Economic outlook Asia-Pacific: Return of the tigers
By Scott Hazelton03 June 2011
Asian economies are poised for further growth in 2011, following a better than expected year in 2010. Asia as a whole experienced a near-record expansion in 2010, with growth of +7.0% and IHS Global Insight expects a further +5.4% increase in economic activity this year, driven by investment, and to a lesser extent, private consumption.
Much of the fiscal stimulus in Asia during the global recession targeted infrastructure development, and residual effects from these projects will continue to support the construction sector in 2011. But there is still a tremendous need for infrastructure upgrades and expansion in many countries in Southeast Asia. With capital markets in much better shape, financing such plans will become easier.
The key concern is that there may be capacity constraints in certain countries and industries, following sharp rises in utilisation rates last year. Although this could be a brake on growth, the need to invest in more capacity will be a plus for the construction industry.
Economic growth across the region will drive the construction sector, and in this respect, the biggest story is in Japan, where earthquake reconstruction will turn the world's third largest construction market from the region's laggard into one of the growth leaders. The immediate aftermath of the natural disaster and electricity shortages of course caused economic difficulties, and the Japanese economy will probably contract at about a -5% to -6% in the second quarter of the year, after a small drop in the first quarter.
However, assuming that reconstruction efforts get under way in the summer, the annualised GDP growth rate in the second half of 2011 could be +7% to +8%, before gradually settling to the pre-earthquake baseline of +1.5% to +2%. Uncertainty remains around the extent and duration of the power generation shortfall as the impact of even limited electricity disruptions for some industries and their global supply chains could be very large.
Reduced activity in the first half of the year with a focus on rescue and recovery implies that even robust building in the second half of the year will hold overall construction growth in the +3% range. However, growth is forecast to rocket to +8% in 2012 and another +4% in 2013 as the bulk of rebuilding occurs in these two years.
China turned in another impressive year in 2010, and contrary to expectations, shows no sign of abating in 2011. Indeed, it now appears that growth could even accelerate slightly, and 2012 and 2013 also look very strong, although growth will slow.
While the residential market, and to some extent the commercial market, attract attention due to concerns over an asset pricing bubble, this remains a concern mostly within the larger metropolitan areas and at the higher end of the pricing spectrum. Most residential construction in the forecast arises from affordable housing as the government continues to encourage migration from rural areas to cities, although they are the second tier interior cities, rather than those in the coastal region.
Infrastructure spending remains more significant in China. Urbanisation will drive transportation, water and sewage infrastructure, while the next Five Year Plan aims to connect lesser developed provinces and other areas, such as Tibet, into the broad national economy. This requires massive investments in road, rail and power infrastructure.
India's construction market outperformed China in 2010 in terms of growth, although in absolute terms it is only a fraction of the size of the Chinese market. Growth will continue thanks to heavy investment in power and transportation projects, and India is also seeing strong investment in the private sector. While the government deficit is large, foreign direct investment is pouring in to the country and financing projects is not proving to be a problem, even with credit markets remaining tight.
Indonesia and Vietnam are the other fast growing construction markets in Asia, although growth in Indonesia is expected to slow, while Vietnam will see an acceleration. However, Vietnam has yet to develop the national consensus of India and China in long term planning, so while growth is strong, the market remains small and the projects fragmented.
Australia has been plagued by natural disasters in recent months that will hold back growth in 2011, even with strong commodity prices that tend to boost this economy. As the country recovers from such impediments as flooding in its coal region, and commodity prices remain elevated with global economic recovery, the need to get more materials into production will lead to a construction rebound.
Infrastructure spending will dominate growth potential through 2012 for the region, partly due to the outsized influence of China. In the near term, this is a reflection of the lingering effects of stimulus spending, but the effect of planned national development schemes are growing, and will be a future driver.
Residential construction activity will improve across the region with time. In the case of Australia, and to some extent South Korea, this represents a cyclical recovery from what is likely to be a down year in 2011. In Japan meanwhile, there will be an acceleration in the residential market due to post-earthquake rebuilding.
Non-residential structures will see a broad recovery in most markets. Japan will need to rebuild or substantially repair hundreds of manufacturing facilities, as well as institutional structures. In the export-led markets of the region, economic improvement in the U.S. and Europe will improve industrial production once again and require expansion, although concerns of overcapacity in some manufacturing sectors is justified.
Indeed, China will pull back investment in some inefficient industries to focus on newer, higher value sectors such as pharmaceuticals. Growth in commercial structures (office, retail, hotels) will also help as the region's economies endeavour to move away from dependence on exports, and increasetheir own domestic consumption.
Asia is increasingly proving fears of a pronounced slowdown to be unfounded.
While concerns over asset bubbles and access to financing remain, the region is proving quite resilient. Reconstruction in Japan will only add fuel to what is the world's fastest growing construction market. But while growth will have to slow in the medium to long term, the risks to the forecast seem to be transitioning to opportunity.iC