Agile strategies for changing markets
That is how much global infrastructure spending may vary between now and 2020, depending on what macro-economic scenarios play out.
In dollar terms, a China hard landing would reduce CP&I expenditures by US$1.1 trillion between 2015 and 2020 (compared to the baseline).
In dollar terms, a global upturn would increase CP&I expenditures by US$600 billion between 2015 and 2020 (compared to the baseline).
We analysed 6 sectors and 7 regions worldwide covering 88% of global GDP.
The global outlook for capital projects and infrastructure (CP&I) spending remains positive over the long term. However, short-term volatility necessitates alternative strategies for growth - from prioritising projects for optimal value to striking the right balance between high and low-risk investments. The objective: to manage effectively through the short term while preparing for a more positive outlook longer term.
Watch this short video of Global Capital Projects and Infrastructure leader Richard Abadie discussing with Andrew Goodwin, associate director at Oxford Economics, two possible options for spending forecasts to 2020: a downside scenario with a hard landing for China, and a more optimistic global upturn scenario. Depending on which scenario plays out, global infrastructure spending could vary by as much US$2 trillion.
We believe it is more important than ever for companies affected by CP&I volatility to understand the potential range of possibilities they could face and be sufficiently agile to respond to conditions as they change. Our goal is to provide CP&I stakeholders with information and options for making the right decisions about capital expenditures.
The UK's recent decision to exit the European Union came after the research for this report was finalised. It is too early to comment on the specific UK and global impact of Brexit in 2020, however, in the short-term the additional uncertainty and volatility is likely to directly impact the UK CP&I market and indirectly impact the global CP&I market, although the latter is unlikely to be severe.
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Global infrastructure spending growth 2014-2020
Source: Oxford Economics
Between now and 2020, global infrastructure spending could vary by as much as $1.7 trillion, depending on which macro-economic conditions play out. In a downside scenario where the Chinese economy hits a hard landing, we estimate that infrastructure spending could fall to US$27 trillion. Conversely, in an upside scenario where there is a global economic upturn, we estimate that infrastructure spending could reach almost US$29 trillion.
Cumulative infrastructure spending 2015−2020, percentage difference between 2016 baseline and China hard landing scenario by sector
Source: Oxford Economics
Under a downside scenario where China's economy hits a hard landing, CP&I spending between 2015 and 2020 would fall by 4%. Over 60% of the difference in (lower level) infrastructure spedning from the baseline would occur in Asia Pacific, by far the most affected region. In large part this is because of China's economic dominance in Asia Pacific. Any slowdown in China would have palpable ripple effects among its neighbours, who rely on Chinese demand for their goods and services to stimulate their economies.
Cumulative infrastructure spending 2015−2020, percentage difference between 2016 baseline and global upturn scenario by sector
Source: Oxford Economics
Looking at the impact on sectors of a global upturn, increased spending by both the private and public sectors would engineer broad-based improvements in CP&I expenditures. Utilities and transport would lead the way, reflecting greater economic activity and higher levels of business investment throughout the economy. But the extraction sector would still be in for a difficult time under either the upside or downside forecasts. In the global upturn story line, the slower rate of increase in oil prices would hold back infrastructure investment.
The correlation coefficient between labour productivity and overall infrastructure quality is 0.81
Sources: PwC analysis, OECD, WEF Global Competitiveness Report 2014–15
In the short term, building or upgrading transport or energy networks, can boost aggregate demand through increased construction activity and employment. In the long term, infrastructure investment can boost economic growth by increasing the potential supply capacity of an economy. For example, improving transport facilities could make workers more mobile, thus making labour markets more efficient and increasing productivity. While a number of other factors influence labour productivity, including skills and technology, PwC analysis has found a strong positive correlation between the quality of physical infrastructure and labour productivity in the G7 and the E7.
Forecast looks at trends driving infrastructure spending and strategies for managing capital projects investments when growth is challenging. In a challenging economic environment, how can stakeholders build in agility to correct course swiftly?
Considering the range of possibilities that could impact capital project and infrastructure spending in the near term, stakeholders of all types – project owners, investors, governments, engineering and construction firms and multinational corporations – have tough decisions to make. We offer some possible options to consider for each type of stakeholder to help your organisation stay agile as you navigate an ever-changing business environment.
Peter Raymond, Global, Americas and Asia Pacific leader, Capital projects & infrastructure
In these economically and politically challenging times, CP&I CEOs acknowledge that they need to address greater expectations from wider stakeholders if they want to grow their business successfully.
Successful companies lay the groundwork by fortifying their physical, digital, and societal infrastructure before disaster strikes.
In this short animation, find out how PwC can help you manage your capital project successfully from strategy through to execution – and avoid becoming one of the 75% of capital projects that run over budget.
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