Europe's Construction Sector Faces Slump in Demand Amid High Costs and Interest Rates

Europe's construction sector set to slow as demand plummets

High interest rates and soaring building costs have drastically reduced the demand for new buildings in Europe. So far, ongoing projects and a heightened focus on sustainability have prevented construction volumes from shrinking, but we're expecting to see a steep decline begin to emerge in 2024.

 

Zero growth in 2023

We’re expecting zero growth for EU construction volumes this year, an upgrade of our previous forecast which is mainly due to a better-than-expected first half of the year. Construction volumes still remain high. In June, EU construction production was at the same level as in the same period last year. Firms still have a healthy backlog of work, with 8.9 months of guaranteed projects at the beginning of the third quarter of this year.

However, there are clear signs that volumes will start to shrink soon as the late cyclical nature of the sector begins taking effect. Home buyers and firms are reluctant to invest in new premises due to the weaker economy, high interest rates and increased building costs. Due to long lead times, it's likely to take a while before these effects are reflected in construction output volumes.

 

Construction volume still stable but fall in building material production

Development EU Construction sector volume (Index February 2020=100, SA)

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Looming slowdown on the cards for 2024

Manufacturers of cement, bricks and concrete – those right at the beginning of the value chain – are already facing sharp production declines. Building material suppliers of these materials are registering an average fall in production of 13% in June compared to the same period last year. The highest declines are faced in Austria (-15.0%), Germany (-15.6%), and The Netherlands (-19.5%).

A decline in building permits, confidence and demand are also indicators for lower volumes in the construction sector in the second half of 2023 and into 2024. However, we only expect a modest decline for the EU construction of -1% in 2024.

 

Renovation market counterbalances decline in new building sector
The construction sector will not see as much of a decline in production volumes as the building materials sector. Building material suppliers mainly deliver to new building projects, which are more susceptible to economic development than the renovation sector. The demand for renovation and maintenance – more than 50% of total construction production – is less affected by economic cycles.

Interestingly, the demand for R&M may even increase during an economic crisis. For instance, homeowners who are unable to sell their houses often opt to enhance their existing living spaces in order to meet their changing housing needs. As a result, this can lead to an increase or at least sustainment of demand for R&M. In addition, the R&M market will likely show future growth driven by sustainable and energy-related factors. Many governments support sustainability measures, and high energy prices act as an extra trigger. Since energy prices have started to moderate this year, interest in energy-saving measures has slowed but still remains at a high level.

 

The confidence of the different subsectors is slowly decreasing
Another sign that the decline in the construction sector will be a small one is the slowly abating confidence indicators in different subsectors. Specialised construction companies have been optimistic for a long time, but in June, indicators were marginally negative for the first time in more than two years. This subsector consists of many construction branches that are active in R&M, such as installation, plasterers, carpenters, painters and glaziers. The confidence of companies in the non-residential building sector as a whole has been in negative territory for almost a year.

Lastly, confidence in the infrastructure sector has remained positive for quite a while and only initially touched negative territory in August. Many infrastructure projects are driven by public investments, the availability of EU funds, the need for upgrading existing roads and required environmental investments such as the extension of electrical grids.