Construction activity has risen steadily across EU countries

After growing by 3.2% in 2018, construction output in Europe increased by less than 2% in 2019. After five years of continuous growth, output is still well below the peak level reached before the financial crisis in 2008. In the next two years, construction activity is expected to show growth levels of less than 1.5%. The sector sustaining growth in the European construction market in the coming years is expected to be infrastructure. It is forecast to achieve an average annual growth rate of more than 3%, compared to the weaker performing building sector, at only 1% average growth.

STEADY GROWTH IN CONSTRUCTION OUTPUT IN EUROPE

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Up to the end of 2006, construction output in Europe had shown steady growth. However, following the economic and financial crisis, output began to decline dramatically. Between spring 2008 and early 2013, construction activity in the EU-28 showed a constant decline, apart from a brief upturn in the summer of 2010.

During this time, output fell by more than 30%. Since the spring of 2013, construction output in the EU-28 has been growing steadily, and has recovered to over 80% of the peak level before the financial crisis. The pattern of decline and recovery in the euro area (19 countries) is similar to the development seen in the EU-28.

During the period of decline and recovery, the civil engineering sector (e.g. railways, roads, bridges, airport runways, and dams) showed some notable differences compared with the building construction sector, which includes both residential and non-residential buildings, and accounts for around three quarters of total construction in the EU-28.

In the period immediately after the crisis, the civil engineering sector declined less than the building sector. However in the period between 2010 and 2013, civil engineering also declined substantially. Since 2013 both sectors have seen a relatively strong recovery, but neither have reached pre-crisis levels of output.

The crisis in the building sector hit all EU28 countries, but showed a range of different experiences. All countries experienced a decline in this sector, ranging from the most significant reduction of 48.2% in Lithuania in 2009, to relatively stable levels of activity in Germany and Luxembourg. In several countries, including Estonia, Ireland, Spain, Hungary, Latvia, and Portugal, output had already begun to decline before 2009. However, in a number of other countries, the fall in building activity was more immediate, but was short lived. For the EU-28 as a whole, building activity declined between 2010 and 2013, but during the following five years showed a recovery with positive rates of growth.

Construction output showed growth in 2019 compared with 2018, in both the euro area, by 1.8%, and in the EU27, by 2.4%. In the euro area in December 2019, compared with December 2018, building construction decreased by 4.6%, while civil engineering increased by 0.9%. In the EU27 building construction decreased by 2.8%, while civil engineering increased by 0.4%. Among EU Member States for which data is available, the biggest declines in construction output in 2019 were seen in Belgium (-6.5%), Spain (-6.2%) and Poland (-5.5%). In contrast, the biggest increases were recorded in Romania (+23.1%), Czechia (+6.2%), Slovenia and Sweden (both +2.9%).

WHAT WILL THE TREND BE IN 2020?

The European Commission’s indicator of construction confidence remained broadly stable in the fourth quarter of 2019, after moderating in the previous quarter. The Economic Sentiment Indicator (ESI) moved up to a five month high of 102.8 in January, driven by a marked increase in confidence in industry and construction.

The marked rise in construction confidence (+1.2) was fuelled by managers’ improved assessment of the level of order bookings, while their employment expectations remained virtually unchanged.

According to Euroconstruct, construction activity in Europe is expected to grow by around 1% between 2020 and 2022. Compared with average annual growth of 3% between 2016 and 2019, this indicates a significant slowdown in Europe. In particular, new residential construction - the current driver of activity – will slow down in 2020, and decline in 2021.

The construction sector benefits from economic factors such as the current purchasing power of private households, favourable financing conditions and higher corporate profits. In addition, it also benefits from population growth (albeit slowing), and the need for infrastructure development and stronger/new environmental policies.

The majority of factors are pointing towards slower growth in construction output in the coming years. In addition, steep increases in the cost of building plots and high occupancy rates are also hindering growth. Investment in housing is expected to remain strong, as increases in disposable incomes and favourable financing conditions have improved the affordability of housing. Strong order bookings are currently supporting this outlook. However, in several countries, construction investment is likely to face capacity constraints and feel the impact of continued increases in house prices.

These come on top of regulatory measures and demographic factors that could also dampen demand.

 A reversal in some of the trends in recent years is being observed. New build activity in the construction sector, which has shown strong growth in the past five years, is beginning to weaken, while the

outlook for the repair and maintenance market is looking much more favourable. In the period from 2020 to 2022 all main construction sectors are expected to face a decline in average annual growth rates. Civil engineering is expected to grow by 2.2%, non-residential by 1.0% and residential construction by only 0.5%.

From a country perspective within Europe, the largest construction markets face the least favourable prospects. In Germany, while investment in construction has gained some momentum, growth in construction output is expected to come to an end, after showing 0.8% growth in 2019. A cumulative decline of slightly above 2% is forecast for the period from 2020 to 2022.

Activity is expected to be weak in areas like commercial buildings and  infrastructure sector. In Austria, investment in the construction sector is set to gradually slowdown in 2020 and 2021.   New orders for construction in the United Kingdom decreased 0.4% year-on-year in the fourth quarter of 2019. This followed a 6.7% reduction in the previous quarter. The latest forecast from the Construction Products Association (CPA) for the UK anticipates a 0.3% fall in construction output in 2020, before recovering to show modest growth of 1.2% in 2021.

The outlook in the French construction market is not favourable, with a small decline expected in 2020. Prospects in the Nordic countries are poor, where average levels of construction activity in Finland and Sweden are expected to fall in the next three years. For example, in Finland, residential construction activity is expected to slowdown, and could turn out to be more severe than anticipated.

In the Netherlands, construction investment is set to slowdown as the number of building permits has declined substantially, due to stricter regulatory requirements and economic uncertainty.

From an individual country perspective, Ireland is forecast to show the strongest cumulative growth from 2019 to 2022, at 30.1%. In this country, investment in construction has continued at a rapid pace, and completions in residential

property have surged. The level of building permits suggest a continuation of this trend, which is reinforced by a public support scheme for homebuyers. Construction output in Spain and Italy should grow by 3.1% and 2.1% respectively in 2020.