Europe’s Construction in Q1: At The Very Least, We Are Off To A Good Start

If there was a contest for an industry that took the biggest hit due to inflation and interest rate hikes, we would have plenty of potential nominees. Banks are currently leading the pack. That said, construction companies can also be a solid target as higher interest rates mean slumping demand, whereas higher prices of construction materials and energy result in a narrowing margin. However, Europe’s construction sector has been holding up so far.

After an extremely weak December, January’s construction volume in Europe rose dramatically, with an increase of 3.9% in the euro area and 3.5% in the EU as a whole. Year-over-year figures are also in the black, with an 0.9% increase in the euro area and 1.4% in the EU. Based on the surveys of chief executives of construction companies, it is safe to say that confidence in the sector continues to beat industry averages over the past two decades.

Month-to-month comparison
Construction of buildings ► Euro area +4.2%; EU +3.6%
Civil objects ► Euro area +3%; EU +2.3%
The largest increase ► Germany (+12.6%), Slovenia (+9.8%), Poland (+7%)
The largest decline ►Hungary (-5,0%), Romania (-4.3%), Belgium (-1.5%)

Year-to-year comparison
Construction of buildings ► Euro area +1.4%; EU +1.5%
Civil objects ► Euro area -1.9%; EU +0.5%
The largest increase ► Slovenia (+26.7%), Slovakia (+14.7%), Portugal (+6.3%)
The largest decline ► Belgium (-4.7%), Hungary (-3.6%), Finland (-2.7%)

In essence,

• The portfolio of orders is still pretty full. On average, EU construction companies had exactly nine months of work at the beginning of 2023. This is 0.2 months more than in Q4 2022.
• There is a downturn in prices of many construction materials. E.g. Wood and metals peaked in the summer of 2022 and have been demonstrating a decline ever since. That said, there was a sharp rise in usually stable prices for concrete, cement, and bricks. Despite lower energy prices earlier this year, the cost of energy-intensive construction materials remains high. It will take another month or two for the prices to stabilize.
• Fewer developers intend to hike the selling price. This is especially true for Austria and the Netherlands: in May 2022, about 75% of developers planned to raise selling prices, whereas, in February 2023, the figures dropped to 50%. According to ING data, there was an even greater decline over the same period in Germany, namely from 54% to 17%. Aside from that, shrinking demand for construction works caused by higher interest rates and overall uncertainty may result in fewer companies expecting an increase in selling prices due to rising competition.
• Structurally insufficient manpower. In the survey launched by the European Commission, a quarter of EU contractors—in particular the companies based in Austria, France, and Germany—mentioned this culprit.
• An increase in the share of R&M (remodeling and maintenance market), which is often overlooked in the construction sector. It consists of small, scattered companies and often lacks reliable data. That being said, R&M Europe’s market share has been slowly increasing in the course of the past fifteen years. In 2008, 48% of production volumes in the EU accounted for R&M work. Gradually, this figure increased to 54% in 2022. This share will continue to grow in lockstep with the need to improve energy efficiency (the very same insulation, heat pumps, and solar panels).
• Lower volatility of the R&M market. Although there is a great demand for more homes in many countries, a shortage of land and complex legal procedures put a strain on new construction projects. E.g. In Germany, the number of issued building permits for family houses fell 26% in January compared to last year. On top of that, the market for new buildings is rather shaky and highly dependent on the economic cycle. In contrast, the demand for R&M services is a continuous process, therefore it is less prone to fluctuations. Plus, the demand for R&M in times of crisis may increase.
• Let’s sum things up. We are witnessing a solid amount of work in progress, a shrinking shortage of materials, a rise in the R&D share, and a manpower bottleneck. Given the existing information, this makes the sector less volatile. If a decline does happen this year, it will be minor.