Global economic outlook

The global economy began 2022 on a firm, albeit uneven, footing, with many markets expecting a robust recovery following the pandemic. Despite 2022 starting on a solid base, conflict in Ukraine and renewed COVID-19 lockdowns in China have destabilised the supply chain further, causing widespread disruption. Higher energy costs, and climate change-induced floods, storms and fires are all combining to test the resilience of the global economy.

The global economy now finds itself in uncertain territory, with inflation expected to rise and economic growth anticipated to slow, notably. The June Organisation for Economic Co-operation and Development (OECD) Economic Outlook showed that the global Gross Domestic Product (GDP) growth grew by 5.8 percent in 2021; however, a reduced growth rate of 3.0 and 2.8 percent are now anticipated in 2022 and 2023 respectively as new challenges come to the fore.

Hold-ups at ports and rising shipping costs are a key part of the problem. The world’s largest ports in Shanghai and Ningbo are only now beginning to see the easing of COVID-19 related restrictions. With freight movements hampered for months, and as suppliers struggle to ship all of the delayed backorders, the pressure in the shipping system is intense. Demand for vessels is likely to add further to shipping costs.

It is likely that it will take until the end of this year to eliminate the bottlenecks in the supply chain. Meanwhile, many businesses are realising that the cost savings produced by outsourcing production internationally have become of secondary importance to maintaining business continuity.

Higher energy costs are also occurring as a result of the Russian sanctions which are disrupting the supply of oil and gas. Transport costs have surged worldwide.

Bottlenecks in the supply chain are likely to continue to plague the global economy in the medium term. In this context, many businesses are realising that the cost savings produced by outsourcing production internationally have become of secondary importance to maintaining business continuity.

Key geographies – Inflation inflammation

Supply turmoil, coupled with rising energy prices, are key drivers of global inflation. These are some of the highest rates of inflation we have seen in decades, yet not in hyperinflation territory of the Weimar Republic in Germany following World War I, or Zimbabwe from 2007 to 2009. Whilst the definition of hyperinflation is loose, for it to materialise we’d expect significant increases to inflation on a month-on-month basis, above double-digit growth.

To understand the potential impact of inflation on the real estate portfolio, Figure 3 below takes into account the top 10 markets that make up more than 90 percent of the projected capital spend in the OP22 five-year lookahead.

An overlay of the Construction Cost Inflation data from ICMS 2022 provides a sobering snapshot on the potential reverberations from inflation this year, and the impact of these disruptions as the rubber hits the road in these markets.

While the forward year’s forecast projects a more optimistic deceleration in the rate of inflation, the knock-on effects of a further increase in interest rates come year end, and prolonged geo-political tensions in eastern Europe may change in the outlook in the coming months.

To view the full list of historical, current and forecasted yearly inflation from ICMS 2022, please click here.

The effect of exchange rates[SP1]

To undertake our analysis of the data in our index, all costs are presented in a single currency, namely in USD. While this is the most straightforward way of comparing costs across different markets, it means that exchange rates have an influence on costs and should be considered when drawing comparisons between markets.

In the current turbulent market conditions, exchange rates have fluctuated significantly and are likely to continue to remain volatile over 2022. As elaborated on in the preceding section, high inflation, rising interest rates and fears around a global economic slowdown will continue to see demand for currencies shift. Since the Russian invasion of Ukraine, the USD has strengthened against most major economies, due to its safe-haven status and this may continue to remain strong while volatility persists.

The graph below again provides a snapshot of recent historical and forecasted movements in the key geographies’ currency value against the US dollar, most showing a marked weakening this year with the exception of the Singapore dollar, which appears to be fairly stable thus far.[SP1]@Joshua Net

With currency volatility expected to continue, real estate professionals should validate the base assumptions from the early stages of the project business case, investment proposals and throughout the project life cycle, since the knock-on effects especially during pre-contract stages on total project costs could be significant. Consultation with cost management practitioners in the market where the project will be delivered will contribute to the level of confidence in these key stages.

To view the full list of historical, current and forecasted exchange rates from Shell group’s Q3 2022 macroeconomic tool, please click here.