european construction – back to growth

High speed train routes through – or rather under – the Alps continue to rank among europe’s most ambitious projects. Pictured is the work to assemble a tunnel boring machine (TBm), which will be used to drive one of the anciliary bores on the 55 km Brenner Base Tunnel project.

After many difficult years in the wake of the global economic crisis, the European construction market has started to see growth. As ever in Europe, there are areas of weakness offset by genuine hotspots – most notably Germany.

According to the Construction Industry Federation (FIEC), construction output in Europe came to €1241 billion in 2015. With growth put at a little over 2 per cent, that should have taken the market to around €1265 in 2016 and on up to around €1290 this year.

Those are impressive figures, but the fact remains that investment in construction is still more than 10 per cent lower than it was ten years ago in the pre-crisis era. Construction’s share of GDP is now only around 8.5 per cent, compared to the previous benchmark of 10 per cent of GDP, which was something of a rule of thumb in the late 1990s and early 2000s.

But there is scope in the current climate for the construction sector to bring about

a small reversal in its fortunes. At present the industry is growing marginally faster the European GDP. The International Monetary Fund put eurozone GDP growth at 1.7 per cent in 2016 and predicts a deceleration to 1.5 per cent this year. If construction can keep growing at around 2 per cent or better – the Euroconstruct forecasting body expects 2.1 per cent in 2017 – its share of economic activity will increase.

As Euroconstruct said in a statement following its November 2016 meeting in Barcelona, Spain, “There is an interesting window of opportunity created by a combination of cheap credit and a more favourable perception of building as an investment shelter. However, this opportunity may be ephemeral, and not a driver for the longer term. The key factor for strengthening the construction sector is public demand, which Euroconstruct expects to keep improving, but only marginally and in (only) some countries.”

One of the key issues highlighted by Euroconstruct, and reflected in other data too, is that while the overall picture for Europe is reasonable, the headline figure masks a very patchy recovery.

“Behind that European average that still looks healthy there are far too many exceptions: lack of growth in in civil engineering and lack of growth in six countries (Poland, Hungary, Czech Republic, Slovakia and by a narrow margin, also the United Kingdom),” said Euroconstruct.

But it has to be remembered that the construction sector has had a rough journey in the post-crisis years. Growth only genuinely returned in 2014 after a false dawn in 2011, and the fall from peak to trough saw output drop by about 15 per cent or €200 billion in terms of annual construction output. Growth may be weak and patchy, but growth is still growth.

Residential renaissance

The real driver of the recovery to date has been the residential construction sector. This segment took off particularly sharply as the market improved in 2014. In contrast the civil engineering market did not improve until 2015 and the non-residential building segment has been even further behind the curve, with a return to growth not materialising until last year.

The outlook from Euroconstruct is for the residential sector, particularly new housebuilding as opposed to repair & maintenance, to continue on its sharp growth trajectory. Growth in the civil engineering/infrastructure segment is expected to accelerate this year after a slow pick-up, while the non-residential market still looks sluggish.

But when looking at the European construction market, headline figures for the region only get you so far. The overall picture is a composite of different countries with very different market dynamics.

In the post-crisis era, it has generally been true that Northern and mid-European countries have had the healthier construction markets, while the Southern economies have been much more troubled. That still holds true to some extent, although most of the Southern markets have now returned to growth.

In some cases that growth is impressive in percentage terms. Spain’s expansion in 2015 and 2016 was of the order of 5 per cent, according to FIEC, so well above the European average. However, the problem remains the country collapsed so far and so fast in the crisis years, that even this impressive growth leaves the market a long way short of being in good health. Construction output in absolute terms in Spain today is only about half of what it was a decade ago.

But there are certainly bright spots in the European construction picture. Nordic markets while being small have shown good growth over the last three years or so, with Sweden being the pick of the bunch. But more significantly, the major markets of France, Germany and the UK have all performed well.

Among these big three, Germany’s construction market put in a remarkable performance last year. According to the Hauptverband der Deutschen Bauindustrie (HBD) trade association representing large contractors, construction output in Germany grew a staggering 6.3 per cent last year, outstripping its own bullish previous forecast of 5.8 per cent. As in Europe as a whole, housebuilding was the main driver, but activity was strong across all sub-sectors of construction.

The outlook is positive for this year, with contractors reporting high order intakes, particularly from public sector bodies. This is partly thanks to increases in federally funded road building programmes. As a result, the HBD expects a further 5 per cent increase in construction output this year.

In France meanwhile there was useful growth of 3.5 per cent in public works last year according to the FNTP trade association representing contractors in this sector. This came after falling output in the two preceding years. Meanwhile INSEE, the national institute of statsitics and economic studies, said housing starts were up 12 per cent in 2016, again following two lacklustre years in 2014 and 2015.

Some of the credit for France’s economic turnaround has been given to the youthful former finance minister Emmanuel Macron, who resigned from the government in August to run as an independent candidate in this year’s presidential elections. His key policy was the July 2015 ‘Macron Law’, a far-reaching package of measures designed to reform bureaucracy and stimulate the economy.

In addition to this, there have been a number of useful projects, particularly in high-speed rail with the new Tours-Bordeaux line to lift the French construction industry. Meanwhile, the current talk about future opportunities centres on the Grand Paris scheme. This project, conceived by former president Nicolas Sarkozy, is designed to better connect the sprawling Paris metropolitan area with measures including a €35 billion, ten-year transportation plan.

Brexit impact?

And so to the UK, where it is impossible to discuss anything without mentioning the B-word.

So far Brexit does not seem to have affected the construction industry. According to the Office of National Statistics (ONS), UK construction output grew by 2.4 per cent in 2016 to £138 billion. It was a slower rate of growth than had been seen in 2014 and 2015, but a fourth consecutive year of growth nonetheless, which came despite the unexpected June referendum result.

As in other parts of Europe, housebuilding was the main engine of growth last year, with the value of new build work rising 10 per cent. The privately funded commercial building market was also strong, helping to offset a weak infrastructure market.

And the near-term outlook for UK construction also looks promising, with a number of major projects in the pipeline. Already underway are landmark infrastructure schemes such as the Mersey Gateway bridge and Thames Tideway Tunnel sewage project, while in the next year or two work should start on the HS2 high speed rail link between London and Birmingham, while concessionaire EDF said it had ‘started pouring concrete’ on the Hinkley Point C nuclear power plant project in March this year. More distant on the horizon are schemes such as Crossrail 2 in London and the third runway project at Heathrow.

Notwithstanding the positive outlook, there are serious concerns around Brexit for the UK construction industry. The most immediate concern is that a clamp-down on immigration would have a devastating impact on the construction workforce. Prior to the referendum last year, David Thomas, the chief executive of one of the UK’s largest housebuilders, Barratt Developments, said a ‘significant’ part of its labour force came from other EU countries, adding that in London the figure was in the range of 30–40 per cent.

For an industry that already struggles to attract staff and suffers from skills shortages, barriers to recruiting from the rest of the EU could have dire consequences in terms of its capacity and wage inflation.

And inflation is already a concern in the industry as a result of the sharp depreciation in the pound after the referendum. According the Construction Products Association, which represents 22,000 manufacturers of construction products in the UK with a turnover of £55 billion, pretty much the entire industry saw a rise in prices last year. Although many raw materials for construction products will be sourced in the UK and therefore unaffected by exchange rates, many raw materials such as metals and plastics will have a price rooted in dollars, as do energy costs.

The prospect of a hard Brexit, bringing with it a further depreciation of the pound and tariffs on imports would of course add further significant cost burdens on the industry.

But the issue with Brexit of course is that no-one knows what form it will take, and it is therefore impossible to plan for the consequences. n