Written by 8:08 am EU Investment

EU construction sector suffers multiple setbacks | Article

German construction output declined by 1.6% in 2021. This was the first contraction since 2015. Among other things, pull-forward effects due to the termination of a VAT reduction at the end of 2020 hampered growth in 2021. In addition, Germany was the only country that did not witness a decrease in construction volumes in 2020 during the Covid crisis which means there was no bounce-back effect as we have seen in some other countries. At the moment, German contractors are among the most constrained by labour and material shortages compared to other EU countries. And as discussed above, the current low water levels will keep the supply chain for building materials under pressure for some time. Order books in 3Q are still higher than in the same period one or two years ago but have decreased a bit compared to the first half year of 2022. German construction output showed a decline in 2Q (-3.0% QoQ) but the previous quarter (4.5% QoQ) was still strong. For 2022 as a whole we, therefore, forecast some moderate contraction of the construction output.

For Dutch construction, we forecast continuing growth for this year and next. Dutch contractors have been profiting from a well-performing economy in the Netherlands in the first half year of 2022. However, it is not all sunshine and Dutch roses. Like in other countries, building companies are facing higher procurement costs, labour shortages are enormous, and the uncertain international geopolitical situation makes companies reluctant to invest in existing and new commercial buildings. Nitrogen emissions are also still an issue and this is especially a burden for the infrastructure sector. The investment in civil engineering projects therefore also decreased in the second quarter of this year. To solve the low supply of houses, the Dutch government aims to build 100,000 new houses per year. However, this is still far out of reach and the number of permits for new dwellings has only been decreasing in the last half year.

For Spain, we forecast a further decline in construction volumes this year. That means that the sector will be in contraction for the fourth year in a row. Production levels are currently more than 20% lower than before the Covid pandemic. Where contractors in other EU countries mainly suffer from material and labour shortages, Spanish building firms primarily suffer from insufficient demand. Almost two-thirds of all Spanish builders mentioned in August that this is the most important factor that limits their production. However, building permit issuance is on the rise. In addition, the Spanish construction sector will see some positive effects from investments in the EU recovery funds. Therefore, we expect some marginal recovery next year.

Polish contractors made a promising start to 2022 with double-digit growth rates. However, growth rates are now diminishing. In July, Polish construction output rose by 4.2% (YoY). The number of approved new home permits in Poland increased strongly in the second half of 2020 and remained stable at a high level in 2021 and is a strong indicator for future production. However, increasing mortgage interest rates, higher building costs and low consumer confidence due to the Ukraine war could slow down the production growth of housing completions. An ambitious investment programme (including the EU Recovery Fund which is still frozen due to a judiciary dispute), could boost the Polish civil engineering sector. Hence, we expect the Polish construction output to continue to grow this year and next but at a slower pace.

For Turkey, expectations remain uncertain due to the effects of the current high inflation in the country and the devaluation of the Lira. In addition, Turkish contractors are facing high import costs for building materials from abroad and demand for new construction is hindered by these high prices. The Turkish construction confidence indicator (EC survey) is quite negative (-13 in August 2022). Contractors’ order books are currently filled at a relatively low level. Therefore, we have lowered our growth expectations compared to our February forecast. We now expect a further decline in the Turkish construction output in 2022 and 2023. This means that the Turkish building output will be in decline for at least five years in a row (from 2018).

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