Size and stability

The construction outlook for Europe is projected to grow more slowly than any region other that North America over the next five years. This is to be expected given the region's very slow population growth and well established commercial, industrial and infrastructure bases.

Yet with a projected size of nearly US$ 1.1 trillion in 2007, the region is on a par with the North American and Asian construction markets. More importantly, the European construction outlook is for improving conditions compared with a North American construction market in retreat, particularly in the residential sector.

Improved economic opportunity in Europe is reflected in the rising value of the Euro as well as the indications of several countries including China, Qatar, Russia, Sweden and the United Arab Emirates to reduce the share of US Dollars held in their foreign exchange reserves.

The most marked turnaround in growth has been seen in the non-residential sector, particularly within the industrial construction segment. With some exceptions, such as France and Italy, European nations have improved their cost competitiveness, particularly labour costs and in general, the more free market oriented economies of Northern Europe offer the superior growth opportunities.

German growth

Perhaps the greatest improvement in construction fundamentals can be seen in Germany, Europe's second largest construction market (just behind the United Kingdom in 2006). Following the reunification boom that ended in 1993, Germany's economic growth has been hampered by structural problems related both to the after effects of reunification and the inadequacies of the economic system.

Structural problems in the economy were already apparent in the late 1980s, but it was not until 2003, amid growing globalisation pressures, that Germany fianlly began to tackle these problems in earnest. The payoffs from the reforms became apparent in the broader economy in 2005, and extended to the construction sector in 2006, with recovery from a decade long slump.

The chart on p.18 indicates the degree of the turnaround expected by sector in Germany, measured by growth in real US Dollars. Nominal growth will be at least +3.5%.

Looking ahead, export growThis expected to stay robust amid a pattern of global demand that favours German investment goods, and domestic demand for investment goods should also remain strong as existing production facilities are expanded because of increasing capacity constraints. Indeed, the high oil prices that are posing a concern for other industrialised nations are proving beneficial to Germany, given the country's strengths in the investment goods sector, notably plant, machinery and vehicles.

Germany's low population growth rate will inhibit residential spending growth, although the improved consumer outlook is likely to continue, cementing the gradual recovery. Restrained public spending growth as the Merkel government attempts to balance its budget by 2008 will also limit the potential in institutional spending.

In short, companies looking for a safe alternative to the US construction market would do well to consider Europe. While higher growth rates may be found elsewhere, the sheer size of the market and the stability of the region and its currency, combined with the renewed activity, make this region a desirable opportunity.   IC