Surge in infrastructure spending likely to spur global growth

HSBC’s Global Connections survey indicates that infrastructure-related trade will grow at an average of 9 per cent each year between now and 2030, implying that total spending will more than triple in the next 17 years. This will help to boost global trade prospects and the HSBC Forecast expects world trade to grow at a modest pace to 2015 before accelerating between 2016 and 2020.

The infrastructure story is a rare bright spot in an otherwise gloomy economic environment, with global GDP forecast to grow at just under 4 per cent for the same period.

Trade in infrastructure-related goods, defined in this case as both the materials needed for infrastructure projects and the machinery required to boost production, is forecast to grow from 45 per cent of global trade to 54 per cent in the same period, with Asia generally – and China and India in particular – leading the boom with 10 per cent annual growth.

There is little faith in Asia that the developed markets will contribute significantly to regional growth, and they are looking to harvest organic synergies to drive future expansion. On a basic level that means improving physical connectivity – refurbishing the defunct Vietnam-Cambodia-Thailand railway link, or building a port on the Andaman Sea to facilitate trade between the Southeast Asian mainland and India, for example – but also tapping into the economic potential of the region’s rising middle class.

We estimate that Emerging Asia will need US$11 trillion (Bt343.2 trillion) in basic infrastructure investment between now and 2030 to build the roads, bridges, hospitals and accommodation for an extra 650 million urban dwellers.

China did not invent the concept of the infrastructure mega-project as economic multiplier, Eisenhower’s road-building programme in the US anticipated it by half a century, but its success has made it a model for the rest of Asia.

It is no coincidence that most of Southeast Asia’s mega-projects are transport related: railways in Thailand, ports in Myanmar, bridges in Indonesia, and tunnels in Malaysia to name a few. Spending on projects such as these is unlikely to slow. Growth rates in Asia have held up, countries have strong domestic savings and little foreign currency exposure, and improved infrastructure is seen as a pre-requisite for continued economic health.

But the research shows an interesting shift in profiles. While Asia’s poorer countries will continue to drive healthy demand for the basics of infrastructure – the concrete, rebar and power turbines that are the building blocks of first-phase industrialisation –the region’s richer countries will be looking to invest in new machinery to assist its move up the value chain.

Currently the United States is the biggest importer of both the basics and manufacturing equipment, but HSBC predicts that it will lose its lead in the two categories by 2020. We believe India will become the biggest importer of goods for infrastructure and China will take the lead in investment equipment, with 20 per cent of the market.

India’s draft five-year plan for 2013-2017 proposes to more than double basic infrastructure spending to over $1 trillion, with more than half the funding coming from the private sector.

China has committed to curbing its reliance on infrastructure investment as a principal driver of economic growth over the coming years, creating a greater role for consumption. While the new emphasis might trim the exuberant basic infrastructure demand growth rates of recent years, we believe that China will continue to use infrastructure spending to fine-tune the economy.

But it is the growth in Chinese demand for investment equipment that is going to receive a double boost in coming years. Wages in China are rising, not only encouraging manufacturers to invest more in automation to cut production costs, but also creating a richer consumer society with correspondingly greater demand for high value-added goods.

Asia’s emerging markets are now the single greatest driver of global growth, and a key element of their growth story is the development of world-class infrastructure to lubricate regional and intercontinental trade, improve productivity, and enhance quality of life. 

 

**Noel Quinn, the author, is HSBC’s Regional Head of Commercial Banking.