Construction in Europe: A return to growth or further contraction?

Construction Intelligence Center 30 Mar 2016 EUROPE BUSINESS

National markets across Europe are responding to current market conditions in varying ways. The team of analysts at Timetric's Construction Intelligence Center examine the current trends across the continent.

Construction activity in Europe as a whole continued on a gradual path of recovery in 2015, expanding for the second successive year, albeit by just 0.7% in real terms. However, the pace of recovery is by no means uniform, with a few countries managing to post relatively fast growth in 2015, while others continue to struggle.

The construction industry in the Netherlands was among the strongest performers in the region in 2015, although the pace of year-on-year expansion slowed from an average of 10.1% in the first three quarters of the year to 2.5% in the fourth quarter. The growth in construction in the Netherlands is reflective of more widespread improvements in the Dutch economy, with current forecasts showing real GDP growth to stand around 2% in 2016. The housing market is also enjoying revival with house prices rising consistently since mid-2013. The Netherlands’ sophisticated transport infrastructure continues to attract further investment, such as the US$4.2 billion light railway development in Amsterdam. The pipeline of forthcoming projects also includes a number in the renewable energy sector, such as the US$3 billion offshore wind farm development in Borssele, highlighting the government’s continued commitment to renewable energy.

The UK also posted a solid performance in 2015 as a whole. However, the pace of expansion slowed during the year, with growth on a year-on-year basis dropping to 0.4% in the fourth quarter, down from an average of 4.3% in the first three quarters of the year. London continues to attract significant investment in new projects, while infrastructure spending picked up in Scotland and Wales, with government spending on infrastructure in Wales estimated to have doubled in 2015. Northern England continues to benefit from greater housebuilding activity and from renewed government impetus to build a ‘Northern Powerhouse’ through numerous infrastructure projects.  

The worst-affected countries in the region during the financial crisis were Portugal, Italy, Ireland, Greece and Spain, often referred as the PIIGS, and recent data on construction activity shows the contrasting fortunes across this group. Spain was one of the strongest performers, posting growth of 4.4% year on year in the fourth quarter, following an average expansion of 5.5% in the first three quarters of the year. Following six years of contraction ending in 2014, the construction sector in Spain has finally moved into a recovery phase, and has benefited heavily from a renewed focus on transport infrastructure upgrades. The residential sector has also experienced a revival, with property sales and house prices both increasing through 2015 (although prices remain up to 40% below their pre-crisis peak in 2007). There are still factors weighing on growth and investor confidence, notably political instability and high levels of government debt. Nevertheless, major transport projects helping to fuel the recovery include a US$21.7 billion 50-km railway line development in Barcelona.  

Portugal has also been recovering, posting growth of 3.1% in the fourth quarter of 2015, following an average expansion of 4% in the preceding three months. This growth is forecast to continue owing to greater demand in the housing market and greater infrastructure investment. Similar to Spain, construction had contracted for seven consecutive years prior to 2015, and although growth has now returned, the pace of expansion is still far below pre-crisis levels. Austerity measures in response to high levels of public debt will continue to curtail growth.  

In Ireland, the economy has returned to growth, the pace of which reached 6.7% in 2015, and the construction sector in particular has experienced a strong recovery. This was demonstrated by growth in 9.3% in 2013 and 7.6% in 2014 in real terms, and a more sustainable pace of around 3% in 2015.

In stark contrast to Spain, Ireland and Portugal, Greece’s construction industry recorded the eighth consecutive year of contraction in 2015; output was down by an average of 18.7% year on year during the first three quarters of the year. Although general economic prospects for Greece have improved thanks to the extension of EU loan deals in return for further privatization and austerity measures, the economy is set to contract again in 2016.

While not experiencing a downturn as severe as in the Greece, Italy’s construction sector also continues to struggle, with 2015 marking the eighth consecutive year of contraction. However, in the fourth quarter of 2015, Italy’s construction industry posted its first quarter of growth since the financial crisis, edging up by 1.1% year on year. Although we expect a number of large-scale publically funded transport projects to help drive growth, austerity policies aimed at reining in public debt have reduced overall public investment in construction projects.

While a number of construction industries in Europe have been impacted by weak investor confidence and a lack of public investment due to austerity measures, other factors such as political instability have also made the recovery more difficult in countries such as Greece and Spain. Both the UK and Ireland have benefited from greater political stability following the financial crisis and this is reflected by the renewed investor confidence and the growth displayed.

Although prospects vary significantly across Europe, even in economies demonstrating a strong recovery such as Ireland, the level of construction activity remains significantly below pre-crisis levels, highlighting the long-term nature of the recovery within the European construction sector.

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