2016 Latin American and Caribbean Construction Market Trend Report
Despite a challenging start to 2016 for the Caribbean further economic growth is expected, provided the negative impact of both external macroeconomic factors and the Zika virus can be managed and mitigated.
Recent reports by the International Monetary Fund and World Bank indicate the region is at a turning point and whilst both external and domestic conditions have improved after a rough start to the year, the outlook for the region is still uncertain.
The IMF reports that commodity prices have recovered from the February 2016 trough, but they are still expected to remain low for the foreseeable future. This has been accompanied by a break or even a reversal in the large exchange rate depreciations in some of the largest economies in the region. Most recently, the UK referendum on Brexit led to a sharp increase in volatility in global financial markets, particularly in equity prices and exchange rates. While direct trade exposures of countries in the Caribbean to the UK are small, averaging only 1% of total exports, the region is exposed to the broader slowdown, through trade and financial linkages and fickle investor sentiment. At the same time, however, a more gradual pace of monetary normalization in the United States, with compressed U.S. term premium, should help contain funding cost pressures for both the public and private sectors.
Taking all of this into account the growth outlook for the Caribbean for 2016 and 2017 has been revised up modestly by 0.1 percentage points relative to earlier forecasts and is now estimated to be 3.4% for 2016 and 3.5% for 2017, following on from the 3.9% experienced in 2015.
Similarly the World Bank opines that the windfall from the global commodities boom has faded while the regions governments face increased social expectations from an emerging middle class that is more connected, more involved, and demanding more. The region's economy is forecast to further grow in 2017 and continue expanding in 2018, but that will largely depend on the strength of external markets and the capacity to address macroeconomic challenges.
Domestic markets and domestic demand are no longer sufficient to fuel growth now that the commodity windfall is gone. External demand and shifting resources to the export economy are needed. Many Caribbean countries are already beginning to do this by looking to international economic ties as a potential source of stable growth. Crucial to this transformation will be complementing regional integration with global integration efforts.
Restoring economic growth and investing in people will be key to preserving and further boosting the economic and social transformations that the region has undergone. In particular, investment in education quality will play an extremely important role in allowing the poor to contribute to, and benefit from, future economic growth. Additional emphasis should be placed on building skills and reducing obstacles to economic activity, such as poor infrastructure and inflexible labour or financial regulations.
A recent report by the Caribbean Development Bank highlighted that unemployment is still a major concern across much of the region and in fact youth unemployment is among the highest in the world. Many Caribbean countries continue to experience double-digit unemployment rates. In St. Lucia, despite recent economic growth and a number of targeted government programs, unemployment fell only slightly to 24.1%. Unemployment has fallen in Jamaica and Barbados due to an economic recovery and in the Bahamas the average unemployment rate for 2015 was improved over 2014, although this average masks the 2,000 construction worker lay-offs from the Baha Mar project.
After five years of sustained growth in the all important tourism sector, the first eight months of 2016 have witnessed declines in all three key performance indicators, occupancy, average daily rate and revenue per available room, when compared to the first eight months of 2015. It is generally accepted within the Caribbean hospitality industry that the threat posed by the Zika virus has been single handedly responsible for the reversal in fortune of the tourism sector.
Our research has shown a collective year-on-year average decrease in construction costs across our sample data of -2.78%. From our analysis, we can determine that Contractors are maintaining reduced profit margins and are also passing on material price reductions driven by lower commodity pricing levels, whilst labour rates generally have increased slightly. Using reliable commodities pricing forecasts to predict the construction costs for each jurisdiction moving forward, we have ascertained that low single digit increases in construction costs are likely to occur across the region in 2017, however certain smaller locations could become more subject to greater fluctuations where legislative change or commencement of projects have a more direct impact on the country at large.
In conclusion, the overall economic recovery of the region remains fragile. Economic growth in 2015 did not keep pace with 2014 growth and forecasts for 2016 are subject to significant uncertainty. The outlook for such small open economies must include what is happening elsewhere in the world. A number of interlinked developments have collectively raised concern over future economic recovery in the region. These developments include the slowdown in China, persistently low commodity prices, uncertainty in the Eurozone post Brexit, the ongoing reduction of Correspondent Banking Relationships, (CBR's), in the region and the impact of Zika on the tourism industry. In addition, consideration must be given to the perennial risks of natural disasters and other weather related challenges, such as those witnessed in Haiti and the Bahamas in the wake of Hurricane Matthew.
However, despite all of the above concerns the Caribbean continues to attract tourists in the tens of millions every year and provided the region's governments continue to recognize the importance of tourism, and invest in upgrading the infrastructure needed to support further growth in the hospitality sector, the region should continue to experience positive economic growth and prosperity in the long term.