Good in parts
29 April 2008
Forecasts for the industry show the European construction market will hit the peak of its growth cycle this year. But Europe is a slow market, and although it is on a high compared to recent years, the growth expected in 2006 will be – even by the most optimistic estimate – just +2.6%.
The growth may be low, but taken as a whole, the European Union (EU) free trade area, which comprises 25 countries, is the largest construction market in the world. Estimates of output last year range from € 1.11 trillion (US$ 1.42 trillion) to € 1.26 trillion (US$ 1.61 trillion), +25% to +40% larger than the US market, which was put at US$ 1.14 trillion last year by the Associated General Contractors of America (AGC).
Headline figures for growth and market size are useful up to a point. However, one of the key features of Europe is that it remains a fragmented market, with different characteristics and drivers coming into play in different countries.
In terms of market size, the dominant countries are the 'Big 5' of France, Germany, Italy, Spain and the UK, which account for about 75% of European construction output. According to the Brussels, Belgium-based European Construction Industry Federation (FIEC), Germany remains the largest of these, with an output of € 198 billion (US$ 253 billion) last year.
But Germany has been by far Europe's most troubled construction market over the last decade. Following the reunification of East and West in 1990, there was a massive five-year construction boom. At its peak in 1995 Germany accounted for more than 30% of European construction output.
Boom was inevitably followed bust, and the country's construction market has been in more or less a continuous recession ever since. Its decline and the emergence of other markets, particularly Spain, saw Germany's share of European construction output shrink to just 18% last year.
Opinion is divided as to whether the German market will grow this year. On the one hand FIEC expects a -1.0% decline, while Euroconstruct, a group made up of various economic forecasting agencies located around Europe is predicting a +1.2% increase in output.
It will be a few months before anyone knows for certain which way the German market is going. Even if there is an improvement, whether it will be sustained is another question entirely. Back in 1999 the country enjoyed a small upturn in construction output, but it has been downhill all the way since then.
One of the recent key developments for Germany was the election of the centre-right politician Angela Merkel as Chancellor (head of government) last November. She replaced Gerhard Schröder, the centre-left politician who had held the post since 1998, with the promise to reform the country's labour laws and expensive social welfare system, to improve economic competitiveness.
Indeed, following her election the phrase 'the Merkel Factor' was coined in reference to the increase seen in consumer confidence. However, Ms Merkel is yet to prove she can drive through the reforms – which will be painful and unpopular in the short term – the German economy and construction market need for sustained growth.
Like the German market, prospects for the Italian construction sector look uninspiring. There are some major projects in progress, including a number of high speed railway schemes in northern and central regions. There is also the 3.3 km long, € 6 billion (US$ 7.68 billion) suspension bridge over the Messina Straits between the southern mainland and the island of Sicily, construction of which is due to get underway this year.
But aside from these high-profile schemes Italian economic growth remains sluggish due to many of the same problems that dog Germany – inflexible labour practices and high taxes. This economic stagnation is reflected in the flat construction industry.
But it is not all doom and gloom in the 'Big 5'. The Spanish construction market continues to be the undisputed star in Europe. It has shown strong and consistent growth for more than a decade, and continues to perform well with its € 165 billion (US$ 173 billion) output set to rise by around +4.6% this year.
There had been fears two or three years ago that the massive Spanish residential construction market might be heading for a crash, but it has so far weathered four successive +0.25% interest rate rises from the European Central Bank (ECB) since December.
Spain has also benefited from a solid commitment to infrastructure investment by its Government. There was a highly successful infrastructure spending plan for 2000 to 2006, which was superseded by a 2005 to 2020 plan, published in July last year. This outlines a € 249 billion (US$ 319 billion) spending plan for the 15-year period, about half of which will be invested in rail links.
The UK has also performed well over the last 10 years or so. Growth was at its highest in 2002 and 2003, and although the construction market contracted slightly in 2005, it looks set to bounce back this year.
The French construction market is also bouncing back, after some tough years at the start of the decade. The general consensus is for growth in excess of +3% this year, following similar rates of expansion in 2004 and 2005.
Looking at the smaller mature markets in Europe, there are certainly some high points. Northern Europe is enjoying good growth at the moment. Sweden, Norway and Finland all look set for a rise of +3% or more this year. However, Denmark, the fourth country in the 'Nordic' market, looks much more subdued.
Elsewhere in northern Europe, Ireland and Belgium are expected to motor ahead with construction output increasing by around +5% this year, while the Netherlands, Europe's sixth biggest market at € 50 billion (US$ 64 billion) per year, also looks good with growth of around +3.5% to +4.0%.
Activity looks more subdued further south, with the Alpine countries of Austria and Switzerland expecting little growth this year. The outlook is positively grim in Portugal which, in contrast to neighbouring Spain, is braced for the fifth year of a punishing construction recession.
Portugal's case illustrates one of the problems that can happen in the EU. Back in the 1990s Portugal was, along with Greece, one of the most underdeveloped countries in the then 15-member EU. This status meant it was the recipient of all manner of loans from the region's two main development banks, the European Investment Bank (EIB) and European Bank for Reconstruction & Development (EBRD), as well as outright grants from the EU's annual budget. [The EU's activities are paid for by taxes at a national level. This currently stands at about 1% of GDP, or € 120 billion (US$ 154 billion) per year].
This lead to a huge construction boom in Portugal, with annual increases in output rising at +10% or more for much of the 1990s. However, the market took a serious nose-dive in 2002. The election of an austere new Government coincided with the redirection of European funds towards the 10 countries, that subsequently joined the EU in May 2004, eight of which were in the poor region of central and eastern Europe.
Infrastructure construction duly took off in central and eastern Europe, in the same way it had done in 1990s Portugal. But in Portugal this year construction output will contract for the fifth year running to about € 25 billion (US$ 31 billion) – some 20% less than the peak of € 31 billion (US$ 40 billion) seen in 2001.
But while Portugal's construction market may be suffering, activity is booming in the emerging markets in central & eastern Europe. Growth estimates differ, but it can be safely said that construction output across the region is rising at more than +5% per year at the moment.
Growth may be good, but these countries still have a lot of catching up to do before their markets reach the maturity of their western European counterparts. For example, Poland has more or less the same population as Spain – about 40 million people. But while the Spanish market is worth € 165 billion (US$ 173 billion) per year, Poland's construction output is just € 26 billion (US$ 33 billion) – just 16% the size of Spain's.
On a regional scale, the accession of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia to the EU in 2004 may have added 10 countries, with a combined population of 75 million people, but it only added about € 55 billion (US$ 70 billion) to the construction market. In other words, the EU's population grew by +20%, but construction output rose by just +5%.
These emerging economies are growing faster than those of Western Europe, so they are closing the gap. However, even at the current rates it will take 20 to 30 years for them to converge.
The residential construction market remains strong across Europe. Growth in the sector did slow last year, but there was no crash, and according to Euroconstruct, the house building market is set to rise +3.5% across the region this year.
The other major driver for growth is civil engineering activity. A rise of +2.8% is expected in Western Europe this year – in line with the headline trend. However, the sector continues to boom in central and eastern Europe, where Euroconstruct is forecasting a +11% rise in activity. There was a similar increase last year, and the group predicts further double-digit gains in 2007 and 2008, as these countries strive to repair and replace their crumbling roads and railways.
The rate of growth in Europe's construction market looks likely to slow over the next two years, with Euroconstruct expecting it to fall to +1.7% in 2007 before rising marginally to +1.8% the following year.
In terms of the major markets, Spain remains the leading light, followed by the UK and France. On the downside, Italian construction activity seems likely to stagnate, and the picture for Germany is not yet clear.
The best prospects are clearly in the smaller markets. Northern Europe looks promising, and the civil engineering sector in central & eastern Europe is positively booming. The overall growth may not be brilliant, but there are clearly good opportunities in the right sectors and countries.