Economic Outlook Europe: Flat market

Euro Zone economic activity may have bottomed out toward the end of 2012, but the region still faces a difficult 2013. The area as a whole will see real GDP edge down an additional -0.2% this year, following an estimated drop of -0.4% in 2012. Economic activity will contract mildly in the first quarter, and remain essentially flat for the remainder of the year.

Activity continues to be constrained by tight fiscal policy in many countries, relatively tight credit conditions, consumer pressures - high and rising unemployment, low wage growth and tax hikes/benefit cuts in many countries - and muted global growth.

Some support to Euro Zone economic activity should come from a recent, significant easing of the sovereign debt tensions following some encouraging policy developments of the European Central Bank. Still, sovereign debt concerns will continue to flare up, limiting business confidence.

In particular, Italy and Spain both face extended recessions and tightening economic policies, which are likely to be a source of market tension and will drag down overall Euro Zone GDP. Spain and Italy are unlikely to see meaningful growth until 2015, with Spain flirting with depression and while its banking problems may yet prompt it to approach the European Stability Mechanism (ESM) for a partial bailout.

Although northern Euro Zone countries are faring better than the southern periphery, several core countries, notably France and the Netherlands, face serious structural and competitiveness problems.

These will weigh on their economies.
With unemployment still very high in many countries and fiscal policies having to remain tight, there is little upside for the Euro Zone. Real GDP growth is expected to be just +0.5% in 2014, rising to +1.3% in 2015.

Outside the Euro Zone , the UK economy was flat in 2012. In 2013 growth will be muted by moderate global growth, problems in the Euro Zone and tighter fiscal policies with constrained government spending and investment. IHS Global Insight expects real GDP to rise +0.9% in 2013, improving to +1.4% in 2014.

Construction forecasts

Given this economic outlook, the view for Western European construction remains poor. Total construction spending will barely move, expanding +0.2% in 2013. Even with an eventual recovery, only an average annual growth of +1.6% is expected to 2017.

The non-residential structures segment will enjoy the ‘strongest’ outlook with average annual increases of +1.9%, with residential construction spending growing only at +1.4%.

Germany, with its manufacturing prowess augmented by a weak currency, offers the best non-residential structures outlook in the near and medium terms. With relatively strong income growth, Germany is also a source of residential strength, joined by the UK.

Austerity budgets in many countries will reduce government spending, which is the largest source of infrastructure funding. So while infrastructure spending in the region will expand at an average of +1.3% over the next five years, this masks growth of less than +0.5% over the next two years.

There is no country, apart from Turkey, with a particularly strong infrastructure outlook, but the picture is made particularly clear with medium term outlooks for France, Italy and especially Spain, of compounding negative rates of growth.

Europe will feature one clear winner, Turkey, although this is a unique economy geographically. Turkey will surpass the world average growth rate by 0.5 percentage points in 2013, with growth of 4.6%. Among the region’s major economies, the UK will post the strongest gain at 4.3% in 2013. However, this is likely to be the high point for the UK as growth rates subside in coming years, while most of Europe will improve from its current low base.

Scandanavia will enjoy moderate growth in the mid +3% range while Switzerland and the Netherlands realise total construction increases near +1.5%. Austria and Germany will have slow growth of around +0.5%.

The contagion of the regional recession will lead to declines in construction activity in Belgium and Finland. Ireland, Italy, and France have made progress on their debt issues but will see construction spending declines decelerate to less than +1%.

Spain, Portugal, and Greece, the countries with the worst debt issues, will see significant further declines in construction spending in 2013 and 2014. By 2014, those countries not still facing debt issues will see a rebound in construction as the cloud of uncertainty overhanging the region is lifted.

As long as the region struggles to resolve its fiscal and financial difficulties uncertainty will remain high. Recent electoral results in Italy point to the difficulty of a regional political solution. Such an environment is not conducive to new investment, and the effect is compounded by weak, although improving, conditions elsewhere in the world.

Combined with necessary austerity measures, excess capacity, and tight credit conditions, it is difficult to see anything but a stagnant near term for Europe’s construction outlook, followed by a rather anaemic of recovery in the medium to long term.