Waiting for the European recovery
By Chris Sleight09 November 2010
Many economists would say that there is some time to wait until the European construction industry returns to growth, and when it does come, the recovery will be a slow business.
The latest figures from the Euroconstruct group of economic forecasting companies are similarly downbeat. Having previously forecast a recovery towards the end of this year, the group now expects construction to decline a further -4.0% in 2010 on top of last year's -8.8% fall and the -3.1% drop seen in 2008.
In other words, from a peak in 2007 when construction activity in Europe was valued at about € 1500 billion (US$ 1890 billion), the industry will have shrunk to € 1270 billion (US$ 1600) by the end of this year - just over a -15% decline in the space of three years.
There has been some stimulus spending in Europe to help cushion the blow of the recession, most notably in Germany, where € 18 billion (US$ 22.5 billion) of a € 50 billion (US$ 63 billion) support programme was spent on infrastructure. Late 2008 and early 2009 also saw France has announce that it would invest € 10.5 billion (US$ 13.2 billion) in infrastructure and public works and Spain's stimulus package included € 11 billion (US$ 13.9 billion) for similar schemes.
However, there was nothing on the scale of the US stimulus plan, which saw US$ 130 billion form the US$ 787 billion American Recovery and Reinvestment Act committed to the built environment, and European contractors could of course only look on with jealousy at the US$ 450 billion of construction-related work in China's package.
One of the key concerns in Europe is now that the recession is over - GDP returned to growth in the middle of last year - the industry will take another hammering as what stimulus money there is dries up, and governments cut back spending to tackle the massive deficits they have built-up.
This could have a big impact on infrastructure construction, which relies on public investment. This would be a big blow to the industry, as it is the one sector that has shown any resilience during the downturn.
This is one of the reasons the recovery in European construction might be so slow. Even as other sectors like residential building bounce back, the continued weakness in non-residential construction, combined with this potential fall in infrastructure work is expected to delay the recovery to 2011 and make for subdued growth thereafter.
But that bleak outlook from the forecasting community does not tally with what many of the large contractors are saying. Skanska for example, which is one of the largest contractors in Northern Europe saw its order intake pick up in the first half of the year.
Comments from president & CEO, Johan Karlström painted an improving picture of the company's key markets. "The housing market in the Nordic countries has developed well, and out assessment is that the trend will continue to be positive for the rest of the year," he said of the residential market," he said.
Of the non-residential market he said, "We are seeing greater interest from the market in commercial real estate investments, especially modern green properties."
However, Skanska also acknowledged that government cuts would probably result in a fall in public construction in the Czech Republic, UK and Slovakia. It added that uncertainty in the UK had also affected the market for public-private partnership (PPP) work.
Skanska was far from alone in reporting better financials this year than in 2009. But for many other European construction companies, growth is coming from outside the region, or from sectors outside of traditional contracting.
Bilfinger Berger for example is reaping the benefits of moving into the facilities management business as it actively downsizes its construction business in Europe and seeks to sell-off its Australian construction arm. Fellow German Hochtief meanwhile is benefiting from record results at its Australian affiliate Leighton, which is enjoying a robust home market and strong growth in Asia.
Similarly, another European giant, Balfour Beatty is reaping the benefits of its acquisition of US-based Parsons Brinckerhoff at the end of last year, which contributed the majority of the group's profits in the first half of the year.
Although these companies are not turning their backs on European contracting work, a common theme is that they are being much more selective in the projects they bid for. Bilfinger Berger for example generated just 21% of its € 3.81 billion (US$ 4.8 billion) first half revenues from construction work, a -12% decline on a year ago. However, the division made a profit of € 6 million (US$ 7.5 million) instead of the € 32 million (US$ 40.3 million) loss seen in the first half of 2009.
But even if some companies see brighter prospects outside Europe and outside of traditional contracting there is still optimism within the region. iC's sister magazine, Construction Europe runs a monthly confidence survey called the CE Barometer, which uses a series of simple questions about activity levels compared to previous months and previous years to assess industry confidence.
According to the CE Barometer, confidence in the industry was at its lowest ebb in December 2008. Last year saw a steady improvement in the future outlook, but with day-to-day activity still falling.
However, after the harsh winter in Europe, confidence turned a corner in April this year, with the majority of respondents saying the industry was back to growth and that they felt confident about the future.
This is of course at odds with what economic forecasts tell us about the industry, but at the same time it ties in with some of the up-beat results announcements that have come in over the course of July and August.
A crucial point of course is that Europe is not a single market but a region of more than 40 countries with widely varying outlooks.
Indeed, not all of Europe experienced a construction recession. The biggest exception to the rule has been Poland, where preparatory work for the 2012 European Football Championship, which it is co-hosting with the Ukraine, has keep the industry afloat over the last few years. This has not only seen key venues refurbished or built from scratch, but more significantly, it has prompted the construction of a lot of supporting infrastructure, particularly motorways.
Although it has not stopped the country going into recession, there is a similar effect in the UK, where preparations for the 2012 Olympic Games has provided a boost to the host city of London. The overall budget to prepare for the games is UK£ 9.3 billion (US$ 14.4 billion), which covers venues, infrastructure and regeneration of the surrounding suburbs in East London.
But aside from these hotspots, the general picture is that the construction recession has been shallow in the Nordic region and Germany, while the countries hit hardest have been in Southern Europe.
Greece's flirtation with sovereign debt default earlier this year have been well documented, as has the fear in some quarters that problems could spread to Portugal, Spain and Italy.
Although a default now looks unlikely, thanks to a rescue package put together by the rest of the EU, the fact remains that the massive deficits in these countries will hurt the construction industry for years to come.
Indeed, they have already had a hard landing. From being a start of the European construction scene for the last two decades, the Spanish market has all but collapsed in the last two years due to the bursting of a massive speculative housing bubble in 2008. It is estimated by some that there are as many as 1 million unoccupied residential units in Spain - a huge number for a country with a population of about 45 million.
As a result of this and wider economic issues the construction market in Spain will only be worth about € 130 billion (US$ 164 billion) this year, compared to € 225 billion (US$ 285 billion) in 2007 - more than a -40% decline.
The question of whether the European construction market is in recovery or not is a debatable one, but it is safe to say the worst is now in the past. Looking ahead though, the industry will have to cope with a slow recovery and a long wait until the activity is back to 'normal' levels.