNorth AmericaSouth America

Western EuropeWorld

2013 2014 2015

Growth in Infrastructure Spending(2010 US dollars, percent change from a year earlier)

0

2

4

6

8


2017-2022 2022-2027 2012-2017

Infrastructure SpendingLong-Term Growth by Regions(2010 US dollars, CAGR)

012345

2009 2012 2015 2018 2021

Western EuropeAsia-PacificNorth America

Latin AmericaMiddle East and AfricaEastern Europe

Infrastructure Spending by Region(Trillion 2010 US dollars)




Netherlands: Revision to exchange rate in the global macro data base resulted in minor revisions to US dollar-based data for the Netherlands for all years.

Historical construction price deflators have been revised for several countries. Construction price deflators are used to convert a series from nominal to real units. The impact of GDP deflator revisions will be visible when looking at construction spending data in real terms. Countries with revised GDP deflators include Austria, Belgium, Denmark, the Czech Republic, Finland, France, Germany, Hungary, Iran, Ireland, Italy, Japan, Mexico, Netherlands, Norway, Oman, Qatar, Slovakia, South Korea, Sweden, Turkey, and the United Kingdom.

A summary of this and other changes in data and meth-odology can be found in the Revisions to Data and Methodology document, which can be found under Publications on the Construction page of MyInsight.

Risks to the forecastThe biggest risk to the global outlook is that as politics becomes more partisan, in a future game of chicken the United States will fail to resolve its debt issues and will default. Such an occurrence would derail the modest re-covery, plunging the US into a recession and wreaking havoc on the global economy as well. An oil price shock and a hard landing for China, as well as the possibili-ty that the anti-austerity sentiment could significantly change the political landscape in the Eurozone, also re-main as potential risks. Over the longer term, the major risk facing the world economy is the unsustainable gov-ernment finances of the advanced economies with high debt burdens.

On the bright side, there are a number of potential up-side risks to the forecast including a major rebound in US

business investment, a stronger-than-anticipated reac-celeration in Chinas economy, or a significant accelera-tion in Europes consumer spending, all of which could lead to stronger-than-expected global growth.

Regional Overview

Regional construction overview

Asia-Pacific

Asia-Pacific as a whole is stabilizing, but economic growth continues to be dampened by still weak external demand. Chinas economy in the near term will be guid-ed by the governments growth-support policies, bar-ring any calamitous shocks. The central governments shift to a growth-support policy stance in mid-2013 has stabilized the economy. The policy shift rejuvenated in-frastructure investment spending and ignited restock-ing. In Japan, economic growth is expected to be strong in the first quarter of 2014, driven by strong consumer spending and solid residential investment prior to the in-crease in the consumption tax from 5% to 8% in April. A scheduled stimulus package of 5.5 trillion yen will mute the tax-hike consequences, although slow prog-ress on reconstructionas well as higher costs and con-struction labor shortagesis likely to reduce its impact. Against a slightly more favorable external demand back-ground, the rest of Asias 2014 economic performance will be driven by three key factors: 1) the ongoing im-pact of US Federal Reserve tapering and associated capi-tal rotation out of emerging markets; 2) the process lead-ing to and the outcome of key elections, and 3) the pace of domestic macroeconomic reforms. Election cycles in Indonesia and India are increasing the perception of risk in these markets and also delaying much-needed reforms that would encourage investment. As a result, growth in

Changes in real GDP growth (Percent)

Current Change from last quarter 2013 2014 CAGR 2012-17 2013 2014 2012-17

Global 2.3% 3.1% 3.3% $ # #Asia Pacific 4.6% 5.0% 5.0% $ # #North America 1.6% 2.5% 2.7% $ # -Western Europe 0.0% 1.1% 1.2% $ # -Emerging Europe 1.7% 2.9% 3.4% $ # $South America 3.1% 3.4% 3.7% $ # -Middle East/Africa 3.0% 3.9% 4.3% $ # $Eurozone -0.4% 0.8% 1.0% - # -China 7.8% 8.0% 7.7% # # -United States 1.7% 2.5% 2.7% # $ -

# indicates an increase of 10 basis points or more, $ indicates a decline of 10 basis points or more, - indicates a change of less than 10 basis points.




these countries will be healthy by global standards but below rates enjoyed in the recent past.

Growth in construction spending in the Asia-Pacific re-gion slowed to 5.8% in 2013 as spending increases in China dipped to 5.4%, well below the double-digit in-creases that were standard for the country over the past decade. Infrastructure construction will remain the pri-mary contributor to Chinas growth and will accelerate

from 7.4% growth in 2013 to 10.3% growth in 2014 as the governments initiatives to support growth via stimulus continue to revitalize infrastructure projects. In Japan, construction activity, which recently had been driven by post-earthquake repairs, is expected to slow in the near term as labor shortages and the negative effects the in-creased consumption tax will have on residential con-struction serve to mute the impact of proposed stimulus spending. Longer term, Japans construction market will also be bolstered by the announcement that Tokyo will host the 2020 Summer Olympics. IHS expects spend-ing in Japan to increase just 1.0% in 2014 but growth will begin to accelerate again in 2015. Construction growth in India increased to 5.2% in 2013 as the United States, China, and the Eurozone showed signs of strengthen-ing. Spending is expected to accelerate as the Indian cab-inet has approved the long-awaited National Cabinet Committee on Investment. The committee will enable the fast-tracking of approvals for big projects, particular-ly infrastructure projects. It is hoped that the commit-tee will be able to push through a number of projects that have stalled, each with investment value in the $185-mil-lion range. Spending in India is expected to increase 6.3% in 2014 and 2015 with the infrastructure segment seeing the greatest strength. China will have the fastest con-struction growth in the region.

Eastern Europe

The economies of Central Europe and the Balkans can anticipate accelerated, if still moderately paced, growth in 2014 as export prospects brighten with further recov-ery of aggregate demand in their key markets in Western Europe and more robust expansion in 2015. From a dis-appointing 1.4% pace in 2013, Polands growth is expect-ed to double in 2014 to 2.9% and strengthen further to 3.4% in 2015 as recent data have been favorable. Russian economic growth lost much of its momentum in 2013 as export demand weakened and investment activity was slack. While domestic consumption continued to be the driver of growth, its pace slowed substantially. Although government spokesmen have blamed the slowdown on the recession and weak recovery in Western Europe, most recently Russian president Vladimir Putin described the economic problems as home grown due to an unfavor-able investment environment and slow growth of labor productivity. IHS sees Russias growth picking up moder-ately in 2014 to 2.7% and further to 3.0% in 2015 as busi-ness and consumer confidence recover along with the general external economic environment.

Eastern European construction spending declined 4.9% in 2013, although the worst should be over as we antici-pate 2.3% growth in 2014. As the global economy recovers

33%

29%

37%

ResidentialNonresidential Structures

Infrastructure

Asia-Pacific: Components of Total Construction, 2013

345678

2013 2014 2015


Infrastructure

Asia-Pacific: Components of Construction(Percent change from a year earlier)

-2 0 2 4 6 8 10

Rest of Region*Australia

South KoreaIndia

JapanChina

Asia-PacificWorld

2013 2014 2015

Total Construction Spending: Asia-Pacific(Percent change from a year earlier)

* Rest of Region includes Bangladesh, Hong Kong, Indonesia, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Taiwan, Thailand, Vietnam




and demand for Eastern European exports is reinvigorat-ed, the regions construction spending will be stimulat-ed. Over the next five years, construction spending in Eastern Europe is slated to see an overall 1.5% compound annual growth rate (CAGR) through 2017. Residential spending will grow at a 1.4% CAGR, slightly slower than the infrastructure segment, which will see a 1.8% CAGR through 2017 but faster than the 1.2% CAGR for nonres-idential structure spending. Office construction will be among the leading segments in the region, with expect-ed annual growth of 2.8% through 2017. Infrastructure spending has led growth in recent years, particularly in Russia and Poland, which account for about 70% of the regions construction spending. Over the next five years growth in energy infrastructure will slow in response to sagging global energy prices as the energy supplies from the North American shale gale come online. Energy in-frastructure spending will see a 1.0% CAGR through 2017 while the small but growing public health infrastructure segment will increase at a 1.1% CAGR. Spending on trans-portation infrastructure will be dampened by the need for fiscal austerity in the near term, although the sector will recover when export demand picks up. Over the up-coming five years spending on transportation infrastruc-ture will expand 2.8% annually.

Russia is the regions largest construction market and it will enjoy a 2.8% CAGR over the next five years, spurred by 2.4% annual growth in the nonresidential structures segment and a 3.9% CAGR in infrastructure construc-tion. Russias economy, which is highly dependent on revenues from energy exports, will be hampered by low-er global energy prices brought on by the influx of new energy supplies, particularly unconventional oil and gas such as the North American shale products. Energy in-frastructure, which led construction spending growth in the past five years, will slow, increasing at a 2.8% CAGR through 2017, down from the 6.3% CAGR during 2007-12. Polands construction market had been an Eastern European star, unique in that it did not experience any contraction during the global recession, but the Eurozone crisis has caught up with the Polish economy, causing GDP growth to slow, and total construction spending is expected to have plunged 15.1% in 2013 as infrastruc-ture projects came to an end and austerity initiatives and low energy prices dry up funding for new ones. The out-look for Polish construction will be brighter in 2014 as Polands trade partners see improved economic strength. Office construction and transportation infrastructure spending can expect the strongest growth. Elsewhere in

22%43%

35%


Infrastructure

Eastern Europe: Components of Total Construction, 2013

-8-4048

2013 2014 2015


Infrastructure

Eastern Europe: Construction(Percent change from a year earlier)

-16 -12 -8 -4 0 4 8

Rest of Region*SlovakiaRomania

Czech RepublicPolandRussia

Eastern EuropeWorld

2013 2014 2015

Total Construction Spending: Eastern Europe(Percent change from a year earlier)

* Rest of Region includes Bulgaria, Hungary, and Ukraine

-6 -4 -2 0 2 4 6

ResidentialStructures

InfrastructureTotal

2013 2014 2 015

Components of Construction: Eastern Europe(Percent change from a year earlier)




Eastern Europe, debt issues in Ukraine along with politi-cal dissension as the president chose to align with Russia rather than go forward with joining the European Union have heightened uncertainty and dampened the invest-ment climate, which will negatively impact construction spending.

South America

The economic outlook for Latin America is one of cau-tious optimism; in our baseline scenario, most econo-mies will accelerate in 2014-15, driven by a more favor-able external environment. A pickup in US economic growth will be particularly beneficial for countries in Central America that depend on the United States as a major export destination. Europe will achieve positive growth, Asian economies will accelerate slightly, and non-oil commodity prices are not forecast to decline.

Thus, the regions exports will recover and post moder-ate growth. Brazils economy will post a modest acceler-ation, led by capital spending and fiscal stimulus in ad-vance of the October 2014 election. Countries such as Venezuela and Argentina that adhere to the so-called socialism of the 21st century will face big economic challenges derived from many years of macroeconomic mismanagement. Government interventionism in most economic affairs has scared away private investment and enlarged fiscal imbalances.

South America has been a leader in construction spend-ing growth, though ranking second behind the Asia-Pacific region over the past five years. The global eco-nomic struggles, particularly in Western Europe and the United States, which are major markets for South American products, have led to a slowdown in construc-tion growth. Spending increased in 2013 but just 2.7%, putting the region just slightly ahead of the global aver-age. The outlook for 2014 is brighter as the US economy gains traction, the Eurozone stabilizes, and Chinas slow-down is halted, if not reversed. Panama, while a small market in size, will continue to rank among the glob-al leaders in terms of growth as the final push to com-plete the canal expansion takes place. It will see healthy growth of 11.3% in 2014 and 8.0% in 2015, after which growth will fall off significantly and the emphasis of the construction market will turn from infrastructure to structures and housing. Brazil is the largest construction market in South America. The economy has stumbled and along with it the construction market. The push is on to deliver the projects promised for the 2014 World Cup and 2016 Olympics but final costs will be greater than an-ticipated. Growth will increase over the next two years in an effort to complete the transportation projects and

venues needed for the Olympics even though they miss the World Cup targets. Infrastructure is also driving con-struction spending growth in Colombia, where the gov-ernment has launched a plan worth US$25 billion for the development of 47 projects before 2020.

The slowing of the global economy will pose the great-est risk to the South and Central American construction markets. The region has enjoyed investment from Asian countries, particularly China, which has been willing to fund infrastructure development in the region in return for access to its natural resources. In Brazil, shortages of skilled labor will also pose a risk to its lofty plans for infra-structure and housing construction. To date, the country has not invested heavily enough in education programs to create a home-grown supply of skilled labor. With reg-ulations calling for the use of Brazilian labor on many of the publicly funded projects, a lack of qualified work-ers is creating bottlenecks in some areas. Development of energy resources is looked to as the road to growth in many South and Central American countries. The rapid development of shale oil and gas and other tight hydro-carbon supplies in North America will serve to moderate global energy prices, making it more difficult for Latin American countries to attract investors interested in de-veloping the needed infrastructure.

124578

2013 2014 2015


Infrastructure

Latin America: Construction(Percent change from a year earlier)

33%

19%

48%


Infrastructure

Latin America: Components of Total Construction, 2013




-5 0 5 10 15 20Rest of Region*

VenezuelaChile

ColombiaArgentina

BrazilPanama

Latin AmericaWorld

2013 2014 2015

Total Construction SpendingLatin America(Percent change from a year earlier)

0

2

4

6

8

2012 2013 2014 2015 2016


In frastructure

Latin America: Construction(Percent change from a year earlier)

* Rest of Region includes Bolivia, Costa Rica, Ecuador, Peru, and Uruguay

For further detail on South American construction please see individual country reports and the Regional Focus section, which highlights North and South America this quarter.

North America

The long-awaited rebound in North American construc-tion that finally got under way in 2012, with a 5.7% year-over-year (y/y) increase in construction spending, expe-rienced some headwinds in 2013 caused by the political stalemate in the United States that increased the level of uncertainty and dampened investment plans as many businesses remained in a wait-and-see mode. The results were not as dour as they might have been particular-ly in light of the October government shutdown. When the sky did not fall, confidence was boosted, making the outlook for 2014 brighter despite the fact that the issues in Washington have not been completely resolved. The housing market continues to show signs of strength as housing prices are on the rise and mortgage applications are steady and new home sales for the year outpaced in-ventory growth by a greater margin in 2013 than in 2012.

Construction spending in the United States was up 4.4% in 2013 and is expected to grow 8.7% in the com-ing year, led by the residential sector. Canadas construc-tion spending was up 2.7% in 2013, led by energy infra-structure, which increased 9.4% as the development of unconventional hydrocarbon resources continues. As the necessary infrastructure is put in place, spending growth will slow so that increases in total construction spend-ing in 2014 and 2015 will be 1.5% and 1.3%, respectively. In Mexico, total construction spending declined slightly with decreases in the residential and infrastructure seg-ments. There was, however, growth in the nonresiden-tial structures segment (a 2.5% increase) with particular strength in transportation equipment structures as auto manufacturers continue to invest there. Follow-on activ-ity to support the growing automobile manufacturing is leading to growth in commercial and office construction as well. The strengthening US economy will bolster ac-tivity in Mexico, with a 4.1% increase in construction ex-pected in 2014 with all segments taking part in the gain.

Over the medium term, North American construction spending will enjoy healthy 4.9% compound annual growth through 2017 with chemical manufacturing, res-idential, and office construction leading the pace. Longer

-2 0 2 4 6 8 10

United StatesCanadaMexico

North AmericaWorld

2013 2014 2015

Total Construction Spending(Percent change from a year earlier)

39%

36%

26%


Infrastructure

North America: Components of Total Construction, 2013




term, growth will decelerate to a 1.2% CAGR as the re-gion settles into a more sustainable steady state.

For further detail on North American construction please see individual country reports and the Regional Focus section, which highlights North and South America this quarter.

Western Europe

After suffering a record six successive quarters of con-traction between the fourth quarter of 2011 and the first quarter of 2013, the Eurozone emerged from recession with 0.3% quarter-on-quarter (q/q) growth in the sec-ond quarter of 2013. The fragility of the upturn was high-lighted by GDP growth moderating to just 0.1% q/q in the third quarter. A combination of rising business and con-sumer confidence (supported by much-reduced sovereign debt tensions), accommodative monetary policy, low in-flation, and reduced fiscal tightening will fuel gradual re-covery during 2014. In addition, a pickup in global growth should be increasingly supportive to Eurozone exports. Given this more stable and improving backdrop, busi-nesses should become more prepared to invest, especial-ly as there is a growing need to upgrade or replace plant and equipment after the extended weakness in capital expenditures. In the United Kingdom GDP growth sta-bilized 0.8% q/q in the third quarter of 2013, having im-proved to this level in the second quarter from 0.5% q/q in the first. Hopefully, prolonged improved economic ac-tivity will sustain recent, appreciably healthier business confidence, encouraging firms to lift their investment and employment. Markedly rising employment supports consumer spending, along with a robust housing market that is also underpinning higher residential investment. Fiscal policy, however, remains tight and credit condi-tions are still relatively difficult especially for smaller companies.

The crisis in the Eurozone will continue to shape the construction outlook for Western Europe and most

other world regions as well. The Eurozone emerged from recession, although the recovery in construction is not universal. Construction spending in the northern coun-tries of Western Europe edged up 0.3% in 2013 though 5 of the 11 countries experienced a decline and 6 increased, led by Norway (up 4.5%). Construction in the southern countries declined 4.3%. Only Turkey enjoyed growth (7.0%) while Greece continued to suffer the biggest loss, a decrease of 22.3%. The dichotomy will continue into 2014 when northern countries will see construction spending grow 3.2% with decreases in just three coun-tries (Denmark, Finland, and Belgium) of 1.5% or less. Construction in southern-tier countries will continue to struggle. France will eke out a slight 0.4% increase. Turkeys growth will slow to 5.7% while its neighbors see further decreases, though the rates of decline will slow.

Looking at the Western European region as a whole, all segments of construction experienced declining spend-ing in 2013, and all will turn the corner to grow in 2014. The turnaround in the residential segment will be less strong than the rebounds in the nonresidential struc-tures and infrastructure segments as the region works off the effects of the housing bubble collapse.

-30369

12

2013 2014 2015


Infrastructure

North America: Construction(Percent change from a year earlier)

47%

29% 24%


Infrastructure

Western Europe: Components of Total Construction, 2013

-3

-2

-1

01

2

3

2013 2014 2015

Reside ntialNonre sidential Structures

Infrastructure

Western Europe: Construction(Percent change from a year earlier)




Middle East and Africa

The near-term economic outlook for the Middle East and North Africa (MENA) region remains vulnerable to re-gional political instability and unrest as countries such as Egypt, Libya, and Tunisia struggle through transitions and as spillover from the Syrian crisis weighs heavily on neighboring Iraq, Lebanon, and Jordan. We see MENAs growth prospects only gradually gaining momentum in 2014 as countries move slowly through the transition process but benefit from strengthening global economic conditions. Urgent reform efforts are needed for MENA countries to begin addressing issues of job creation and economic diversification, but these have proven difficult under current conditions. Prospects for improved real GDP growth in sub-Saharan Africa are on the rise despite some prevailing headwinds. Development of econom-ic activities beyond the extractive industries that Africa has traditionally relied upon will improve the momen-tum of growth in the region. Activities such as telecom-munications, financial services, tourism, agro-process-ing and light manufacturing, and call centers/customer

service outsourcing will augment Africas capacity for ac-celerating development. Infrastructure projects, which tend to be large-scale and rank high as a component of foreign-direct investment value, will complement these ventures. Longer term, a growing middle class will sup-port further economic expansion in the region.

Also serving to moderate construction growth in the region is the political turmoil that began as the Arab Spring unrest, experienced in many countries, particu-larly Tunisia and Egypt, which has made investors more hesitant. On the other hand, some of the wealthier coun-tries, particularly those such as Saudi Arabia and Jordan, which are well-endowed with energy resources, have boosted construction of housing and infrastructure in a move to quell potential dissidents in their countries.

Total construction spending in the Middle East and Africa region will increase at a compound annual rate of 3.7% through 2017. Infrastructure will see the fast-est growth (4.0% CAGR) and residential construction will be the slowest-growing segment (3.1% CAGR). In the oil-rich Middle Eastern countries, energy infrastructure dominates, while in the African countries, transporta-tion infrastructure is the focus of construction efforts.

-10 -5 0 5 10Ireland

DenmarkFinlandSwedenNorway

SwitzerlandAustria

BelgiumNetherlands

GermanyUnited KingdomWestern Europe

World

2013 2014 2015

Total Construction Spending:Western Europe (Northern Countries)(Percent change from a year earlier)

-25 -20 -15 -10 -5 0 5 10

FranceGreece

PortugalTurkey

ItalySpain

Western EuropeWorld

2013 2014 2015

Total Construction Spending:Western Europe (Southern Countries)(Percent change from a year earlier)

27%31%

42%


Infrastructure

Middle East & Africa: Components of Total Construction, 2013

112345

2013 2014 2015


Infrastructure

Middle East & Africa: Construction(Percent change from a year earlier)




Regional Focus

North America

Total construction overview

The United States is the largest contributor to construc-tion spending in North America, accounting for about 70% of all spending.

Real total construction spending in North America was on track to increase 3.6% year over year (y/y) at the close of 2013. Residential construction was on pace to see spending increase 11.5% while nonresidential construc-tion was expected to decline 0.9%.

In 2014, total construction spending is expected to post a 7.0% y/y gain, driven largely by the residential segment. Looking ahead, total construction spending in 2015 is expected to increase 6.8%.

Over the medium term, the outlook for North American construction spending is positive, with a 4.9% compound annual growth rate (CAGR) expected between 2012 and 2017. During this time, the fastest growing segment will be residential construction.

In the longer run, growth will slow to 1.2% CAGR from 2017 to 2022, led by spending on nonresidential struc-tures construction.

The construction market in North America is regaining ground as economic conditions both in the United States and globally continue to show signs of strength. The eas-ing of debt crises in several European countries will have a positive impact on the demand for North American exports. At the same time, the recently negotiated Bipartisan Budget Act in the United States removes a

large element of risk from the forecast by virtually elimi-nating the possibility of a repeat of Octobers government shutdown. Over the short run, the deal provides some re-lief from the spending sequester for the next two years and replaces arithmetically determined budget reduc-tions with more targeted initiatives. Combined, these factors will reduce uncertainty and instill confidence on the part of business to hire and to invest, including in-vestments in new or renovated structures. Additionally, the recovery in the US housing market will drive growth in the coming years.

In Canada, economic losses from the Great Recession have been recovered, but expansion will be soft given the backdrop of global uncertainties, increased debt lev-els, and gradual tightening monetary policy. In the lon-ger term, a slow-growing population will pose demo-graphic challenges to economic growth. However, a solid demand for commodity-base goods will be a major driv-er of growth.

In Mexico, the latest IHS forecast calls for the Mexican economy to grow 3.0-3.3% in 2014 before accelerating to 3.9% in 2015. An improved (from Mexicos standpoint) outlook for oil prices may allow for some fiscal stimulus, and some relaxation in monetary policy will also help

-4 -2 0 2 4 6

Rest of Region*Israel

IranUnited Arab Emirates

South AfricaSaudi Arabia

Middle East and AfricaWorld

2012 2013 2 014

Total Construction SpendingMiddle East & Africa(Percent change from a year earlier)

-1 0 1 2 3 4 5 6 7 8 9

United StatesCanadaMexico

North AmericaWorld

2013 2014

Total Construction Spending(Percent change from a year earlier)

* Rest of Region includes Egypt, Kenya, Senegal, Tunisia, Bahrain, Jordan, Kuwait, Oman, and Qatar

0

400

800

1,200

1,600

2,000

2008 2010 2012 2014 2016 2018 2020 2022

Residential Nonresidential Structures Infrastructure

North America: Components of Total Construction(Billions of 2010 US dollars)




domestic demand. A better picture for the United States improves Mexicos outlook in 2014-15. Economic funda-mentals are improving in the United States, particularly in housing, but policy headwinds from Washington are still holding it back for now.

Residential construction overview

In North America, real spending on residential construc-tion was expected to increase 11.5% y/y as 2013 ended. Growth in this segment came from the United States, as both Mexico and Canada were on track to see minor spending declines.

Residential construction is expected to increase 11.1% in 2014, to be followed by a further increase of 11.5% in 2015. Spending in the region will come largely from the United States as the housing market continues to emerge from its prolonged recession.

The medium-term outlook for spending in North Americas residential sector is positive, with a 7.9% CAGR expected between 2012 and 2017.

In the longer run, residential construction spending will slow to 0.6% CAGR from 2017 to 2022 as the pent-up US housing demand is satisfied and the market settles in to meet slowing demand generated by slowing popu-lation growth.

In Canada, consumers are expected to begin deleverag-ing in order to tackle household finances, and concerns of oversupply will stunt new home building activity. Demographic factors will also work against this segment. While the Canadian population is increasing it is also ag-ing, with the over-65 age cohort growing most rapidly, lowering demand. Urbanization is also rising. These de-mographic changes have led to a surge in multi-unit res-idential structures as more Canadians moved closer to cities or into retirement communities. The surge in con-struction of multifamily housing is starting to cool as de-mand is being met.

In Mexico, credit to the private sector will continue to ex-pand and support domestic demand. The Mexican finan-cial system will continue to increase its lending both to consumers and firms; an upward trend has already been observed since the second half of 2010, and we forecast further robust growth in 2014. Growing household in-come will support growing demand for housing, spurring moderate growth in residential construction in Mexico.

In the United States, increased consumer spending, of which a sizable portion emanates from improved auto

sales and durable goods related to additional home sales, has a positive impact in the near term. This spending can be attributed to improved household net worth, slight-ly better jobs growth numbers, and improved consumer confidence. This improvement in the overall economic climate is aiding the US residential market. The in-creased demand is pulling down existing home invento-ry and pushing up demand for new homes to fill the gap.

Nonresidential construction overview

Structures

Real spending on construction of nonresidential struc-tures in North America was set to post a decline of 2.1% y/y at the close of 2013. The strongest performing sec-tor for the year was commercial construction, while in-stitutional construction had the weakest performance.

We anticipate that nonresidential structures construc-tion spending will increase 5.3% in 2014 and 5.4% in 2015 as business confidence improves spurring both hiring and investment. In the near term, office construction is ex-pected to experience the highest rate of growth.

Over the medium term, spending on nonresidential struc-tures construction in North America will increase at a 3.9% compound annual growth rate from 2012 to 2017. Spending on office construction will enjoy the strongest growth during this period with a 7.4% CAGR, while in-stitutional construction spending will be the weakest performer as governments at all levels only slowly work off budget deficits.

In the longer term, building construction spending is expected increase at 1.6% CAGR with institutional con-struction spending enjoying the highest growth as edu-cation and healthcare facilities become more pressing priorities and coffers are able to fund them.

0 5 10 15 20

United States

Canada

Mexico

North America

World

Residential Construction Spending in 2014(Percent change from a year earlier)




In Mexico, the outlook for manufacturing looks promis-ing, as automakers in Mexico have relatively ambitious expansion plans while the US market recovers and they gain market share.

In the United States and Canada, a better entrenched global economic recovery will spark an acceleration in export activity. This, in turn, will boost business confi-dence and lead to a pickup in nonresidential investment. In addition, lower energy prices, particularly for natural gas, will make North America more lucrative for man-ufacturing, particularly in energy intensive industries such as chemicals.

Infrastructure

As 2013 came to a close, real infrastructure construction spending in North America was on pace to show a modest 1.0% y/y increase. Construction on energy infrastructure drove growth with gains of 2.7% y/y while transportation infrastructure construction, heavily dependent on tight public funding, was the weakest performer.

Infrastructure construction spending is expected increase 3.1% in 2014 followed by 1.1% growth in 2015. Energy infrastructure construction, propelled by the surge in the development of domestic unconventional energy sources, will post the highest growth in 2014.

North Americas infrastructure segment faces a positive spending outlook with a 1.8% CAGR between 2012 and 2017. During this time, public health construction is ex-pected to grow most rapidly spurred by the resurgence of the housing sector, while publicly funded transporta-tion construction will continue to lag.

In the longer run, growth in infrastructure construction in North America will slow to 1.5% CAGR from 2017 to 2022. Over this period, spending on transportation will expand the fastest.

Mexico will have the strongest infrastructure growth in North America over the near term. The central bank is cutting interest rates while the government has ob-tained congressional approval to widen the fiscal def-icit in order to increase spending and help an economy that posted poor growth in the first nine months of 2013. Plummeting public investment has been a major drag on growth, although it is expected to recover in 2014.

The Canadian government will continue to invest in in-frastructure projects. The C$33-billion Building Canada plan announced in 2007 expired in 2013, but the 2013/14 budget pledged C$47 billion in new funding over the next 10 years for infrastructure projects at the provin-cial and municipal levels. This included C$32.2 billion for the Community Improvement Fund, aimed at roads, transit, and community infrastructure, as well as a new C$14-billion Building Canada fund targeting infrastruc-ture projects that will bolster economic growth. In con-junction with other federal infrastructure investments, a minister pointed out that the governments latest plans amount to the largest investment in infrastructure that Canada has ever seen. The government plans to balance the budget by fiscal year 2015/16.

In the United States, government spending is expected to continue to be a drag on GDP growth this year, though a much smaller one than in 2013. This is one reason why we expect 2014 to be a year of stronger economic growth and reduced risk. Even with this cautiously optimistic outlook, uncertainty remains with regard to funding for infrastructure projects across the country. Also on the horizon is a discussion of the Surface Transportation Act signed by President Barack Obama in July 2012, which essentially left funding at current levels for two years. There have already been calls to begin talks as to what steps to take before this expires in September 2014.

0 1 2 3 4 5 6 7

United States

CanadaMexico

North AmericaWorld

Nonresidential Structures Construction Spending in 2014(Percent change from a year earlier)

0 1 2 3 4 5 6

United States

CanadaMexico

North AmericaWorld

Infrastructure Construction Spending in 2014(Percent change from a year earlier)




Risk

North America poses low construction risk and the United States offers faster growth in the near term.

All three countries face below-average risk and compare favorably in size to the global median. Over the next five years, led by the recovering residential sector, the United States will enjoy above-average construction spending growth, putting it in the favorable upper left quadrant of the Opportunity/Risk bubble chart.

Central and South America

Total construction overview

The regional outlook for South America is one of cau-tious optimism; most economies will accelerate in 2014-15, driven by a more favorable external environment.

In 2013, real total construction in Central and South America increased 2.7% year over year (y/y). Residential construction grew 2.4% while nonresidential construc-tion increased 2.8%.

In 2014, total construction spending is expected to post a 4.1% y/y gain, spurred by an improving global economy along with infrastructure investments in several of the regions countries. Spending growth will accelerate to 5.9% y/y in 2015.

Panama will post the most significant gains in total con-struction in 2014, driven by continued construction on the Panama Canal project and the expansion of the Canal Zone.

Venezuela will have the weakest market, with spending suffering a slight decline. Venezuelas economic condi-tion is rapidly deteriorating amid rampant inflation, de-creasing currency reserves, and government intervention in multiple sectors, all of which are deterring investment interests in the country.

The medium-term outlook for Central and South Americas construction spending calls for a 3.4% com-pound annual growth rate (CAGR) between 2012 and 2017. During this time, nonresidential structures spend-ing will increase the fastest. Growth will slow in the lon-ger run to 2.4% CAGR from 2017 to 2022 when spend-ing on residential construction will have the highest growth rate.

The outlook for Latin America in 2014 is mostly pos-itive. Most economies in the region will see econom-ic growth accelerate as they adapt to the new world eco-nomic environment with relatively stable commodity prices and less exciting demand from China. On a pos-itive note, the US economy will accelerate from 1.5% growth in 2013 to 2.5-2.7% in 2014, and this development will help Latin American countries. Latin Americas real

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8

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2 12 22

Global Average Canada United States Mexico

North America(Vertical scale: Total construction spending growth, real 2010 US dollars, 2012-17; Horizontal scale: Five-year construction risk score)




GDP grew 3.1% in 2013 and will accelerate to 3.4% in 2014 and 3.9% in 2015.

The Brazilian economy will post accelerated growth in 2014-15, driven by investment. Brazils GDP is ex-pected to expand 3.0-3.3% in 2014 before accelerating to 3.6-3.9% in 2015. A more aggressive stance against infla-tion by the central bank may help improve business sen-timent and investment. Interest rates in Brazil are now, on average, similar to 2012, so there is little room for the government to save money on interest payments. As a re-sult, there is no room to execute fiscal stimuli (mostly in-vestment) without hurting public finances significantly. Therefore, we should not expect a major boost from gov-ernment spending, even though 2014 is an election year; the possibility of a fiscal spree (political business cycle) under tight fiscal conditions has become one of the ma-jor risks for the Brazilian economy for 2014. The worlds recent economic environment has not helped Brazil, and exports, which will grow only moderately, will not drive growth. Investment will support growth, and the government is using all of its available tools to stimulate industry.

In Colombia, Chile, and Peruand to some extent, Uruguay and Panamastrong macroeconomic funda-mentals and high-quality policy frameworks will sup-port the continuation of relatively strong growth in 2014. These economies are characterized by credible inflation-targeting regimes, flexible exchange-rate re-gimes, and sound external debt profiles. They also have well-capitalized financial systems with relatively good asset quality; public finances are in relatively good shape and public debt ratios are relatively low.

Countries where macroeconomic mismanagement reigns, such as Venezuela, Ecuador, and Argentina, will decelerate in 2014 as the impact of low investment in previous years coupled with low fiscal flexibility pass-es the bill. These countries do not have room for policy maneuvering; Venezuela and Argentina already exhib-it high inflation, so they cannot further ease monetary conditions, and Ecuador uses the US dollar as legal ten-der. Public finances are not in the best shape either, so an increase in fiscal spending is ruled out.

In the medium term, Latin America will have to fix structural problems to make growth sustainable, among them widespread poverty and very bad income distribution. Most countries in the region have a frag-ile social equilibrium by which rapid economic growth may lead to drastic political change if the poor do not benefit from the countries relative buoyancy, such as

the Socialism of the 21st century adopted by many countries.

(Source: IHS)

Residential construction overview

In Central and South America, real spending on residen-tial construction increased 2.4% y/y in 2013.

Residential construction is expected to grow 2.0% in 2014 and will pick up to 3.0% in 2015.

Brazil will spend the most on residential construction in 2014 and Panama will experience the strongest growth rate, while Venezuela will be the only country to post a year-over-year decline in residential spending.

The medium-term outlook for Central and South Americas residential sector is positive, with 2.8% CAGR expected between 2012 and 2017. In the longer run, resi-dential construction spending will increase 3.8% CAGR from 2017 to 2022.

-5 0 5 10 15 20Rest of Region*

VenezuelaChile

ColombiaArgentina

BrazilPanama

Latin AmericaWorld

2013 2014

Total Construction SpendingLatin America(Percent change from a year earlier)

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Residential Nonresidential Structures Infrastructure

Latin America: Components of Total Construction(Billions of 2010 US dollars)

* Rest of Region includes Bolivia, Costa Rica, Ecuador, Panama, Peru, and Uruguay




The Venezuelan governments move to introduce housing price controls is likely to force proprietors not to sell properties. Venezuelan president Nicols Maduro announced in December that he will extend his govern-ments policies to introduce price controls on the real es-tate sector. Rental prices are already regulated so the new move probably implies there will now be price controls on buying and selling houses and flats. If that is the case, the government will aim to introduce standards and pa-rameters to determine the fair price of houses and flats and not allow properties to be sold at higher prices than those stipulated. Maduro was granted extraordinary powers to legislate for one year (from 19 November) to deal with Venezuelas economic problems and tackle cor-ruption. The move by the government is likely to create a deterrent to private housing construction.

Brazils popular Minha Casa, Minha Vida (My House, My Life) program will continue in 2014. The program, started under President Dilma Rousseff, is part of PAC-2 and is a government social housing project aimed at building low-cost homes from 2009 to 2014 to address the housing shortage. The program received initial fund-ing of 278.2 billion reais. In December 2013, the president marked the 1 millionth home to be handed over through the program.

(Source: IHS)

Nonresidential construction overview

Structures

Real spending on nonresidential structures in Central and South America posted a 1.7% y/y gain in 2013. The strongest performing sector for the year was office

construction, which gained 3.4%, while industrial con-struction had the weakest growth of just 0.7%.

We anticipate that nonresidential structure spending will increase 4.8% in 2014 and 6.9% in 2015, with office construction expected to experience the highest growth.

Brazil will spend the most on nonresidential structures construction in 2014 with continued investment in fa-cilities, including venues for events as well as lodging and other service facilities as it prepares for the 2016 Olympics.

Panama will experience the strongest growth in non-residential structure construction while Venezuela will have the weakest.

The medium-term outlook for nonresidential structure spending in Central and South America calls for 3.7% CAGR from 2012 to 2017. Spending on office construc-tion should yield the highest growth rate during this period (4.9% CAGR). Longer term, spending on nonresi-dential building construction is expected to increase at 2.5% CAGR, with office construction spending continu-ing to enjoy the highest growth.

Argentinas economic growth will slow in 2014. Policy mismanagement, high inflation, foreign-exchange con-trols, and import restrictions will stifle investment. Household consumption will also be moderate in 2014 as inflation continues to erode real wages and wage adjust-ments will lag behind, thus cooling private consumption. Nonetheless, the manufacturing sector will start to re-cover from last years slump.

Brazil planned to spend US$13.6 billion on projects in preparation for hosting the 2014 FIFA World Cup, but

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Rest of Region*Venezuela

ChileColombiaArgentina

BrazilLatin America

World

Residential Construction Spending in 2014(Percent change from a year earlier)

* Rest of Region includes Bolivia, Costa Rica, Ecuador, Panama, Peru, and Uruguay

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Rest of Region*Venezuela

ChileColombiaArgentina

BrazilLatin America

World

Nonresidential Structures Construction Spending

IHS Global Construction ExecSummary Feb2014 140852110913052132

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