EMEA economic overview
It is clear that now, more than ever, there is a consistent need to revise and revisit project budgets set in 2021 (or last month, for that matter). The war in Ukraine has disturbed an already turbulent market. McKinsey’s Global Survey found that geopolitical instability is now cited as the top risk to economic conditions.
High inflation remains a primary global concern, with Eurostat predicting annual inflation to be 7.5 percent in March 2022 in European member states, up from 5.9 percent in February 2022. Concerns persist with the rising cost of materials and labour shortages across the construction industry. Unprecedented increases in the price of steel, gas, oil and aluminium are the result of enormous demands from the world’s largest economies in this unrelenting boom in the global raw materials market.
With an ever-evolving situation, Gleeds Insights & Analytics analyses local statistical information and advises investors to evaluate inflation contingencies in their budgets. With today’s unrest, it is critical that supply chains and cashflow forecasting be (re-)assessed to mitigate the negative pressures placed on current developments.
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INSIGHTS & ANALYTICS, GLEEDS EMEA
As we examine construction industry statistics in our quarterly EMEA market reports, here are four Western European markets from a broader, economic perspective:
France
Given the sharp increase in uncertainty over future developments, because of the war in Ukraine, the Banque de France (BDF) has conducted two contrasting macroeconomic scenarios for 2022–2024 (referred to as ‘conventional’ and ‘degraded’).
Concerning the Gross Domestic Product (GDP), commodity prices are a drain on the national economy because commodities are imported. This has had a downward impact on the French GDP and an upward impact on consumer prices. There is a growth carry-over for 2022 estimated at 2.9 percent at the end of Q1, attributed to the positive 2021 recovery results. Because of this, despite the anticipated slowdown, 2022 GDP growth should reach 3.4 percent in annual average terms under the ‘conventional’ scenario and 2.8 percent under the ‘degraded’ scenario. As is the case across Europe, inflation is expected to be high, driven notably by the energy component.
According to French National Statistics Institute, INSEE, the composite indicator remains stable at the high level of 114, with business managers in the construction industry positive about past activities, although slightly less positive about prospects for the future. As of March 2022, the production capacity utilisation rate is 92.8 percent, which stands stably above its long-term average of 88.8 percent, despite shortages of personnel and material supplies.
Germany
Germany, Europe’s largest economy, flagged a “substantial” risk of recession due to the Ukrainian war.
German advisors who set fiscal policy cut Germany’s 2022 economic growth forecast to 1.8 percent from 4.6 percent. Amid soaring energy costs, inflation surged to 7.3 percent — the highest level since reunification in 1990, according to the federal statistics agency, Destatis, and up from 5.1 percent in February 2022. The prices of mineral oil products and natural gas have increased notably, impacting the high rate of inflation. The European Central Bank will feel increased pressure to raise interest rates to counter surging prices.
Looking at ways of cutting Germany’s reliance on Russian gas, Germany looked at both short-term and mid-term scenarios around their nuclear facilities and have concluded to close their three remaining nuclear plants. As a result, Germany is looking to build up alternative energy sources such as construction of electricity networks and renewable energy. Plans are in place to build a liquefied natural gas (LNG) terminal to replace Russian gas, with hopes for completion within two years (at Tesla speed!).
The property and construction industry’s unemployment rate has hit record lows. Remarkably, annual construction turnover appears untouched by the many challenges experienced in the past five years. Perhaps these positive figures and government investment in infrastructure projects will be enough to maintain the construction industry during these uncertain times.
As German contractors are ultimately facing increased risks, some are becoming more selective of clients and projects they are willing to tender for. Other German contractors have chosen to include higher profit margins to prepare for future increases, hence the entire value creation chain experiencing inflation.
Italy
Projects have progressed despite increasing challenges in the construction sector and a swelled Construction Cost Index which is now between 10-17 percent. That, coupled with new high figures in material shortages and labour availability issues has reflected a certain amount of resilience to projects progressing.
Optimistic figures in 4Q 2021 reflected a full GDP recovery from the impacts of previous years and the Consumer Price Index (CPI) stood at just slightly below the average across EU member states.
The Confidence Climate in Construction Index for 1Q 2022 was nearly 30 points above that seen in 4Q 2019 — highs not found since the 1980s. The GDP is estimated, however, to be slashed by around 0.7 percentage points due to the recent surge in energy prices, according to the Italian National Statistics Institute, ISTAT.
March 2022 continued a monthly growth of confidence in the construction sector, underpinned by record levels of business activity and new work brought by increased client demand, largely due to governmental tax breaks. Residential, commercial and civil engineering advanced, with employment rising at its fastest rate in 21 years. Accordingly, constructors increased their buying levels, further prolonging lead times and straining supply chains, as seen throughout Europe.
Although the projection of order books over the next three months dropped from 19.9 percent in February to 15.3 percent in March, it remains higher than March 2021, before supply chain issues became a growing concern. It is higher still than reported figures in 2019, before the word “pandemic” became part of everyday vocabulary.
Spain
The effects of Russia’s invasion of Ukraine have surpassed forecasts, sending already elevated energy bills higher still, raising inflation to almost 10 percent; the biggest jump in nearly 40 years.
Bloomberg named Spain as the economy to be among Europe’s worst hit by the energy shock, but the country’s steady GDP recovery in 2021 serves as an indication of the government’s dedication to securing economic stability.
As seen in other European countries, Spain has not escaped skilled labour shortages on jobsites. Though wages remain steady, increased overhead costs due to price rises in fuel and energy are a cause for concern. Speciality contractors demand the highest bidder, typically with crews deserting work sites, again causing setbacks.
Another source for delays is the transportation crisis, increasing lead times. With fuel prices swelling, claims for price revisions on trades like earthwork removals have seen delays as they rely on repeated travel routes. March also brought a two-week, widespread transportation strike, resulting in some national tax relief on the price of fuel — but not before leaving everyone desperately trying to secure stock, from food to construction materials and everything in between.
