PROSPECTS STABILISING

While politics and tariffs are factors that can be hard to quantify, construction spending is expected to increase in Germany in 2025, albeit from a low level, writes

Structural factors are delaying a cyclical upswing in Germany’s economy and will limit its momentum in 2025–26. However, prospects for 2025 are stabilising, as suggested by a significant improvement of the Purchasing Managers’ Index (PMI) indicators for both manufacturing and service sectors in January.

A close eye will need to be kept on developments surrounding potentially broad-based US tariff increases and political developments surrounding the Russia-Ukraine war, but existing potential for negotiation on both issues argue against becoming too pessimistic for the economy. At the time of writing, a new coalition government was in the process of being formed.

Neither a regular 2025 budget nor major new economic policy decisions are likely before mid2025, adding domestic political uncertainty to an already volatile international environment. Falling inflation and weakening activity levels should allow the European Central Bank (ECB) to continue easing monetary policy.

Following an estimated decline of 3.1% in 2024, real total construction spending in Germany is forecast to rise by 1.3% in 2025. This represents only a gradual recovery as stillhigh financing costs, domestic and geopolitical uncertainty, and increasing protectionism continue to undermine investor sentiment. The upturn will also be limited by prior declines in building permits and new orders, with growth not accelerating to 3.0% until 2026. The number of bankruptcy declarations in the German construction sector has been rising since 2022 and in the first ten months of 2024 was 21.6% higher than the same period in 2023.

Steep construction costs

High financing and construction costs, alongside weak demand and falling property prices are to blame for hindering construction firms’ finances and rendering projects unfeasible. While interest rate cuts by the ECB should ease some of the financial pressures faced by construction firms and property developers, any benefits will take time to materialise. New order volumes fell slightly in the first 11 months of 2024 and continues a steeper trend from 2023. New orders for housing and nonresidential buildings fell by 3.3% and 5.3%, respectively, while increasing by 3.9% for infrastructure.

The latest Hamburg Commercial Bank Germany Construction PMI survey compiled by S&P Global showed that a lack of incoming new business remained an issue across the industry at the start of 2025.

New orders fell at an accelerated pace in January 2025, with surveyed firms attributing this to a lack of tender opportunities, high Source: S&P Global Market Intelligence building and borrowing costs, and general weakness in the economy. Building companies offer a pessimistic construction outlook for the next 12 months and are reducing their workforce and purchasing activity.

Residential construction spending in Germany fell by an estimated 4.9% in 2024 as buyers and builders pulled back from home purchases and project starts amid affordability and profitability concerns. We expect residential construction to achieve just 1.1% growth in 2025.

While falling interest rates and rising real incomes should attract buyers back to the market, affordability issues will remain as home prices gain momentum.

Annual construction cost inflation for new residential buildings has also picked up, with the construction price index for residential buildings up 3.1% year over year during the fourth quarter of 2024 and 43.7% higher than its pre-pandemic level.

The Building Energy Act, mandating that every newly installed heating system in newbuild areas must run on 65% renewable energy from January 1, 2024, will hold back housing projects given the high upfront investment. Nonresidential structural construction spending fell 1.8% in 2024 with a modest rebound in growth to 1.5% expected in 2025.

Economic and political issues

Office construction, which dominates the nonresidential segment, will continue to be impacted by economic and political uncertainties and higher development costs, although several global real estate service providers expect a gradual increase in investment activity during 2025.

The shift toward hybrid working is increasing demand for high-quality space, particularly in central locations, that meet environmental, social and governance requirements.

Manufacturing construction is particularly exposed to the automobile industry with many electric vehicle microchip factory projects suspended or postponed over the past 12 months.

This includes a €30 billion (US$32 billion) chip project in Magdeburg, which was delayed by two years by Intel in September 2024. However, investment in other renewable energy projects has increased in recent months, with Frankfurt approving a school building initiative that will see €1 billion (US$1.1 billion) invested in building and renovating schools over the next five years.

Infrastructure construction spending is expected to slow from 2% in 2024 to 1.8% in 2025. Nonetheless, the sustained expansion will be driven by investment to renovate and modernise transport infrastructure, as well as various energy projects aimed at transporting electricity from renewable energy sources.

Furthermore, the possible creation of a new off-budget fund for additional spending on infrastructure could provide a boost to construction growth in 2026–27.

Infrastructure projects are set to benefit from funds through the EU Recovery and Resilience Facility.

However, most of the funding will be spread out over several years and, as a result, will contribute only modestly to growth in the near term. So far, €19.8 billion (US$21.5 billion) – approximately 65% of the country’s total financial allocation – has been disbursed by the European Commission to Germany.

Germany’s historically critical manufacturing sector faces mixed fortunes – utilities struggle with the energy transition to electric, and petroleum refining seems to be in permanent decline.

However, transportation and chemical industries are rebounding, while electrical and electronic equipment manufacturing holds the greatest long-term potential for strong and sustained construction growth.

S&P GLOBAL is an American publicly traded corporation headquartered in Manhattan, New York City. Its primary areas of business are financial information and analytics. It is dedicated to sharing essential economic intelligence with those working in and affected by global markets. Its experts provide a 360-degree perspective across countries, risks, industries, and commodities.