Aerial view of a construction site

Reasons Why Europe’s Construction Industry Might Face Contraction in 2024

The European construction sector may witness a downturn starting from 2024, as suggested by the newest projections presented by economists at the Dutch banking entity, ING. Here are the key insights from their analysis.

Underlying Concerns

ING has sounded the alarm on rising interest rates and escalating construction expenses, noting that these factors have “significantly diminished” the appetite for erecting new buildings across Europe.

Presently, ongoing developments and a pronounced emphasis on eco-friendliness have staved off a decline in construction volume. However, ING believes this situation might change come 2024.

EU permits for new homes declining, expect for Spain
EU permits for new homes declining, expect for Spain

Revised Projections for 2023

Contrarily, the bank has revised its earlier predictions regarding the European Union’s (EU) construction activity in 2023, now forecasting a stagnant growth. Two primary reasons for this optimistic revision include:

  1. A more favorable performance in the year’s initial half, which maintained buoyant construction volumes.
  2. An observation that construction output in June 2023 was on par with the metrics recorded during the corresponding timeframe the previous year. Furthermore, a robust pipeline of assignments ensures almost 9 months (8.9 precisely) of assured projects as we entered the year’s third quarter.
confidence indicators sub sectors are slowly moving into negative territory
Сonfidence indicators sub sectors are slowly moving into negative territory

Emerging Indicators of a Possible Contraction

ING highlights “unequivocal signals” indicative of a dip in volumes, given the hesitancy of potential homeowners and corporate entities to pump capital into new structures. This is amid a tepid economic backdrop, surging interest rates, and ballooning construction costs.

The intrinsic nature of the construction sector, characterized by prolonged lead durations, implies that the dip in demand might not immediately reflect in the volume of construction outputs.

It’s worth mentioning that manufacturers specializing in products like cement, bricks, and concrete are already grappling with plummeting production rates, witnessing an average contraction of 13% across EU nations in June, compared to the same month the prior year.

Taking stock of these developments, ING anticipates a “conservative” 1% dip in EU construction activity in 2024.

Renovations Could Offer Some Respite

In a silver lining, ING remains optimistic that the renovation domain might offset the deceleration anticipated in the new-build sector.

Renovation and upkeep demands, which presently represent over half of the entire construction output, remain largely insulated from fluctuating economic conditions.

ING posits that considerations surrounding sustainability and energy dynamics suggest that the Repair & Maintenance (R&M) segment is poised for an upward trajectory.

High energy tariffs coupled with state-backed incentives promoting sustainable practices could potentially amplify this trend.

Waning Confidence in the Sector

Unfortunately, a dwindling confidence is becoming discernible amongst certain construction entities, as highlighted by ING.

Specialist construction firms, encompassing roles such as installers, plasterers, carpenters, painters, and glaziers, reported marginally pessimistic indicators for the first time in over two years as of June.

Adding to the gloom, August witnessed a dip in optimism levels pertaining to infrastructure, even though there remains an evident necessity for refurbishing existing infrastructures and augmenting energy-related assets.

Pricing Strategy Realignment

ING’s research indicates a decline in the number of construction agencies hiking their prices, attributable to a mix of lower pricing for certain construction materials and intensifying rivalry in light of subdued demand.

The number of contractors that want to increase prices is diminishing fast
The number of contractors that want to increase prices is diminishing fast

As a case in point, back in August 2022, surveys revealed that approximately 65% of firms in Austria and the Netherlands were contemplating increasing their sales prices. Contrastingly, by August of the following year, these figures had dwindled to a mere 8% in Austria and 20% in the Netherlands. In a notable trend in Germany, a majority of construction businesses are now considering slashing their prices.

These varied factors together paint a comprehensive picture of the challenges and opportunities facing the European construction sector in the near future.

Related Posts