Double dip for construction

The eurozone debt crisis has pushed the European construction market back into recession (if it ever emerged). The recovery will take at least another year and it will be a weak rebound when it comes. Chris Sleight reports.

Having reached a peak in value of almost €1.6 trillion (in today’s prices) in 2007, the European construction market has been on the slide ever since. Some statistics suggest it may have managed some growth in 2011, but if the market did bounce back it was a barely perceptible recovery – certainly less than 1 per cent growth that year.

Since then the sovereign debt crisis in Europe’s peripheral economies has derailed economic growth in general in the region, and construction output has fallen along with GDP.

The problem is twofold. First, the struggling countries were once significant construction markets themselves. In the pre-crisis years, Spain and Italy each accounted for about 10 per cen of Europe’s construction output for example. Greece, Ireland and Portugal were much smaller of course, but at times were attractive markets owing to their steep growth. This was particularly true of Ireland.

The second problem is the way the debt crisis has eroded business confidence in general, discouraging private companies from investing and also depressing the residential market. The theory was in the crisis years that once the immediate threat of financial Armageddon had passed, private companies would start spending again as public investment fell away in the face of the inevitable austerity drive. What has happened of course is that the austerity has come, but there has not been enough private spending to plug the gap.

As a result, the Euroconstruct group of economic forecasting companies believes that construction output in the 19 countries it monitors, which make up the bulk of the European market, fell 4.7 per cent in 2012. A further decline of 1.5 per cent is expected this year, taking construction output to about €1.28 trillion – near enough a -20 per cent drop from the peak of activity in 2007/8, and taking the market back to about the size it was in 1996.

Although a recovery is forecast for 2014, the unpredictable nature of the forces holding back the recovery mean it is not something to count on. The threat of another default in one of Europe’s distressed economies could knock confidence again and further delay the long-awaited up-tick.

Regional variations

But as ever in Europe, the headlines figure tells only a limited story. It hides a series of markets that are doing well and some that are doing badly. Frankly, there are also construction

Turkey represents one of the brightest spots in the region. Pictured is a 10m, diameter tunnel boring machine commissioned for the Kargi Kizilirmak Hydroelectric Project in the country’s central mountainous region.

markets in Europe that are catastrophic at the moment as well.

On the plus side, the Nordic and Baltic region is unspectacular, but showing good steady growth. Norway and Sweden are all seeing modest single-digit growth and some of the smaller Baltic states like Estonia and Latvia are looking strong. The falling markets around the Baltic rim are Denmark and Lithuania.

Another bright spot is Germany, and this is significant because it is the largest construction market in Europe. Growth was particularly robust in 2011 – some data sources say there was a double-digit gain in construction output. The euro crisis has taken its toll since then, but the German construction market is still believed to be growing.

And that’s about it for good news. Of the other major markets, France and the UK are seeing their construction output fall, as are many of the other smaller economies in Europe. For the really bad news look at Italy or Spain in particular. There was a time when along with France, Germany, Italy and the UK, Spain was one of the ‘Big 5’ construction markets in Europe that accounted for about two thirds of output. That is no longer the case, as construction output in Spain has fallen so steeply for so long, that it is now only really a mid-sized market.

The steepest falls of all have been in Greece. It is not a country where many attempted to measure construction output even before the crisis, but based on the rough rule of thumb that construction accounts for about 10 per cent of GDP, the pre-recession market could have been worth some €30 billion per year. However, according to Eurostat the falls in Greek construction have at times been of the order of -30 per cent per annum in the post crisis years. If this is the case, construction output in Greece might only be about 20 per cent of what it was in 2008 – maybe about €6 billion.

Last summer saw the Shard in central London reach completion. At 95 storeys and 310m high it is the tallest building in western Europe. Government austerity cuts across Europe mean work such as road building and other areas that have been traditionally financed by public funds, are seeing a sharp downturn. Austerity impacts

One factor that is common across almost all of Europe is public sector austerity. This has a range of impacts on construction, for example in the building of schools, hospitals and other public buildings. However, it is most striking

Poland national stadium opening - 29 Jan 2012 Preparations for the 2014 Winter Olympics in Sochi continue to provide a steady stream of work. Pictured is the construction of the Mzimta rail bridge, which is part of the supporting infrastructure for the games.

in the infrastructure sector, where despite the emergence of Public Private Partnerships over the last 20 years, most work is still funded by the public sector.

According to data from Eurostat, civil engineering output in the EU 27 was down 7.5 per cent in the 12 months to the end of the third quarter of 2012. Compare this to the overall decline of 6.2 per cent in construction output and the 5.9 per cent drop in building construction, and it is clear that the civil engineering market is bearing the brunt of the downturn.

The dramatic change in the market over the past few years has of course had some significant impacts on construction companies. There have been numerous bankruptcies among mid-sized players, but so far there haven’t been any collapses of panEuropean companies.

But that is not to say there have not been problems, particularly with heavily indebted companies. Spanish contractor Sacyr came close to collapse as it tried to refinance debt in late 2011, while 2012 saw compatriot ACS take huge impairment hits on its ownership of energy company Iberdrola, which drove it to a €2 billion annual loss.

In Italy meanwhile, there has been a fascinating tussle between two contractors – Salini and Impregilo – as Salini has sought first to gain control of Impregilo’s Board, and then to merge with its much larger rival, all to the great upset of the Gavio family which had historically controlled Impregilo. Now Salini has the upper hand, it says it will push ahead with its plan to build a pure construction company – Impregilo had also been in the toll road business – with the scale to compete for major contracts around the world. In fact, internationalisation is one way that European contractors have managed to offset some fo the weaknesses at home. Some of the biggest contractors in the US, for example, are European-owned – Sweden’s Skanska is a major player, as is Germany’s Hochtief through its subsidiary Turner.

More recent years have seen Spanish and Portuguese contractors benefit from the construction boom in Latin America. Indeed, the biggest construction project in the world at the moment is the expansion of the Panama Canal, and this is being carried out by a consortium led by Sacyr, and which also includes Impregilo. The consortium also includes Belgian dregdging specialist Jan De Nul and local contractor Constructora Urbana.

It is a source of disquiet among contractors how difficult business is becoming at home, and the current situation in Poland embodies some of the worst difficulties. Poland was a strong market throughout the crisis years, as heavy investment was made in venues and infrastructure ahead of the 2012 European football championships.

However, since last summer the market has come to a grinding halt. Data from Eurostat says construction output in Poland in December was more than 23 per cent lower than it was a year previously. This has led to a string of contractors running into trouble. Hydrobudowa, which worked on the national stadium in Warsaw in the run up to the football championships, was forced into liquidation by the government client body claiming for alleged delays to the scheme. Another large domestic contractor, Polimex-Mostostal, has had to be rescued by the government’s Industrial Development Agency as it faced project overruns and penalties.

At the same time, contractor trade associations, including the European Construction Federation (FIEC) and European Internatinal Contractors (EIC) have been raising the issue of what they describe as the unfair contract conditions that the government has sought to impose on contractors for public sector work.

“We have never heard such outspoken criticism about procurement practice and contracting authorities in a single country by so many contractors from so many different enterprises and countries,” says Ulrich Paetzold, director general of FIEC. The concern is that government bodies are pushing excessive financial burdens and project-related risks onto contractors. Burdens the contractors say they cannot bear.

Outlook

At the moment then, the construction market outlook in Europe is poor, but it has to be said that we are probably right at the bottom of the curve at the moment. With the eurozone debt crisis gradually diminishing and worldwide economic activity picking up, the market should start to gradually improve over the next year or two.

However, the European construction market is not one that is particularly prone to booms. Even in the best years, growth seldom exceeded 3 per cent, so the best that can be hoped for going into 2014 and 2015 is probably an improvement of around 2 per cent. n