Construction industry: 2023 set to be difficult

Construction industry: 2023 set to be difficult

The construction industry started off the year as expected in the first quarter, before feeling the full brunt of the Russian war of aggression in Ukraine. Incoming orders for mainstream construction increased by 4.1 percent in real terms and construction revenue by 5.6 percent, also on account of the favourable weather conditions.

The situation has changed considerably since then. In the first eight months of the year, incoming orders (up 10.3 percent) and revenue (up 11.5 percent) both still recorded double-digit rises in nominal terms. This explains why the current business situation in mainstream construction was on balance still rated as moderately positive in late autumn.

However, these figures are completely invalidated by the rising construction prices. The deflator on construction investment is likely to be 18 percent this year which is its highest level in post-war German history. Factoring in the high rate of inflation, incoming orders and revenue in real terms were both five percent down in the first eight months of the year compared to the same period last year.

A positive development is that mainstream construction recorded its highest backlog of orders since German Reunification in the middle of the year at 72 billion euros. In combination with the reach of orders calculated by the ifo Institute, this will keep mainstream construction busy until next spring. On the other hand, there are some negative trends. Despite the easing up of shortages in materials reported in the middle of the year, the production of every third construction company is still hampered by shortages. At the same time, the proportion of companies reporting order cancellations has tripled since the outbreak of the war.

The persistently high prices of building materials are not just having an impact on the earnings of construction companies. They are also pushing up the prices for construction services, dampening the demand of prospective investors.

The trend in interest rates is particularly problematic. The dramatic reduction in mortgage interest rates between 2009 and 2021 markedly improved the refinancing terms for construction investments. The low and negative interest rates on the capital market thus fuelled a substantial increase in the interest of investors in real estate investment. The lower interest rates also reduced public interest expenditure which benefited, at least in part, public construction expenditure. The hefty rise in interest rates since the start of 2022 is likely to put an end to these trends.

Sentiment in the industry has become correspondingly bleaker, particularly business expectations going forward. In February this year (before the outbreak of the war), the average rating for expectations in mainstream construction following seasonal adjustment was at minus 15 points. By October, this value had dropped much further, down to minus 47 points.

The construction industry correspondingly revised its economic forecast for the current year in late autumn. Revenue in mainstream construction is now expected to drop by five percent in real terms this year and continue to point down next year.

The labour situation in the construction industry, in contrast, recorded a positive development. The number of employees in mainstream construction increased by two percent from January to August.