Forecasts for European construction negative

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Outlook both in the EU and wider global economy and political events including the UK’s decision to leave the European Union and upcoming elections in France, Germany and the Netherlands. These issues were highlighted at the 82nd Euroconstruct conference hosted by ITeC (Institut de Tecnologia de la Construcció de Catalunya), in Barcelona during November.

As usual, Euroconstruct issued their forecast of construction output in Europe at the conference, updating their forecast from the previous conference held in June.

The new forecast is for only 2% growth in 2016, six tenths of a point less than the previous estimate.

In issuing the new forecast, Euroconstruct noted that “Brexit has not yet caused a direct disaster on the European economy, but it has indeed lowered the midterm expectations, combined with a long list of other factors including China slowing down, Germany slowing down, uncertainty in the US, European banks still not out of trouble, and interest rates likely to increase”.

Euroconstruct observed that expectations for 2017 are not encouraging. European construction output is forecast to increase 2.1% next year, at a rate only slightly faster than the economy as whole (GDP in the region is expected to grow only around 1.4% next year).

Euroconstruct note that “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”.

More significant for longer term prospects will be rising public demand, particularly for housing, a trend which Euroconstruct expects to continue. Euroconstruct forecasts that construction sector output will grow between 2.1% and 2.2% in both 2018 and 2019.

Although the pace of growth is slow, it is expected to be consistent. If the forecast becomes a reality, the European construction sector will reach 2019 with uninterrupted growth for six years in a row. This would put the output level at only 3% below the 1995-2015 average.

Considering individual sectors Euroconstruct forecast that residential construction will have grown 3.9% in 2016 – mainly because of improving performance in France, Germany and the UK, together with a range of smaller European countries and encouraged by low interest rates.

However, credit is unlikely to remain so favourable and therefore Euroconstruct forecast that the pace of growth in residential construction will fall to around 2% in 2018 and 2019.

Euroconstruct observe that the recovery of non-residential construction is still at a very early stage in Europe.

Therefore, the present downgrade in the economic outlook comes at a very inconvenient time, cooling the already weak demand for industrial and other business assets.

Euroconstruct does not expect rapid changes, forecasting growth in non-residential construction of only 1.5% for 2016-2017 and 1.8% for 2018-2019.

Office construction is expected to perform somewhat above these averages, since it is rebounding from a period of significant contraction.

However industrial and storage construction are expected to perform below the non-residential average. Activity in Europe’s civil engineering sector is believed to have declined in 2016, by around 1%, a hangover from Europe’s continuing high levels of public sector debt.

There are also significant variations between European countries. The increase in construction activity in 2016 has come mostly from Germany. Construction output in Germany increased 2.5% to €297 billion this year, reinforcing the country’s position as by far the largest construction sector in Europe.

However, the German pull on European construction is expected to fade with output due to fall by 0.6 per cent in 2019 after growth of just 0.2 per cent in 2018 and 1.5 per cent in 2017.

The UK is currently Europe’s second largest construction market, with Euroconstruct estimating output of €223 billion in 2016. However, growth projections for the UK have been slashed. Euroconstruct figures now point to a decline both this year and in 2017, with output falling by 0.2 per cent each year.

This is not only a consequence of the EU referendum, but also a wider slowdown reported in the industry. Output fell 1.1 per cent in Q3 quarter on quarter, according to the Office for National Statistics, marking the second consecutive fall following a 0.1 per cent decline in Q2.

Slowing in the German and UK construction sectors will leave France, currently the third largest European construction market with output of €204.33 billion in 2016, as the main generator of growth over the next three years. After three years of decline between 2013 and 2015, construction output in France is estimated to have increased 2.4% in 2016, and is forecast to accelerate to 3.6% in 2017, and to remain high at around 3% per year in 2018 and 2019.

The recovery in Spain is also expected to continue, with construction output estimated to have grown 2.1% in 2016 and forecast to grow by over 3% each year between 2017 and 2019.

However, Euroconstruct forecasts for Spain have been revised down since June, with wrangling over the formation of a new government continuing to hit public funding and deficit reduction targets.

Construction output in Italy turned a corner in 2016 according to Euroconstruct, rising by around 1.9% this year and building on an increase of 0.8% in 2015 after several years of significant decline. Growth is expected to continue at a rate of around 2% per year between 2017 and 2019.

According to Euroconstruct, the construction sector in several smaller EU markets should grow rapidly over the next three years, most notably Ireland. November’s forecasts show growth in Ireland of 12.5% this year, followed by 8.5% in 2017, 7.1% in 2018 and 9.2% in 2019.

This makes Ireland comfortably the fastest growing market by 2019, with only the Czech Republic (8.3%) and Hungary (7.1 per cent) approaching that level.

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