Written by 2:37 pm Europe Economy

Eurozone’s construction sector hit by rising costs

The eurozone’s construction sector is suffering its worst decline since the pandemic brought the economy to a near-standstill in 2020, according to the latest closely watched monthly survey.

The gloomy findings underline how rising borrowing costs, sharply higher raw material prices and worries that a recession could accelerate a fall in property prices are all weighing on the European construction industry.

December’s S&P Global eurozone construction purchasing managers’ index, released on Thursday, showed a total activity index of 42.6, down from 43.6 in November. Figures below 50 indicate declining activity. 

The data marked the eighth consecutive month of contraction in home building. Activity declined in all three of the 20-nation bloc’s biggest economies — Germany, France and Italy.

The figures, based on a survey of purchasing managers at 650 construction companies, are the latest sign of declining activity in European economies affected by the war in Ukraine and the resulting surge in energy and other costs.

The construction sector ended 2022 on a “negative note” with a “sharp fall” in building activity, said Laura Denman, an economist at S&P Global Market Intelligence.

The final three months of 2022 marked the index’s worst quarterly performance since the April to June quarter of 2020, when building activity was disrupted by the pandemic.

Excluding periods of Covid-19 lockdowns, total home-building activity dropped at the sharpest rate since March 2013 and new orders for all construction projects declined at the fastest rate since September 2014, S&P said. The biggest falls in both cases were in Germany.

Commercial building activity also fell for the ninth consecutive month, it said, adding that the biggest drop was in France. 

“December data suggested that firms were anticipating challenging economic conditions to continue into the future,” Denman said. She added, however, that there was a “sustained easing” in both cost and supply pressures.

Overall production in the eurozone construction sector has recently rebounded back above pre-pandemic levels, rising 2.2 per cent in the year to October, according to figures released by the EU’s statistics agency. 

But construction companies warn they face potential collapse and are calling for more government investment in making homes more energy efficient.

Tim-Oliver Müller, head of the German construction industry association, warned last month that many of its members were “struggling to survive due to rising building material and energy prices”. 

A recent study by the Ifo Institute in Munich found 16.7 per cent of German construction companies had suffered cancellations of building projects in November, up from a usual rate of only 1 to 2 per cent. New home-building orders in Germany plunged 14 per cent in October from the previous year, according to the federal statistical agency.

Construction generates about 9 per cent of eurozone output, so the fact that many building companies are worried about falling activity and shrinking order books is a bad omen for the bloc’s overall economy, which is expected to suffer a mild recession this winter.

Florian Hense, senior economist at German fund manager Union Investment, said: “The construction sector is definitely among the most interest rate sensitive, so if you raise rates then you would expect construction activity to be hit early, especially when raw material inflation is still high.”

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