Inflation overseas in 2002 proved more stubborn than many estimators thought it would be. A year ago, fear of a deep recession in the U.S. led many to believe that inflation would fall dramatically. That didn't happen, but worldwide construction inflation weakened for the second consecutive year and should decline again in 2003, according to a forecast by Gardiner & Theobald Inc.

In its eleventh annual survey of international construction costs, conducted exclusively for ENR, the London-based international project and cost management firm reports that construction inflation averaged 3.2% for 22 nations in Europe, Asia and the Middle East. This is down from a 3.7% annual inflation rate in 2001 and 4.4% in 2000 for the same group of countries. Next year, construction inflation should slip another 0.3%, according to respondents providing forecast data.

These inflation figures exclude several nations with extraordinary cost trends that would skew the data. For example, construction inflation is still rampant in Romania where costs increased 34% this year after climbing 40% in 2001. Argentina's financial crisis shattered five years of cost stability, sending building costs in Buenos Aries soaring 91% this year. Click here to view Global Construction Cost Forecast

Cost stability also fell victim to the Middle East conflict. In Israel, building inflation jumped from 1% a year ago to 6.7% this year. Local construction cost consultants are bracing for another 7.2% increase in 2003.

Other nations have made tremendous strides in containing inflation. Five years ago, most eastern European nations were battling double-digit inflation. This year, it is down to zero in the Czech Republic, 1% in Poland and 5% in Hungary. In Cyprus, building inflation was slashed in half from 11% last year to 5% in 2002.

Several international markets are struggling with the problem of deflation. The most severe case is the Hong Kong market. While construction inflation is negligible in Shangai, prices have fallen through the floor in Hong Kong. This year, costs in the city are expected to decline 7.1%, the fifth consecutive year costs have fallen. Deflation also is reported in Taiwan, Japan and Germany.

Because of Germany's continuing economic difficulties, construction prices are stagnant or falling, reports David Lawrence, European managing partner at the Berlin office of London-based E. C. Harris Ltd. "Because demand is not strong, the government is looking for new ways to procure things," he says. Prison building and road construction are among markets targeted for private investments.

Germany's construction gloom is casting a shadow over neighboring Poland. With Germany providing less work for migrant labor, Polish teams are being forced home to a market oversupplied with people. As Central Europe's largest nation, Poland already is well served by construction labor, says G&T's Jan Holyst, in Warsaw. A skilled construction worker earns $5.90 an hour in Poland compared to a wage of $36.15 an hour in Germany, according to the G&T survey.

"Tender levels are still very competitive," says Holyst. "There has been increased competition this year, which is reflected in the downturn in the value of work available," he adds. Inflation for materials, equipment and labor is being suppressed by contractors either absorbing hikes by reducing profit margins, or putting pressure on their suppliers to ease off, he says.

French construction costs have declined over the past 12 months, claims Nick Beider, of E.C. Harris in Paris. With construction spending down, contractors are bidding more keenly. However, bids are being complicated by large increases in labor costs, which "are going through the roof" for some trades because of a severe shortage of construction workers, says Beider.

In the U.K., one of Europe's busier markets, bid price levels are increasing about 3.5% a year, says Paul Ridout, a partner in G&T in London. "Over the past few years, there's been a general increase in workload and there's been lots of threats of shortages. But, in fact, it has stayed very much in balance," says Ridout.

After a busy construction period, prices in Hungary appear to be falling or remaining stable in terms of materials and equipment, partly influenced by currency exchange shifts, says Mark Rea in G&T's Budapest office. The Hungarian currency's growing value against the euro and dollar "is making imported items cheaper in local terms," says Rea.

Spain's rapidly growing construction sector is pushing construction inflation to 3.5%, or about 1% more than for general retail inflation, with energy intensive materials experiencing the biggest hikes, says Ignacio Menéndez Pidal de Navascués, who heads E.C. Harris España, S.L., Madrid. Labor remains in short supply locally, but contractors are filling the gap by turning to North African and Latin American labor markets for help.

In the Arabian peninsula, Dubai is considered by many to be the center of activity in the Middle East. Various initiatives by the tiny emirate to promote leisure and business opportunities continue to stimulate construction. An important stimulant is the recent change in legislation allowing foreigners to acquire real estate, says G&T's resident partner, Jeff Higgins.

Booming construction and a reported shortage of contractors of the "right caliber" are causing prices to creep up, says Higgins. And typical of the Arabian peninsula, indigenous labor is "always a problem," he says. But "flexible" government attitudes to immigrant workers from the Indian subcontinent and farther afield meets the demand. Skilled construction workers in Saudi Arabia get paid $4 an hour, according to G&T.

Saudi Arabia's construction prospects are being boosted by relatively strong oil revenue, says Brian Tingate in G&T's Riyadh office. Government spending in Saudi Arabia may increase next year, particularly in the health and education markets, he says.

But demand for construction remains slack, keeping a firm lid on construction costs. Bid prices "are extremely competitive," says Tingate. "Government expenditure is being controlled extremely tightly. There's very little public work..The private market is moving reasonably well, with retail development, banks, shopping malls and leisure developments," he adds.

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