Compared with the frenetic pace of 2022, project activity cooled in 2023 due at least in part to inflation, rising interest rates, and the end of COVID-19 stimulus. Nonetheless, the value of announced cross-border (and US inter-state) investment in the Americas this year is on track to be nearly 40% higher than in 2019, with the average project being more than 50% larger, according to fDi Markets. How will 2024 stack up?
The robust US economy continues to defy the odds, but global demand is weak. While avoiding a widely predicted recession in 2023, most economists agree we aren’t out of the woods yet. Weak growth in China and Europe and rising global conflicts will likely negatively affect economic development projects in the Americas, as could political deadlock in Washington and the upcoming presidential election. The impact of higher interest rates, rising credit card debt, and the return of student loan payments will hinder projects heavily dependent on consumer spending.
Another challenge for 2024 will be meeting the workforce, industrial property, and energy demands of large projects. The rise of the megaproject, which can require hundreds of megawatts of electricity, has put a strain on North American grids. To meet this demand, the US needs to increase electricity generation by around 50%, and that doesn’t include the additional demand from an electrified automobile fleet. With a shortage of everything from transformers to large logs for power poles, it will require more investment in electricity generation from hydrocarbons, much to the dismay of many environmentalists. Texas voters recently approved a constitutional amendment authorizing $10bn for the new Texas Energy Fund to provide low-interest loans to build gas-fired power plants, develop microgrids, and modernize the state’s electric grid.
So, does that mean the ESG balloon is finally coming back down to earth? Fuelled by government subsidies such as the Inflation Reduction Act to promote clean tech projects, the market has been frothy with venture capital-backed, speculative technologies full of promise but never achieved at scale. Return on investment hurdle rates have been steadily increasing due to rising interest rates while inflation is making it harder to contain costs. We are already seeing planned and announced projects delayed or canceled. And if demand for electric vehicles continues to soften, I expect that trend to accelerate. On the bright side, projects with proven technologies funded by strong balance sheets, particularly in high-value sectors like semiconductors and biopharma will be the drivers of economic development activity in 2024.
Despite the headwinds, I believe 2024 will be another strong year for economic development projects. However, the mix of projects may be much different from years past. Projects with a strong business case and reliable funding will carry the day, while highly speculative projects heavily dependent on government subsidies will not make the cut. Communities with announced projects that meet the latter description need to plan now how they will pivot if the worst becomes a reality.
Written by Didi Caldwell. This article first appeared in the December 2023/January 2024 print edition of fDi Intelligence.