Rampant inflation in the Far East is running side-by-side with deflation in Hong Kong, stagnation in the Middle East and boom in the USA, according to the latest international construction cost survey from Gardiner & Theobald. The figures show that a year of economic uncertainty has sent tender price inflation yo-yoing around the world.
The figures are compiled by G&T's offices in Europe, Asia and the USA, along with data supplied by Hong Kong-based cost consultant Levett & Bailey and Melbourne-based Rider Hunt. The three firms have a two-year-old global alliance.
The average 1998 inflation rate for the 25 countries where data was available is 7.95%, up from 6.18% in 1996. However, when Indonesia's 100% inflation is omitted from the calculations, the average drops to 4.4%.
The Far East's reaction to last year's financial and political crises is varied. Singapore and the Philippines joined Indonesia in an inflationary spiral, whereas Hong Kong, Japan and Thailand all registered price decreases as contractors chase fewer projects.
Western Europe had an average tender price inflation of 3.3% in 1998, moving up slightly from 3.1% in 1997. This puts tender price inflation in the UK well ahead of the European average, reflecting a fairly buoyant 12 months for the industry. The USA fared even better, thanks to the financial and high-tech sectors, but the Middle East has slumped along with the oil market that it depends on.
This year, G&T forecasts that inflationary pressures will be contained in Western Europe, and reduced in the USA. But with the Far East and Middle East markets so volatile, if for different reasons, the firm is prudently avoiding any forecasts there.
Europe and the Middle East
The UK's 1998 tender price inflation rate of 5.7% is the second highest in Western Europe, after booming Ireland. Although G&T forecasts that this will drop in 1999, the predicted rate of 5.4% is still relatively high.
The German industry, by comparison, has suffered a price slowdown of 0.1%. However, this figure hides the variation between the recessionary eastern cities of Leipzig and Dresden and the rest of the country. Berlin, preparing for the arrival of the German parliament, is still an island of inflation.
France's tender price inflation rate of 1% reflects a clients' market in which contractors are hungry for work.
The average inflation rate in Poland, the Czech Republic and Hungary was 11.5%, down from 13.1% in the previous year. Although the three countries had similar inflation rates last year, the past 12 months have seen Hungary race ahead of its more stable neighbours with a 25% inflation rate.
Switzerland has continued its decade-long decrease in tender prices. Interest rates are favourably low at about 3%, but the country's corporations are engaged in a round of downsizing and are in no mood to build. "The outlook for 1999 isn't very positive," says Rolf Schlegel, an associate in G&T's Zurich office. However, next year sees the start of a £14bn tunnelling and rail investment programme that is likely to stimulate economic activity.
Construction in the Middle East has been badly affected by last year's collapse in oil prices, in a dramatic turnaround from G&T's survey a year ago. Saudi Arabia in particular has suffered a flat year, with more of the same to come. "The government is not spending money and that's impacting on the private sector," says Brian Tingate in G&T's Riyadh office.
Dubai is less depressed, thanks to the government's efforts to develop the tourist industry and encourage retail and hotel investment.
Indonesia tops the chart with a building cost inflation of 100%, well ahead of retail inflation at 84%. The actual figure may be higher – the cost of imported goods has risen three- or four-fold in the past year – but the almost complete absence of live building projects makes this difficult to calculate.
"Commercial property is dead, and most infrastructure projects have been stopped," says G&T associate John Rolfe. "Only a few oil and gas or industrial projects are still going, and we're lucky to be involved in some of them." The country is in a state of limbo until democratic elections are held in the summer. Rolfe predicts that, if a stable government is formed, the economy could regain momentum quickly.
Neighbouring Thailand has responded to the Far East crisis with deflation of 1.7% and cut-throat competition. But Hong Kong has fallen into a deeper trough, with inflation running at –6% last year compared with 19.3% in 1997. This reflects a slump in demand following steep falls in the stock market and property values. However, the fact that the Hong Kong dollar remains pegged to the US dollar means construction in Hong Kong is still expensive in relation to other Asian countries. Despite a continuing building boom, mainland China has managed to avoid inflation – perhaps by encouraging Western construction firms to compete for a place in its market.
Rest of the world
The frenzy of construction work in preparation for the 2000 Olympics has had little effect on tender price inflation in Australia. Running at 3.2% last year in comparison with 2.4% in 1997, it seems a competitive market outside the Olympic arena is controlling costs.
No inflation figure is available for the whole of the USA (figures shown are an average of seven cities), but G&T reports local rates of 8.3% in San Francisco and Arizona, compared with 5.1% in Los Angeles and 3.1% in Sacramento. This reflects a healthy US economy, where information technology companies in particular have been investing in new-build projects. Andrew Mann, who runs G&T's US operations out of New York, has noted pricing hotspots for lifts, cladding and skilled electricians in Manhatten, as banking and financial services clients expand their office space, but predicts 1999 will be slower, because of the effect of crashes in Russia and Brazil.
South Africa's tender price inflation rate of 8.2% might be thought to reflect recovering construction demand. However, last year's interest rates of up to 25.5% have forced all but a few retail and leisure clients out of the market. Solly Preller, executive chairman at G&T associate practice Schoombie Hartmann, predicts a slow recovery in 1999 following an early summer election.