International Construction Regional Report: Europe

The European construction market has fallen almost without respite since the global financial crisis took hold in 2008. At one point it looked like there might be a rebound in 2011, but since then the sovereign debt crisis in the region’s peripheral economies has eroded confidence and pushed the industry back into a decline.

The Euroconstruct network of European construction forecasters predicts that the market will return to growth in 2014. However, the group’s history over the last three years of consistently revising its forecasts downwards, combined with general economic risk and concerns, means the turnaround is far from certain.

The forecasts unveiled at Euroconstruct’s December 2012 conference in Munich, Germany pointed to a -4.7% decline in European construction activity last year to € 1.27 trillion (US$ 1.65 trillion) across 19 major European markets. This represented a significant downgrade from the prediction of a -2.1% decline for 2012 made at the group’s June meeting in London and the -0.3% fall it forecast in December 2011.
For 2013, Euroconstruct is currently forecasting a further -2.5% decline in European construction output, before the market returns to growth with a +1.0% rise in 2014.

However, individuals within the organisation admit that with the debt crisis in Europe’s peripheral countries showing no sign of resolution, and other global economic concerns, this is an unlikely prospect. Ludwig Dorffmeister of the Ifo Institute, who presented the overall outlook for the European construction sector at the Munich conference, said, “Economic developments lead to a change in forecasts and they are changing all the time. The risks are quite significant and I feel that a moderate recovery will not happen before 2015.”

The most distressed construction markets in Europe this year continue to be the debt-ridden peripheral countries. Spain for example is expected to see a -30.8% decline in construction output this year, following falls of -22.4%, -17.6% and -20.1% in 2009, 2010, and 2011. A further fall of -23% is forecast for next year. Portugal and Ireland are also expected to see double-digit declines in construction output this year.

However, there is moderate growth forecast for some key countries. At € 273 billion (US$ 355 million), Germany is Europe’s largest construction market. Following this year’s -0.2% decline, growth is expected to resume in 2013, with a +2.5% increase in output. Low single-digit growth is also forecast next year for Denmark, Norway, Sweden and Switzerland.

Industry output

Overall though, the Euroconstruct conference was downbeat about the state of the market. With industry output expected to be around € 1.27 trillion (US$ 1.65 trillion) in 2011 prices this year, the sector is now worth about the same as it was in the mid-1990s. In other words, the last four to five years of recession have wiped-out the previous 10 years of growth.

In terms of individual sectors, the civil engineering market has been hit hardest this year, with a -7.5% decline, according to Euroconstruct. Markku Riihimäki of Finnish Euroconstruct member, the Technical Research Centre of Finland (VTT) said, “Public financing problems are slowing down civil engineering. The return to the normal level will take time.”

Non-residential construction is set to fall -4.2% this year, while the residential sector will fall -3.5%. Andrea Kunnert of the Austrian Institute of Economic Research (WIFO) said of the housing market, “The Nordic region shows the strongest growth for the near future. But these forecasts have risks and this is closely intertwined with the recovery in the Euro Area.”

If there is a bright spot in the European construction market, it is the Nordic region in general. Sweden escaped the crisis relatively unscathed and has enjoyed several years of reasonable growth. Norway has also come through the last few years well. But on the downside, the market in Denmark seems to be falling quite steeply at the moment and Finish construction output is also shrinking.

Poland is another disappointing market. Throughout the crisis years it was the one bright spot in Europe, with infrastructure work and venue construction linked to last summer’s European football championship delivering good levels of growth.

However, as many feared, as soon as the tournament was over the market seemed to tip into recession. Data from Eurostat, the European Commission’s statistical arm, shows that the market took a dramatic turn for the worst in the middle of last year and by December construction output was some -23.7% lower than it was 12 months prior.

Bankruptcies

The market downturn has had a big impact on the contracting sector, with several major Polish contractors, including Budas and Hydrobudowa, either filing for bankruptcy or going into liquidation.
Hydrobudowa’s case is particularly striking, as its liquidation seems at least in part due to penalties and non-payment for its work on the Warsaw National Stadium

The client, a government body called the National Sports Centre (NCS), put in a claim of PLZ 461 million (US$ 145 million) against the contracting consortium, which included Austria’s Alpine Bau, out of a total budget for the contract of PLZ 1.5 billion (US$ 475 million). The claim was said to be for delays on the project.

The consortium countered that the claim was unjustified, but the burden on the case was enough to push Hydrobudowa into liquidation.

A similar fate has befallen the UK market, where construction activity has been on the wane for 12 months or more. The situation seems markedly worse since the second half of the year, when work associated with the London Olympic Games came to an end.
Indeed, data from Eurostat shows the UK market was -15% lower in December 2012 than it was a year previously.

Having said that, the data from Eurostat paints a bleaker picture than figures from other organisations. It says that the European market finished 2012 some -8.5% lower than it was a year previously, which is about twice the drop that Euroconstruct reported.

The disparity in the overall figured from different sources can be seen in other crucial markets. Few would argue that Italy is deep in the grip of a construction recession, and France is in a milder downturn.

However, Eurostat figures also show Germany teetering on the brink after a weak fourth quarter. Surprisingly though, the same set of data shows the Spanish market returned to growth at the end of last year, with construction output in the fourth quarter some +5.8% higher than in Q4 2011.

The weakness of the European market of course does not just affect contractors. It has had knock-on effects to other parts of the wider construction supply chain.

According to Italian construction equipment trade association UNACEA, for example, domestic sales of construction equipment have fallen for five years in a row. In 2012 they were down -30% on the previous year. With the market last year at 7,606 machines, UNACEA vice president Giampiero Biglia said it was 1984 when sales were last this low in unit terms.

With market conditions so difficult at home, it is perhaps not surprising that many of Europe’s construction companies are increasingly looking to other regions of the world for work.

According to the German Engineering Federation (VDMA), for example, of the € 7.9 billion (US$ 10.5 billion) of construction equipment made in Germany last year, € 5.5 billion (US$ 7.3 billion) was exported.
Future markets

As Johan Sailer, chairman of the VDMA’s construction equipment and building machinery division said, the industry is looking outside the region for growth. “It is impossible to predict if and when the construction industries of Spain, Portugal and Greece will finally pick up again. It seems most likely that growth will be generated in less traditional markets,” he said.

He added that the markets of the future were countries “which many of us might not really have been considering yet.”
And there is evidence that many contractors are thinking along the same lines. Output in the European construction market may be at its lowest for 15 to 20 years, but overseas revenues for European contractors have never been higher.

According to the European International Contractors trade association, European construction companies generated revenues of € 156 billion (US$ 203 billion) outside their home markets in 2011.

Admittedly, almost half of this was in other European countries, but there was still some US$ 106 billion generated outside the region. This compares to just US$ 43 billion in revenues from outside Europe 10 years ago.

So for European contractors, maybe the answer to troubles at home is to look further afield.