There Are Few Bright Spots for Europe’s Construction Industry
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The European construction industry before the pandemic was in its seventh year of recovery. That might sound like a strong, long-lasting recovery, but average growth from 2014-19 was only slightly above 2% per year, which is rather low in a period of economic upswing, especially after the severe financial crisis that ended in 2009. As a result, only one-third of the losses incurred in the construction industry were due to the economic and financial crisis caused by the pandemic.
European Construction Outputs
UK construction outputs in 2019 were 20% lower than pre-crisis levels in 2007. Spain and Italy in particular, but also Ireland and Portugal, dragged down Europe overall. These countries had not fully recovered from the most severe downturns and were then hardest hit by the pandemic. The 2019 forecast for the upcoming years predicted declining growth since several housing markets showed signs of saturation. Estimates at the time assumed that the construction industry would grow at the same rate as the overall economy in 2020, and slightly less than the following years.
The first month of 2020 came up with much better construction data than expected, but COVID-19 hit and led to a strong downturn, with a total construction decline of 9%, which is less than the overall economic decline of 12%. The downturn hit the service sector stronger than any prior crisis. The construction industry was affected by the pandemic twice. Construction sites had to be closed for around one week in Germany and nearly eight weeks in France and the UK, the two countries within the Euroconstruct network most negatively affected. These closures, along with stricter distancing rules and further regulations, will lead to delays of existing projects, which mainly explains the rapid downturn in 2020. New projects, especially in nonresidential construction, will have to be reevaluated. Especially large projects are likely to be postponed. Suffice to say, the current outlook for 2020 is rather gloomy.
Nonresidential construction is the most exposed to the crisis. That makes sense, since the commercial construction sector includes hotels, restaurants, and leisure facilities, which were hit hardest by the pandemic. The crisis also hit the office construction segment nearly as hard, where investment decisions also depend to a large extent on a stable economic environment. In the past year, office projects were implemented only if the pre-letting rate was more than 50% or if they were entirely unoccupied, so some caution prevailed on the market in countries including the UK and Germany, even before the pandemic.
Civil Engineering Impact
The effects on civil engineering are not quite clear. One thing should be certain: in contrast to previous crises, no additional civil engineering projects will be implemented to stabilize the economy, as the entire economy is affected by lockdowns and economic aid will be spread more widely. On the positive side, at least for the time being, governments are still standing by existing civil engineering projects, and a reduction in investment volumes has not as of this point been communicated in the UK, France, Germany, Italy, and Spain. That could still change in the furor of increasing borrowing to finance state aid for companies.
Forecasts are more uncertain than ever since there have never been such lockdowns in recent history. Following our forecast from August 2020 of an 11.5% decline in total construction output, a slightly more favorable estimate of -9.1% has emerged. This could have been too optimistic. The lockdown in spring led to a sharp drop in COVID-19 cases and showed a more favorable picture in the summer period. Reduced levels of restrictions turned the picture clearly negative in the meantime, with case numbers almost as high as in spring before the lockdown, so new restrictive rules were introduced. But nevertheless, the construction industry was in a healthy state with full order books before the pandemic, so a major downward revision is not anticipated right now.
The strongest decline among the five countries is recorded by the UK and Spain, with a drop of GDP in both close to 20%. The economic decline in the second quarter of 2020 was less severe in France, Italy, and, especially, Germany, where the shortest lockdown period was in place. This explains, to a large extent, why the UK and Spanish construction industries were also hardest hit, and why the other three markets were far less affected. Total construction volume in the five countries of focus amounted to around 1,000 billion euro in 2020. The most important segment is building construction, which accounts for 80% of the total volume.
Data on the construction industry indicated before the crisis that dynamics in housing — the number one growth driver in construction — will significantly slow down. Civil engineering will take its place in the next year. It’s important to note that the pandemic hit the building sector harder, and therefore the recovery in 2021 will be stronger. In fact, construction growth will clearly decline in the building sector, and the volumes will even shrink in the longer term.
Two factors must be considered when talking about civil engineering as a growth driver. First, the civil engineering market makes up only 20% of total activity, and therefore it is too small to take a key role as an economic pillar. Second, public investment plans are set out in government budgets, and the implementation across countries can often be quite different.
European Construction Outlook
The best outlook shows countries affected most by the crisis, namely the UK and especially in the building sector but also civil engineering, to be strong in the upcoming years. Beside the UK, France and Italy will show above-average growth in building construction and civil engineering, while in Spain, only a strong recovery in the building sector is forecast. In Germany, the outlook in both areas is close to stagnation. Germany’s market was least affected by the pandemic so far, and the outlook before the crisis indicated a decline in both areas.
All that said, business confidence within the construction industry is sound. In the Euro area, employment expectations increased significantly in April and pointed upward until September. Building activity was also strong, but slightly delayed. On the other hand, the expectations for the order books only marginally improved, which could be a first indication of a slower recovery in 2021.
The bad news is that the losses in volume due to the pandemic are unlikely to be compensated in the next two years in residential and nonresidential construction. The outlook of only the smallest sector, civil engineering, is positive. The losses of 2020 loom over the rebound effect when looking toward the end of 2022. These forecasts do not include a second lockdown, which is likely in some way in several countries, or partial lockdowns like the one in the Netherlands. There are severe downside risks, especially since we never had a pandemic like this before. A negative second-round effect, along with lower economic recovery, could dampen the construction industry’s performance for 2021 even more.
About Michael Weingärtler
Michael Weingärtler is a construction market expert at the Austrian Institute of Economic Research. His focus is on analysis and forecasts of construction markets and the infrastructure sector. Michael is also currently a member of Euroconstruct, Europe’s leading construction market forecasting network, with which WIFO co-operates. Previously, Michael was an Economic Consultant at ISA Austria and a Lecturer, Economic Policy at the University of Applied Sciences.
This construction industry article is adapted from the October 15, 2020, GLG webcast “Construction in Core Europe: Market Analysis.” If you would like access to this video panel or would like to speak with construction industry expert Michael Weingärtler, or any of our more than 700,000 industry experts, contact us.