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The Global Economy Outlook

In its latest Global Economic Prospects published in June 2016, the World Bank revised its 2016 global economic growth forecast down to 2.4% from the 2.9% pace projected in January. The downward revision is due to sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade and diminishing capital flows.

Advanced economies are expected to grow by 1.7% in 2016, 0.5 percentage point below its January projections. Investment continues to be soft amid weaker growth prospects and elevated policy uncertainty, while export growth has slowed reflecting subdued external demand. Despite an expected boost from lower energy prices and the ongoing improvement in labour markets, growth is projected to level off in 2016 rather than accelerate.

Meanwhile, emerging market and developing economies (EMDEs) started the year with weaker manufacturing activity. Investment growth also slowed substantially, especially in commodity exporters, partly reflecting tightened domestic policies and weak capital inflows. In China, a gradual domestic rebalancing is under way, with robust growth in services and policy support measures mitigating the slowdown in industrial activity. Brazil and the Russian Federation are still mired in recession. Global merchandise trade remains subdued, reflecting rebalancing in China and weaker demand from commodity exporters, which together contributed to an outright contraction in overall EMDE merchandise imports in 2015.

For 2016, EMDE growth is projected at 3.5%, 0.6 percentage point below previous projections. However, these numbers mask ongoing divergences between commodity exporters and importers. Commodity exporting EMDEs, especially energy exporters, have been struggling to adjust to persistently low commodity prices. In 2015, this group grew a mere 0.2%, the slowest since the global financial crisis. For 2016, their growth forecast has been reduced to 0.4%, 1.2 percentage points below January projections. In contrast, commodity importing EMDEs have shown resilience to headwinds, reflecting solid domestic demand. For this group, growth is expected to remain steady at 5.8% throughout the forecast period, a rate close to its long-run average. Activity in commodity importing EMDEs excluding China has picked up and is expected to continue to accelerate.

In low-income countries (LICs), growth moderated to 4.5% in 2015. Although growth is projected to pick up to 5.3% this year, lower commodity prices and persistent security and political challenges have trimmed 0.9 percentage point from the previous forecast. While the difficult external environment confronting LICs will likely continue, projected growth is supported by resilience of domestic investment and the expected implementation of reforms.

In an environment of anemic growth, the global economy faces pronounced risks, including a further slowdown in major emerging markets, sharp changes in financial market sentiment, stagnation in advanced economies, a longer-than-expected period of low commodity prices, geopolitical risks in different parts of the world and concerns about the effectiveness of monetary policy in spurring stronger growth. The unexpected U.K. vote to leave the European Union in June 2016 created an additional wave of uncertainty and led many agencies to downgrade the global growth forecast further. However, most Brexit-related forecast revisions are concentrated in advanced European economies, with a relatively muted impact elsewhere. For 2017, the International Monetary Fund (IMF) has projected a global growth of 3.4%.

The Malaysian Economy
In the second quarter of 2016, the Malaysian economy expanded by 4.0%, marginally lower than the 4.2% recorded in the previous quarter. Despite the stronger expansion in domestic demand, growth was weighed down by the continued decline in net exports and a significant drawdown in stocks. On the supply side, growth continued to be driven by the major economic sectors. On a quarter-on-quarter seasonally-adjusted basis, the economy recorded a growth of 0.7% (Q1 2016: 1.0%).

Private sector activity remained the key driver of growth, expanding at a faster pace of 6.1% in the second quarter, against 4.5% recorded in the previous quarter. Private consumption grew by 6.3% (Q1 2016: 5.3%), supported by continued wage and employment growth as well as the additional disposable income from government measures. Private investment grew at a faster pace of 5.6% (Q1 2016: 2.2%), underpinned mainly by continued capital spending in the services and manufacturing sectors, amid some improvements in business confidence. Growth of public consumption also improved in the second quarter to 6.5% (Q1 2016: 3.8%), mainly due to higher spending on supplies and services. Public investment turned around to register a positive growth of 7.5%, a tremendous increase from the -4.5% recorded in the first quarter of the year, on account of higher spending on fixed assets by both the Federal government and public corporations.

On the supply side, all major economic sectors continued to expand, with the exception of the agriculture sector. The services sector grew at a higher rate of 5.7% in the second quarter (Q1 2016: 5.1%), driven primarily by stronger household expenditure. The manufacturing sector expanded by 4.1% (compared with 4.5% in Q1 2016), supported mainly by the export-oriented electronics and electrical cluster. Meanwhile, performance of the mining sector improved (2.6% in Q2 2016 against 0.3% in Q1 2016), on account of higher crude oil and natural gas production during the quarter, particularly in Sabah. However, growth in the agriculture sector contracted by 7.9% (Q1 2016: -3.8%), due mainly to a double-digit decline in the production of palm oil amid the lagged impact of El Niño on yields.

The construction sector expanded 8.8% in the second quarter (Q1 2016: 7.9%). Growth in the civil engineering sub-sector was stronger, underpinned by petrochemical, transport and utility-related projects. In the special trade sub-sector, growth was sustained, supported by early-work activity such as site clearance and piling activity. The residential sub-sector expanded at a faster pace during the quarter, reflecting higher construction activity of both high-end and affordable housing projects. In the non-residential sub-sector, growth weakened further following slower construction activity in commercial property, especially in the office space segment.

Going forward, growth of the Malaysian economy is expected to fall between 4% and 4.5%. Domestic demand will continue to be the main driver of growth, supported primarily by private sector spending. Private consumption is projected to expand further, underpinned by continued growth in wages and employment, as well as additional disposable income from government measures. While the growth in private investment has moderated due to lower capital expenditures in the oil and gas sector, overall investment will remain supported by the implementation of infrastructure development projects and capital spending in the manufacturing and services sectors. Exports are projected to remain weak given the subdued global demand. Overall, while domestic conditions remain resilient, uncertainties in the external environment may pose downside risks to Malaysia's growth prospects.

Performance of the Construction Sector
According to figures released by the Department of Statistics Malaysia, the total value of construction work done in the fourth quarter of 2016 grew 8.1% year-on-year to reach RM32.6 billion, driven mainly by the civil engineering sub-sector. On a quarter-on-quarter basis, the value of construction work done increased by 2.0% as compared to the preceding quarter.

By type of activity, the highest growth was contributed by the civil engineering sub-sector with 12.5%, followed by the residential buildings (9.8%), special trades activities (3.7%) and non-residential buildings sub-sector (2.5%).

In terms of value, the highest percentage share was contributed by the civil engineering sub-sector, which recorded 35.3% or RM11.5 billion of the total value of construction work done. This was followed by the non-residential buildings (30.6%; RM10.0 billion), residential buildings (29.5%; RM9.6 billion) and special trade activities (4.6%; RM1.5 billion) sub-sectors.

Selangor continued to register the highest value of construction work done of RM7.1 billion (translating to a 21.9% share) among the states. This was followed by Johor at RM6.8 billion (20.8%), Wilayah Persekutuan at RM6.4 billion (19.5%), Sarawak at RM2.6 billion (8.1%) and Pulau Pinang at RM1.7 billion (5.3%). Collectively, these five states accounted for 75.6% of the total value of construction work done. In terms of construction activity by project owner, the private sector continued to dominate with a share of 61.3% (RM20.0 billion) while the public sector accounted for 38.7% (RM12.6 billion) of the value of construction work done in the fourth quarter of 2016.

Construction Sector Updates
The Malaysian construction sector recorded double-digit growth from 2012 up to 2014. It remained one of the fastest-growing economic sectors in 2015 with an 8.2% growth registered. Notably, the 10th Malaysia Plan (10MP) drew to a close in 2015, with the construction sector charting a solid compound annual growth rate (CAGR) of 11% in the five-year period. Moving forward, the RM260 billion development expenditure under the 11th Malaysia Plan (11MP) represents a 16% increase from the previous plan, which bodes well for the growth trajectory of the sector.

The value of construction work completed posted a 12% growth for the third consecutive year in 2015. An acceleration of civil engineering works had compensated for a tapering in the pace of growth in the property sectors. The cooling off in momentum was most evident in residential properties, which grew at 11% (2014: +22%), while construction work for non-residential properties recorded a 14% expansion (2014: +17%). Overall, these property segments still accounted for the lion's share (more than 60%) of all construction activities (by value).

Despite the healthy overall industry growth, locally listed construction firms delivered a mixed performance in 2015. This highlights the volatility of earnings and the underlying execution risk faced by construction firms, particularly because they may have concentrated order books. Construction firms have continued to enjoy favourable access to funding for their expansion. This was evinced by the healthy 12% CAGR for the banking system's loans to the construction sector in the last three years. The bond market has also remained a viable funding avenue for construction players vis-à-vis financing diversity.

The cumulative value of infrastructure project awards this year is expected to surpass the high of RM46 billion in 2012, with momentum of awards gaining steam for rail and road projects. The biggest project to date is the RM32 billion Klang Valley Mass Rapid Transit (KVMRT) Line 2, where seven major packages worth a combined RM22 billion have been awarded. In the pipeline, sizeable jobs undergoing the tender process include the Light Rail Transit (LRT) 3 and some highways. While oil-and-gas-related infrastructure job announcements are still flowing out of Pengerang (Johor), construction firms exposed to the upstream segment may face more challenges amid low oil prices and the scaling back of Petronas' capital expenditure.

The order books of the 10 largest listed construction firms by revenue already offer sturdy multiples over their annual construction revenues. Most of these firms reported a minimum coverage of 1.7 times, with IJM Corp Bhd well ahead of the pack. Gamuda Bhd, on the other hand, enjoys fee-based income from its role as project delivery partner (PDP) for the KVMRT lines. Some of the jobs up for grabs this year, especially in the infrastructure segment, span several years, reducing the need for contractors to replenish work. Order books for contractors will likely stay concentrated, underlining the importance of smooth job execution.

While sector-wide operating profits still inched up in 2015, the recent upward revision in foreign worker levies in Peninsular Malaysia and the rise in steel bar prices since early 2016 are among main cost pressures crimping margins this year. The new levies for foreign workers came into effect on March 18 where category one employers (manufacturing, construction and services) have to pay a levy of RM1,850 for each foreign worker hired while category two employers (plantations and agriculture) are to pay RM640 per worker. Applicable for Peninsular Malaysia only, the new levy rates entailed an increase of RM600 for the manufacturing, services and construction sectors, and RM50 and RM230 for the plantations and agriculture sectors respectively. Construction players also struggled to cope with the rise in the price of steel bars, which have increased from about RM1,500 per tonne in January to hover around RM1,800 to RM1,900 per tonne in October.

The sector is also facing significant manpower shortages, following the clampdown on foreign workers earlier this year. A labour-intensive industry, the construction sector needs a continuous supply of workers – an estimated of one million every year, the majority of them foreign workers – for infrastructure and building projects in order for it to sustain growth of 8% to 10% this year. With RM58.67 billion worth of government and private jobs awarded to contractors in the first half of 2016, it is important to have sufficient manpower to complete the jobs in a timely manner. On this note, Construction Labour Exchange Centre Bhd, established in 2003 by the Construction Industry Development Board (CIDB), is working closely with Master Builders Association Malaysia (MBAM), the Home Affairs Ministry and other agencies to facilitate legal and suitable workers for the industry.

Moving forward, the high levels of project awards in the past two years will further drive the sector's growth. However, amid the more challenging economic climate, the implementation of less urgent projects may become more uncertain, as implied from the recalibrated Budget 2016. Prospects for the property segment have become more muted, but this could be offset by the award of infrastructure jobs that have gained traction. 2017 will see the remaining packages of the KVMRT 2 (valued at over RM5 billion) being awarded, as well as the Pan Borneo Sarawak Highway at about RM11 billion, the West Coast Expressway at about RM2 billion and the KVLRT 3 at RM9 billion. Beyond 2017, the Kuala Lumpur-Singapore High Speed Rail, estimated to cost RM70 billion, would be the single largest infrastructure project.

Mass Rapid Transit Corporation Sdn Bhd (MRT Corp) is also reported to have started planning construction of a third line for the KVMRT project. The third route, which will be known as the circle line due to its circular track, will be built entirely underground. The company has already appointed an independent consultant to carry out an engineering feasibility study for the project and the first report is expected to be completed in the first quarter of 2017. The Business Times recently reported that Line 3 may cover a distance of between 45km and 48km or longer, depending on the final alignment and would cost at least RM50 billion. It is expected to cover Ampang Jaya, Kuala Lumpur City Centre, Jalan Bukit Bintang, Tun Razak Exchange, Bandar Malaysia, KL Ecocity, Pusat Bandar Damansara, Mont Kiara and Sentul. Line 3 will be integrated with the Sungai Buloh – Kajang (SBK) Line 1 and Sungai Buloh – Serdang – Putrajaya (SSP) Line 2. It is expected that the award of jobs for Line 3 may start from the second quarter of 2017.

The Steel Sector
After years in the doldrums, the domestic steel sector is finally turning around. The recovery in global steel prices and the government's latest safeguard measures on imported steel certainly bode well for the survival of the RM41 billion sector. In recent years, aggressive dumping of imported steel products, mostly from China, has rendered many local steel millers uncompetitive with widening losses and their operations almost at a standstill. Between 2013 and 2015, local players were seen raking up losses of up to RM2 billion from the global tin slump and cheaper China steel imports. The unprecedented import of steel bars and wire rods – mostly from China – had also led to the low utilisation capacity of local steel mills to 40% between 2013 and 2015, resulting in the closure of smaller steel mills and retrenchment of workers nationwide.

According to industry observers, a sustained recovery in the global steel prices led by China supported the improved margins for domestic players, who had in the past few years been hit by a global price slump and competition from cheaper imports. Renewed demand from China – the world's major steel consumer and producer – had sent international steel prices together with iron ore and coking coal prices skyrocketing, particularly in March and April of 2016. China is said to be focusing on supplying its domestic consumption after facing a shortage brought about by the recent winding-up and mills closure by the Chinese authorities to curtail excess steel production capacity. For Malaysia, the higher steel prices, particularly from China, had increased the landed cost of steel imports and helped to improve domestic players' margins. As at September 2016, the domestic prices of steel bars and wire rods had gone up by over 10%, with steel bars trading in the range of RM1,800 to RM1,900 per tonne while wire rods have firmed up to about RM1,900 per tonne.

Effective September 26, the government's latest provisional safeguard measures in the form of duties of 13.9% for imported steel coils and 13.4% for imported reinforced steel bars also augur well for local steel millers. The latest measures would mean that China-like steel products with the imposition of around 13% duties plus MFN (most-favoured-nation) steel tariff rate of 5% totalling 18% will definitely deter cheaper China steel imports from entering Malaysia shores. However, MBAM has highlighted concerns that the safeguard measures on steel may lead to uncontrollable prices of steel bars due to the absence of free flow of imported steel. This would have an enormous cost impact on steel consuming industries (including the construction sector) as steel is used as an input in many different industries.

On steel outlook, Kenanga Research is positive on the sector as steel prices are expected to remain stable with China's depleting steel inventory indicates rising domestic demand there, closure of loss-making steel mills in China, and the Chinese government's strong commitment in reducing steel production capacity through consolidation of steel groups coupled with financial support of 100 billion yuan for worker retrenchment schemes.

The Property Sector
According to the National Property Information Centre's (NAPIC) Property Market Report 2015, the overall property market in Malaysia slowed down by 5.7% to 362,105 transactions in 2015 (from 384,060 transactions in 2014). In terms of total transaction value, the market reported an 8% decline to RM149.9 billion from RM162.9 billion in 2014.

The residential sub-sector continued to lead the overall market, with 65.2% contribution in volume and 49.0% in value. 235,967 transactions worth RM73.47 billion were recorded in the review period, declined by 4.6% in volume and 10.5% in value. In line with market softening and bleak household sentiment, the primary market reacted accordingly as the number of new launches reduced by 19.2% to 70,273 units, against 86,997 units in 2014. Major states such as Johor and Pulau Pinang saw substantial declines in new launches, each down by 42.8% (9,428 units) and 47.5% (2,348 units). The overall sales performance for the country hovered at 41.4% (29,089 units sold), lower than the 45.4% (39,491 units sold) recorded in 2014.

Construction activities for the residential sub-sector were generally on a low tone with the exception of starts. Completions were down by 25.0% (80,850 units) whereas starts recorded a 10.3% increase (188,757 units) over 2014, as higher numbers of service apartments in Johor Bahru (20,914 units) and Kuala Lumpur (13,197 units) commenced construction. On the contrary, new planned supply was at a four-year low at 139,189 units, down by 31.8%. As at end-2015, there were 4.93 million existing residential units with nearly 0.89 million in the incoming supply and 0.64 million in the planned supply.

Meanwhile, the commercial property sub-sector recorded 31,776 transactions worth RM26.4 billion in 2015, down by 10.6% in volume and 17.1% in value from the previous year. Most major states recorded lacklustre performance with Johor recording the highest decrease of 21.9%, followed by Kuala Lumpur (KL) at 15.0%, Selangor at 11.1 % and Pulau Pinang at 10.7%. In terms of transaction value, only Pulau Pinang held strong with an increase of 19.0% despite fallen market activity whilst the other major states succumbed to double-digit declines.

The slowdown in the property market remains apparent as the number of unsold units in both residential and commercial properties climbed by 16% in the first quarter of 2016. 18,908 of the 81,894 units of residential and commercial properties launched in the first quarter of the year have yet to be sold. These unsold properties amount to RM9.4 billion and represents an increase of 15.9% from the value of unsold units in the previous quarter.

Similarly, the office market in KL and beyond KL (Selangor) remained mostly static and unglued in the first quarter of the year, in the light of the slowing local economy, and the situation looks set to continue for the rest of the year. According to The Edge/Knight Frank Klang Valley Office Monitor 1Q2016, the cumulative supply of office space in KL city, KL fringe and beyond KL stayed unchanged at 92.53 million square feet as there were no completions of office buildings during the period. But there is high impending supply (currently under construction) with about 860,000 square feet in KL city, 3.4 million square feet in KL fringe and 1.7 million square feet in beyond KL slated for completion by the end of 2016. The supply of office space is expected to grow 15.1% between the second quarter of 2016 and 2018 with the bulk of new completions in KL fringe. Overall occupancy remained relatively flat during the period of review and rents saw dips in all the regions.

2017 is expected to be another lacklustre year for the property sector, with recovery anticipated in 2018. The overall market activity is expected to be further toned down due to weak economic conditions and oversupply situation. According to the CBRE/WTW 2017 Real Estate Market Outlook report, the property market dipped further in Q3 2016. It revealed that transaction activity dropped; agricultural land remained the second most active, after residential properties; the commercial sector fell to third place; followed by development land. State wise, Selangor made it as the most active, followed by Johor. Additionally, NAPIC reported that 57% of residential property transactions in Q3 2016 were priced below RM250,000 while 43% were recorded between RM250,001 and RM1 million.

As uncertainties and concerns over the large market supply remain unabated, loan growth is expected to slow further as the weak credit cycle continues. Apart from the stringent loan requirements from financial institutions that are said to have caused the drop in the number of property transactions, the increasing cost of living and economic uncertainties have led to an upswing in worries about job security, resulting in more cautious consumer spending. These and more will have led the market to consist of more genuine purchasers with speculative sentiments not as strong as during the boom period.

Looking at the property outlook in the Klang Valley for 2017, key drivers to a positive year are expected to come from infrastructure – HSR, MRT and LRT additional lines and stations, new highways and expressways. While Johor and Seremban are expected to gain from the spillover effected from new infrastructure, residential hotspots to take note of include – Selangor Vision City, Nilai/Pajam, Semenyih/Kajang, Putrajaya/Cyberjaya, Rawang/Ijok/Kuang, Sungai Buloh and Kuala Selangor. Key drivers that will push these areas are scarcity of land in the city centre, high land costs in the city as well as the improved connectivity in view of new infrastructure.