EUROPEAN CONSTRUCTION IN DOLDRUMS

WHAT HAPPENED?

Figures released last month by the Hamburg Commercial Bank (HCOB) Purchasing Managers’ Index showed that activity was down in the Eurozone as a whole, as well as in the major economies of Germany, France and Italy. In Europe as a whole, activity has now been in decline for 28 months straight.

In the case of Germany, the HCOB PMI shows that activity in the country has been in negative territory for more than two years. In France, activity has also continued on a broadly downward trajectory since 2022.

Not all sub-sectors of the industry are equal, as far as their performance is concerned.

“It is definitely true that that these confidence indicators are still in negative territory,” says Maurice van der Sante, senior economist, construction, at Dutch bank ING. “We have to acknowledge that it’s mainly the new residential sector that has been hit and many other sectors are doing surprisingly well.”

WHAT IT MEANS

Given strong demand for housing in Europe it is somewhat strange that the environment for new residential building projects remains so tough. But strong inflation in building materials costs and increased interest rates following the Covid-19 pandemic and the outbreak of war in Ukraine in 2022 have made it much more difficult to make projects profitable.

Germany remains a difficult market. Building permits for housing now sit at their lowest level in 14 years. “From a housing policy perspective, the first half of the year was another major disappointment,” says Tim Oliver Müller, managing director of the Federation of the German Construction Industry, Bauindustrie.

“We are heading for the weakest level of approvals since 2010. This is cementing the housing shortage in conurbations and their surrounding areas, as well as in many regional centres. In June, the number of approved dwellings continued to fall by double digits for the 21st time in a row,” he added.

Meanwhile, the HCOB France Construction PMI for August showed that housing construction has fallen at one of the fastest rates on record, while commercial building work has also dropped. That has dragged overall construction activity levels down at the fastest rate since January.

Meanwhile, the HCOB Italy Construction PMI for August also showed a decline in activity for the fifth month in a row, with residential construction the weakest-performing subsector. Construction companies expressed weak optimism for the future, although confidence levels were at their lowest for two years, according to the survey.

WHAT’S NEXT?

While the overall activity figures look gloomy, there is cause for optimism in Europe. “I see a light at the end of the tunnel. Production volumes [of building materials] are bottoming out. There has been a decline in the European Union of 15-20%, which is of course huge, but it is slowly beginning to track upwards again. It’s not very convincing yet, but the first signs are there,” says van der Sante.

He also points to increasing house prices in the Netherlands, which are now back to the levels they were two to three years ago. “That is a good sign for new building construction, but it always takes some time before contractors see an increase in their production,” he adds.

As a result, ING expects Europe to witness a continued decline in activity in 2024 but then forecasts a small increase in 2025.