CHALLENGING CONSTRUCTION CONDITIONS

French construction remains in recession although growth in the medium term should come from the €100 billion ‘France Relance’ plan, writes Scott Hazelton

The French economy was virtually stagnant during the second half of 2023, with economic growth remaining under pressure in 2024. Leading indicators suggest that labour market conditions are cooling, and we expect a gradual increase in the unemployment rate in 2024.

The resilience of business sentiment is positive for investment, but tighter credit conditions will take their toll. The availability and price of credit should continue deteriorating with tight monetary policy and elevated perceived risks by commercial banks. Higher borrowing costs will have a particularly large impact on housing, slowing residential investment. Risks to the forecast are to the downside.

France’s construction sector had another difficult month in February as activity declined steeply. Work on housing, commercial and infrastructure projects fell, signalling a broadbased downturn.

The headline HCOB France Construction PMI Total Activity Index – which measures month-on-month changes in total industry activity – posted 41.9 in February.

While this was up from January’s three-year low of 39.6, it represented a sharp reduction in construction and extended the current period of decline to 21 months.

The biggest drag remained the housing sector, with 43% of home builders reporting less production than in January. A rapid contraction was also seen in civil engineering, with commercial building featuring a softer deterioration.

Real total construction spending will remain trending downward, although the expected 0.5% drop in 2024 will be more moderate than the 1.8% fall in 2023. This reflects the lagged impact of tighter financial conditions on construction demand, as well as the decline in building permits issued during 2023. Construction will continue to face challenges in the availability and cost of labor and materials, as well as stringent environmental regulations.

Technical recession

French construction entered a technical recession during the second quarter of 2023 and remains there, according to quarterly national accounts data published by the National Institute of Statistics and Economic Studies (INSEE).

Residential will remain the primary drag on growth in 2024, with real spending forecast to fall by a further 1.5%, after a 3.0% decline in 2023. High interest rates and tighter lending standards will continue to dampen housing demand and limit project starts, while property prices are likely to fall further, particularly in large cities. The volume of new housing loans in December 2023 was 32.0% lower than a year earlier, according to the Bank of France. Construction spending on non-residential structures is expected to decline by 0.2% in 2024, following a 0.5% increase in 2023, as investors and developers remain cautious amid weak economic growth, tighter financial conditions, high construction costs and a gradual increase in unemployment.

As the impact of tighter financial conditions subsides and economic conditions improve, growth is predicted to pick up to 1.8% in 2025. The expected downturn in 2024 is reinforced by a weak pipeline of new work.

Typically, the host country of the Olympic Games would experience an uptick in construction. However, the Paris Games feature primarily renovations to existing spaces and the use of temporary facilities with only limited new venues. The French construction market was roughly €370 billion (US$400 billion) in 2023, yet the construction budget over the build cycle for the Olympic Games is about €3.5 billion (US$3.8 billion), about one percent of national construction spending.

After falling by 2.0% in 2023, infrastructure construction spending is expected to grow by 1.5% in 2024 as public finances remain under pressure. Growth over the medium term will be underpinned by the €100 billion (US$108 billion) ‘France Relance’ recovery plan, announced in September 2020 to stimulate post-pandemic economic recovery.

Source: S&P Global Market Intelligence

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Of the total, €40.3 billion (US$43.7 billion) will be financed by the European Union for the country’s National Recovery and Resilience Plan (NRRP). The NRRP includes €4.4 billion (US$4.7 billion) for modernising the railway network, plus new rail construction including the €25 billion (US$27 billion) Turin-Lyon high-speed link. The Grand Paris Express project, 68 new stations and an addition four lines with a total length of 200km around Paris by 2030, will also provide a stream of work.

Hotels and restaurants had respectable growth in 2023, but that represented the last of the post-Covid recovery. This year is less inspiring and with the passage of Olympic Games activity, 2025 could present the trough of this cycle. Retail remains in long-term decline, courtesy of e-commerce.

Infrastructure offers the sharpest contrast. French NRRP investment is heavily skewed toward transportation, particularly passenger rail, and this will drive several years of strong growth. Water and sewer do not have the same public policy attention. Investment in energy infrastructure was particularly affected by the Russian invasion of Ukraine and the disruption of fuel supplies.

Ongoing electrification of the European economies will be a driver for further investment, but to a large degree this merely represents spending on a different ‘fuel’ type, i.e. wind turbines and solar arrays superseding more construction intensive carbon and nuclear fuelled generation.

IC