Infrastructure And Urbanisation, A Global Trend
2018 Investment Themes series: Megatrends theme #3
Infrastructure is the backbone of the economy. It comprises the basic framework, facilities, networks (transport, power, communications) and buildings which a country, organisation or community needs to function competitively and to improve the standard of living of its people. There are enormous renovation needs in developed countries. However, in emerging markets, infrastructure and urbanisation are essential for reaching the next stage in their expansion.
A global trend
In a bid to keep pace with the world’s population growth (+25% by 2040) and the expansion of the middle classes, far-reaching developments will be made over the coming years in the areas of infrastructure (including upgrades) and urbanisation (strong growth). Sectors concerned by these phenomena are construction, capital goods, utilities, basic materials, infrastructure and transport. This theme also covers diverse areas such as smart grids, waste water treatment, telecommunications and waste management. Another reason for a surge in infrastructure spending (encouraging urbanisation) is the political will to boost economic prospects in as many regions as possible and underpin growth through job creation.
In 2012 the World Economic Forum estimated the gap between real and essential spending (earmarked to replace existing infrastructure and investments and satisfy future demand) at $1,000 billion per annum (1.25% of world GDP). The Organisation for Economic Co-operation and Development (OECD) forecasts that more than half of all investments will be made in emerging markets.
Developed countries: essentially a need for modernisation
Budgetary considerations have been hampering infrastructure investments. Moreover, infrastructure is frequently in a dilapidated state, calling for renovations for the sake of safety. In the US, the average age of roads is 27 years. Another motivation for upgrading infrastructure is technological progress. But the main reason is that infrastructure is the backbone of the economy. It comprises the basic framework, facilities, networks (transport power, communications) and buildings which a country, organisation or community needs to function competitively and to improve the standard of living of its people.
Emerging markets: infrastructure is essential for reaching the next stage in their expansion
According to a report published by PwC and Oxford Economics, two consultancies, 60% of infrastructure spending between now and 2025 will be made in Asia-Pacific, driven by China. By this date, the annual pace of infrastructure spending is forecast to grow by 7-8% on average. Each dollar earmarked to the development of infrastructure will add between 5 and 25 dollar cents to GDP growth (+5% to 25%).
The first Silk Road (or Silk Route) was created more than 2000 years ago. Established as a network of trade routes linking China to Central Asia and the Middle East, this road had an enormous impact on the entire region for many centuries.
Five years ago, Chinese President Xi Jinping laid the groundwork for building a new modern Silk Road of pipelines, rails, roads, and utility networks to link Southern, Central & Western Asia and Europe.
Today the investment opportunities are vast for 68 countries and international groups which represent more than 60% of the world’s population and 30% of global GDP. The investment, estimated at $6 trillion over the coming years, will help to reshape global trade.
In India, 500 million people are expected to move to urban areas over the next four decades, which will usher in massive spending in infrastructure to meet their needs. As such, investments in infrastructure and telecommunications will jump from $27 billion in 2013 to $130 billion in 2025.
The infrastructure and urbanisation theme represents a core holding over the long term.
Under-investment in infrastructure is a problem that has persisted for more than a decade. If the trend is not reversed significantly, economic growth prospects are dented. In the US, the American Society of Civil Engineers estimates that the economy will shed 2.5 million jobs by 2025 and GDP will be cut by nearly $4,000 billion if spending in new projects is not made.
The main factor weighing on projects is financing. Even though current lending conditions have rarely been so good, many countries suffer from swollen deficits and an enormous public debt.