Message from Alexandra Reilly
“Working in partnership with Shell, we are dedicated to driving consistent delivery with assured outcomes supported by data and market insights.”
Alexandra Reilly Global PMO Lead
Global economy shows resilience amid persistent challenges, with easing inflation and anticipated interest rate cuts balancing against geopolitical risks and slower growth in emerging markets
The global economy is currently stable and showing signs of improvement, although growth is expected to remain sluggish due to persistent structural challenges. The overall gross domestic product (GDP) has held up better than anticipated, growing by 3.5 percent in 2022 and 3.2 percent in 2023. The International Monetary Fund (IMF) expects the global economy to grow at the same rate into year 2024 and 2025 with advanced economies offsetting the slowdown in emerging and developing countries.
Positive indicators include easing inflation and softening commodity and energy prices, which help reduce the risk of a global recession.
Additionally, there is an increased expectation for interest rate cuts to stimulate growth, though this growth is anticipated to be slow to materialize. Major central banks, including the Federal Reserve and the European Central Bank, are expected to begin loosening monetary policy as inflation pressures ease.
The global economy is also navigating a pivotal political year, with 2024 set to see the greatest number of elections in global history. This could influence economic trends and forecasts, as geopolitical instability and rising tensions may lead to more isolationist and de-globalising policies.
To assess the potential inflationary impact on the Shell real estate portfolio, the figure below shows the top 10 markets, which collectively represent over 90 percent of the projected capital expenditures for the next 5 years based on the recently concluded OP24 exercise.
Figure 2:
Percentage from total Capex by country
Global construction cost inflation is moderating. Average inflation is expected to decline to 3.3 percent in 2024, with all regions reporting lower rates than the previous year.
Africa remains the region with the highest expected inflation, at 5.7 percent. Lagos, Nigeria, is experiencing particularly significant inflation, estimated at 25 percent. Factors contributing to this include higher import costs due to global inflation and exchange rate fluctuations, as well as domestic pressures from materials and labor costs.
Globally, construction costs are projected to increase slightly in 2025, reaching 3.4 percent. However, regional differences persist. North America, Europe, Australia and Africa are expected to see inflation rise, while the Middle East and Asia may experience a decline.
The UK's inflation is anticipated to remain stable at 3.0 percent. In Africa, inflation is expected to remain high, averaging 5.9 percent in 2025. North America, Asia, and Australia are projected to have higher inflation than Europe, which is forecast to have the lowest inflation rate at 1.9 percent.
An overlay of the information on construction cost inflation from ICMS 2024 with Shell RE’s key locations shows the inflation rates although raising is expected to be stable for the forward years. The situation is also expected to improve in Nigeria with the hike in construction cost is expected to reduce to 20 per cent in year 2025 indicating optimistic outlook with the policy reforms and economic growth.
Figure 3:
Construction cost inflations
To compare the cost rates across different geographies, the cost details are presented in a single currency, namely in USD.
Fluctuations in exchanges rates can significantly impact the cost of construction projects. As for Shell real estate, the cost of IT & AV components for example are based on the US dollar as the procurements are done through global framework contracts which can influence the variations in the total construction project against approved budget.
Based on the data from Shell Group’s Q3 2024 macroeconomic tool, except India, the local currencies for all key Shell real estate geographies are expected to strengthen or stabilise against the USD.
This could be driven by US Federal Reserve’s decision to reduce interest rates to keep unemployment low with the inflation easing. As for India, foreign fund outflows and the increased dollar demand is expected to weakened the currency.
Given the anticipated volatility in currency exchange rates, real estate professionals should rigorously evaluate the underlying assumptions used in project business cases, investment proposals, and throughout the project lifecycle.
Early identification and mitigation of potential impacts, particularly during pre-contract stages, can significantly reduce risks to total project costs. Consulting with local cost management experts can provide valuable insights and enhance confidence in key decision-making processes
Figure 4:
Movement of local currencies against US currency with year 2022 as the base
