Access Construction Market Insight reports
Access Construction Market Insight reports
Contents
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As restrictions ease and a semblance of normality looms, industry attentions have firmly turned to the significant supply chain constraints and material cost escalation that have been seen both globally and locally in 2021. Linesight Director, Stephen Ashe, discusses the 2021 performance to date and the impact of the above, and other key issues, as well as providing an outlook for the foreseeable future.
While the domestic economy and labour market are both benefitting from the significant easing of restrictions since our market review earlier this year, the impact of the pandemic and Brexit continue to be felt.
The latest figures from Eurostat indicate that the Irish economy grew at three times the average amongst the EU-27 in Q2, recording a 6.3% expansion on Q1 compared to 2.1% across the block, with double-digit growth anticipated for the full 2021 year. The Q2 figure was up 21.1% on Q2 2020. While last year’s growth was supported by multinational activity (pharmaceuticals, computer and business services exports) and that has continued this year, as the economy has reopened, domestic demand has further driven this growth.
Looking at the Exchequer, there has been some controversy in recent times, following the release of the Government’s Summer Economic Statement (SES). However, the government announced earlier this month that the budget deficit this year is forecast to come in at at €13.165 billion, compared to the previous target of €20.285 billion. Following a peak of 31.5% in the COVID-adjusted unemployment rate in April 2020, the easing of restrictions over the course of this year has seen this rate fall to 10% in September 2021, following a brief spike again to 27% in January 2021 as tight restrictions were reintroduced in Ireland.
Just last week, the Cabinet confirmed that Ireland would raise its corporate tax rate from 12.5% to 15%, in response to pressure from the European Union and the US, and tax developments internationally. The OECD has announced a revised framework agreement on global corporate tax reform, with 140 countries signing on, with the objective of modernising tax rules and limiting what it deems ‘aggressive tax planning’ by some multinationals.
COVID containment measures made for a challenging start to the year for construction, with the industry grinding to an enforced halt again following the 2020 shutdown. A 25.9% year-on-year contraction was posted in Q1, but as restrictions lifted in Q2, a rebound was seen, with 22.9% growth recorded. This is also indicated by the Ulster Bank Purchasing Managers’ Index, with May to July denoting the second strongest three-month period in the 21-year history of the survey, and while the rate of expansion is moderating, it follows a remarkable pace upon the easing of restrictions, as pent-up demand was realized. September recorded a 56.3 reading, down from 57.5 in August (with above 50 indicating industry growth).
In terms of building and construction output in 2021 to date, the most recent CSO figures indicate a 7.7% quarterly increase in volume in Q2, and a 26.3% rise on a year-on-year basis. The seasonally adjusted volume index indicates that residential was the strongest quarterly performer with a rise of 52.6%, while civil engineering posted growth of 30.6% and non-residential sector increased by 2.2%. Looking at the year-on-year performances, civil engineering recorded the highest volume increase at 85%, while residential grew by 43.6% and non-residential 19.1%.
In terms of the value index, a 20.8% increase was recorded in Q2 on a quarterly basis and 34.3% on a year-on-year basis. It should be noted when reviewing the above figures that the Capital Goods Price index has seen increases in recent months, and this will have a bearing.
Modified investment is expected to grow by 2.5% this year, accelerating to 6.8% in 2022, with the CIF anticipating a 1% increase in modified investment in building and construction this year, rising to approximately 5% in 2022 and 6% in 2023.
Non-residential investment saw a record-high in 2019, shrinking by 9.5% in 2020, but is expected to grow by 3% in 2021 and 5% in 2022.
As referenced in our March 2021 release, the indicators point to delayed activity as a result of the industry shutdowns, as opposed to weakened demand.
Supply chain disruption and material cost escalation remains a core challenge for the industry, with unprecedented lead times and shortages as a result of both the pandemic and Brexit. We discuss this issue in more detail in a dedicated section below.
Another key issue for the industry is the labour shortage, with a bottleneck of demand on the employer side, but 12,000 construction workers remain on the Pandemic Unemployment Payment as of the end of August. With the government’s Housing for All plan laying out ambitious targets for the residential sector in particular, they expect demand for 55,000 construction workers to be created, so it is evident that addressing the skills shortage needs to be a fundamental industry objective.
Sectors deemed non-essential, such as private housing and commercial property were severely impacted by the industry shutdown, together with the sectors that rely on tourism and trade, such as hotels and retail. Other key sectors, such as data centres, life sciences, high-tech and logistics, continued to accelerate at pace, with demand booming in these sectors.
The Banking and Payments Federation Ireland (BPFI) is forecasting 22,000 completions in 2021, and 27,000 in 2022. Robust demand will remain, as indicated by the €1.2 biilion of first-time buyer mortgages granted in August – the highest level seen since the BPFI began tracking this indicator in 2014. As the abovementioned completion levels are still well below the 35,000 new homes needed a year, further pressure on prices is anticipated.
The recently announced Housing for All plan has been heralded as the “largest State building programme in our history”, promising over 300,000 new homes between 2022 to 2030, comprised of 90,000 social homes, 36,000 affordable homes, 18,000 cost rental homes and 156,000 private homes. With 213 actions laid out to deliver this housing to the market, the plan has received some criticism since its release, due to the funding only being guaranteed for five years, and the plan itself spanning nine years.
Large backlogs amongst the utility companies at present, mainly Irish Water and ESB, are impacting delivery times, given that buildings cannot be commissioned until they have power and water. These legacy issues with utility companies struggling to meet current demand have been highlighted to the government by the CIF, as investment in Irish Water and ESB will be required in order to meet increased demand.
New planning legislation was introduced in May to curb the amount of new houses that can be purchased by institutional investors. This will, in theory, enable more owner occupiers to inhabit new build homes, although it remains to be seen what impact that this will have on the output of new dwellings completed.
Hospitality and retail are experiencing revivals, following the huge blow dealt to these sectors in 2020. Hotels have seen a welcome increase in transactional activity, with approximately €200 million in sales estimated to date in 2021. HotStats’s most recent release for July 2021 puts Dublin hotel occupancy rates year-to-date at 44.5%.
Retail is benefitting from strengthening sentiment, as indicated by rises in the Consumer Pulse and Retail Pulse, under the Bank of Ireland's Economic Pulse, albeit from a low base. Retail sales increased by 3.3% month-on-month in June on a seasonally adjusted basis, and were up 10.6% year-on-year. However, the trend towards e-commerce over bricks and mortar retail remains, which is leading to demand in the logistics sector for warehousing space. Overall, while consumers have yet to return to pre-pandemic shopping behaviours, there has been a welcome increase in footfall, consumer confidence and retail sales expenditure. As a result, there has been some resurgence in the appetite for development in this sector in recent months.
Although the first half of 2021 was muted with regards to activity in the commercial sector, the return to offices is having a positive impact for the second half of the year. Early indications are that there will be a prevalence in the hybrid working model for a lot of organisations. Demand for more flexible office spaces is being seen, as employers adopt this model, and overall demand for quality space remains considerable, as vacancy rates continue to decline.
The return to office trend will accelerate going into Q4 2021. €3.5 billion has been invested in Irish commercial real estate so far in 2021 and the market is on target to achieve in excess of €4 billion for the year. This represents the highest volume on record for this period, and doubles the volumes seen for the first three quarters of 2020.
Healthcare was one of the sectors that witnessed limited lockdown. It is a sector that continues to perform well in both public and private investment, with growing demand emerging for development in the sector in recent months.
Industrial and logistics continues to go from strength and strength, and is expected to record a strong performance in 2021 as the expedited shift towards e-commerce and Brexit boosts demand. Prime yields and rents are being seen in this sector. As of the end of August, the industrial and logistics sector is on course to have its strongest year on record in 2021. The creation of a new Amazon logistics hub in Baldonnell Business Park is also expected to create employment for up to 500 people in the sector.
A report earlier this year by Host in Ireland estimated that the construction spend on new data centres in Ireland will amount to €1.5 billion in 2021. In total, the pipeline of new data centres will amount to circa. €6.7 billion (construction value) between 2021 and 2025. In the last year, the number of operational data centres in Ireland has increased by 25% to hit 70.
Owners and operators are investing significantly in renewable energy sources and their further implementation to curtail the impact of energy usage from this sector on the grid.
The government is rumoured to be classifying data centres as strategic developments given the level of foreign direct investment that they attract, which will fast track the planning and judicial review process.
Life sciences is an important sector for Ireland, exporting more than €45 billion per year and employing over 50,000 people directly. In its National Development Plan - Project Ireland 2040, which outlines capital investment of almost €116 billion, the government has committed €9.4 billion towards research to support Ireland’s reputation as a growing R&D hub.
The recent announcement from AstraZeneca about their planned investment in Dublin’s College Park further strengthens the number of top global pharmaceutical companies who are investing or have recently invested in Ireland, confirming the importance of the sector to the country. In the specialist area of medical devices alone, Ireland has a presence from eight of the world’s ten largest companies.
Plans to attract further investment is supported by both the IDA and NIBRT, with the creation of a new training facility for the Cell and Gene Technology (CGT) area of the sector, to support the development of the local workforce required to staff further new manufacturing facilities.
Material cost escalation and the extensive supply chain disruptions perpetuated by the perfect storm of Brexit and COVID-19 have been particularly topical this year, with huge spikes seen in the majority of materials in H1, and this remains a key challenge for the industry.
Steel demand is met primarily by importing stocks, and a jump in the raw material price was seen during 2020 and 2021. While prices rose in H1 2021, and spiked in July, the outlook is for costs to reduce by between 1-5% in 2022 as the market moderates.
On a global basis, lumber has been one of the materials most affected by the commodity market volatility, with the U.S. impacted in particular, as a result of supply shortages domestically and from Canada. This has had a knock-on effect around the world, with rough wood recording a sizeable hike in price in H1 2021. We anticipate that the Q4 figure will see a further increase, and although it should stabilise in 2022, it is likely to remain at this high level.
Ireland is dependent on imports with regards to copper, and an international increase in price impacted Ireland during 2020. Following incremental increases in H1 2021, costs peaked in Q3 and we anticipate that they will moderate slightly as global demand softens.
Planning remains an acute industry challenge. The controversial SHD (Strategic Housing Development) process is coming to an end, with a marked decline in planning permissions this year, despite pent-up demand, and of the 49 SHD projects granted permission in 2021, 23 of these have stalled due to judicial reviews. It is due to be superseded by the General Scheme of the Planning and Development (Amendment) (LSRD) Bill 2021, which will re-introduce local authorities into fast-track applications, in an effort to address one of the fundamental shortcomings of the SHD process, with a ‘two-step’ consenting process ending the judicial review being the only route to appeal.
Contributors: Stephen Ashe, Eamonn Trainor
The Bank of England (BoE) has an optimistic outlook on the recovery of the economy throughout 2021. With COVID restrictions easing and the vaccination programme in full effect, the BoE had forecasted the GDP to rise sharply by 4.25% in Q2 2021. However, the August Monetary Policy Report shows an even greater increase of 5.0% for Q2 2021. This follows the historic 9.9% contraction in 2020, more than double any previously seen levels.
The Office for National Statistics (ONS) shows that the UK unemployment rate fell to 4.6% between May-July 2021, down 0.2% from the previous period. August also showed a promising rise in payroll employees, with an increase of 241,000 to reach a total of 29.06 million. The general consensus amongst economists is that this does not portray the true picture, as official data shows 1.56 million jobs were fully or partly on furlough at the end of July, which has since finished at the end of September 2021.
The ONS reported a 3% rise in the Consumer Prices Index including owner occupiers’ housing costs (CPIH) in the 12 months to August 2021, up from 2.1% in the 12 months to July 2021. This was the single largest increase since records of the CPIH statistics began in 2006. It was largely attributable to an increase in the prices of food, second-hand cars, clothing, and eating and drinking out. However, transport was the biggest singular increase at 0.87%. The Bank of England is targeting 2% inflation this year, but CPI inflation rose sharply from 0.7% in March to 2.5% in June, due to the faster than expected rises in goods’ prices, whilst sharp increases in global demand for goods are causing further supply shortages.
The UK construction industry recorded a better-than-expected recovery in H1 2021, with data from the ONS indicating that the construction industry expanded by 20.4% year-on-year. Looking at monthly performances, construction output fell by 1.3.% in June when compared with May 2021, followed by an additional 1.6% decline in July 2021. This infers that the Q2 construction output is 1.8% below the pre-COVID-19 levels in February 2020, with total new work 3.2% below pre-pandemic levels, and maintenance and repair works at 0.6% above.
The value of construction projects starting on-site in the three months leading up to July 2021 rose in almost every sector compared to the same period in the previous year, as the industry bounces back from the lockdowns which had negatively impacted project starts in 2020. However, the value of housing, industrial, hotel and leisure and education sectors project starts have all decreased in the same period compared to 2019, which is shown in the table below:
Infrastructure projects have been the strongest performer throughout the pandemic, recording 35.7% increased output since February 2020. This is in no small part down to the government’s National Infrastructure and Construction Pipeline, which outlines £548.3 billion in investments into infrastructure projects over the next 10 years, on flagship projects, such as HS2 and the Lower Thames Crossing tunnel.
Data centres have recorded increased demand and as a result, growth, in comparison to forecasts prior to the pandemic. The FLAP cities (Frankfurt, London, Amsterdam and Paris) are expected to add an additional 415MW of capacity throughout 2020/2021, which is 100MW more than the previous peak in 2019. These levels of growth are expected to continue throughout the next few years, as the demand continues to outpace supply. With globally stored data at 65 zettabytes (trillion gigabytes) in 2020 and forecasts of reaching 175 zettabytes by 2025, the demand for data centres is more prevalent than ever.
Schemes such as Dogger Bank tie into the government’s ambition to set the UK on the path to net zero by 2050, with plans to reduce greenhouse gas emissions by at least 68% by 2030. The UK’s path to meeting this target is backed by the government’s ‘Ten Point Plan for a green industrial revolution', which will create and support up to 250,000 British jobs by 2030. The plan sets out ambitious policies and investment, with the potential to deliver over £40 billion of private investment by 2030, developing innovative technologies to make significant strides in cutting emissions across energy, transport and buildings. The efforts in this regard can be seen across the construction industry, as it moves towards more sustainable solutions – these changes are not only being driven by the government, but also multiple industry stakeholders, from designers and consultants, to developers and end users.
Furthermore, the government has also introduced the ‘Build back better' plan, which outlines a £100 billion investment plan that aims to create new jobs, improve productivity and support economic growth as we transition out of a recovering economy. This plan includes investment in areas such as broadband, roads, rails and cities over the course of the 2021-2022 period. Most notably, the budget will be allocated to projects such as the UK’s first Infrastructure Bank, which aims to help finance infrastructure projects in UK sectors, such as clean energy, transport and water and waste, with an initial capitalisation of £12 billion, it’s expected to support at least £40 billion in infrastructure projects throughout its lifecycle.
The UK is currently facing a perfect storm of events that has the potential to limit the growth of UK’s construction industry, causing risks and uncertainties in the industry as we transition out of the pandemic and back into the new normality - namely, growing shortages of labour and materials, alongside the increased demand being seen. The Trade and Cooperation Agreement (TCA), which came into effect on 1st January 2021 post-Brexit, is forcing restrictions on the freedom of movement, as a new point-based immigration system is introduced. This has caused a massive decrease in skilled EU workmanship, with an estimated 1.3 million non-UK workers having left the country throughout the pandemic.
If the labour shortage continues, it will place upward pressure on the wage rate, which would in turn would feed through to rising inflation. Businesses in all sectors have called for the easing of post-Brexit immigration rules, alongside recommendations for further investment into skilled training. Between the first quarter of 2017 and the first quarter of 2021, the construction workforce from the EU fell by 51% in the UK overall, and by 63% in London.
The construction industry is going through a period of what is being referred to as hyperinflation or a super cycle, with a combination of several major factors having had a disruptive domino-effect throughout all stages of the supply chain. Ultimately, these factors are linked to the global economic changes that have been caused by both Brexit and COVID-19.
As a result of COVID-19 and the various national lockdowns, the industry is still suffering due to manufacturing companies being forced to reduce their output capabilities with a reduced workforce on-site to facilitate social distancing measures. This in turn is creating supply shortages, leading to companies relying on stockpiles of materials that have dwindled throughout the pandemic. This has caused projects to incur further delays, due to contractors being unable to secure materials without having severely increased lead times for certain key materials, in comparison to pre-pandemic levels. The pandemic has also caused an increase in logistics costs, with further requirements for PPE and social distancing, alongside the impacts of Brexit leading to further red tape, customs checks and trading difficulties throughout the UK. From July 2021, all suppliers importing goods from the EU need to make full safety and security declarations at ports and pay the relevant tariffs.
There are also growing concerns that supplies of key building materials, such as timber, steel, cement and roof tiles are dwindling from the knock-on effects of Brexit and COVID-19. The chief executive of the Federation of Master Builders (FMB) has forecasted that there is no certainty as to when this crisis will end, with signs of significant material shortages for at least the duration of 2021.
Furthermore, the costs of building safety is also on the rise, with new legislative acts coming into force, such as the Fire Safety Act 2021, following the Grenfell Tower disaster in June 2017. This new legislation will be governing the way residential properties are managed, with the goal of reducing the risk of external fire spread. This has caused an increased demand to replace existing materials to become more compliant with fire safety standards, which in turn has seen the average price of cladding increase by 5.2% in the in the previous 12 months leading up to April 2021.
The BCIS Price Adjustment Formula Indices for July 2021 indicates that nearly all construction components have seen a significant increase since March 2020, with materials such as structural steel, softwood windows and doors, and concrete reinforcement recording some of the most abrupt increases, as described in the table below. The London Metal Exchange (LME) also reported that metals on the exchange have risen sharply in the year to July 2021, with the price of primary aluminium rising by 39%, copper by 67%, lead by 21% and zinc by 42%. Linesight’s upcoming report on materials escalation will delve into this topic in more detail, including providing a 2022 outlook for material prices.
Material component and % price inflation
Structural steelwork - 33%
Concrete reinforcement - 23%
Timber - 22%
Fencing - 14%
Suspended ceilings - 5%
Plastics - 7%
Insulation - 2.5%
Source: BCIS Price Adjustment Formula Indices % increases
Construction industry output growth is expected to continue in an upward trajectory throughout 2021 as COVID restrictions come to an end, and the continuous investment in development of the country’s residential and infrastructure sectors continues. The BoE has recently increased their forecasted GDP growth for 2021 from 5% to 7.5%, following the record 9.9% contraction in 2020. However, there are some risks to this recovery, such as bottlenecks throughout the industry related to materials and labour shortages, which could potentially prevent the construction industry from achieving these optimistic targets. This is coupled with the uncertainty that Brexit brings regarding new trading legislation with the EU, and negotiations are still underway with other countries, such as the US-UK trade deal, which will be very influential to the importation of materials, causing further uncertainty within the industry.
With approximately 90% of the adult population having received their first vaccination jab and the lockdown restrictions easing, there is a sense of optimism that construction output will converge back to pre-pandemic levels towards the end of the year. This is backed by the Bank of England forecasting a historic 7.5% GDP growth for the year.
Contributors: Michael Riordan, Stuart Taggart, Andy McLoughlin and Luke MacDonald
The quarterly change overall in Israel has been positive, with a very high rate of inoculation and the full reopening of the economy in March. GDP is projected to record strong growth of 5% in 2021, while the labour market continues to slowly improve with a downward trend in the unemployment rate, currently at 5%. The Bank of Israel (BOI) monetary committee are focusing on fiscal policies to strengthen and secure the economy, with inflation in 2020 declining slightly by 0.5%, according to the IMF. As noted in our previous edition, the BOI has been targeting inflation at 1 – 3 %.
In addition, the appreciation of the new Israeli shekel against the dollar and euro will impact exports. OECD’s economic outlook notes that investment and external demand are set to strengthen, as uncertainty fades and vaccinations progress globally. High-tech services and FDI will continue to grow robustly.
From a political perspective, on June 13th, a coalition party was finally formed that marked the end of Benjamin Netanyahu’s 12 consecutive years as Prime Minister.
Israel’s construction industry contracted by an estimated 8.9% in 2020. In terms of sectoral performances, we continue to see growth expand, with Israel high-tech leading across the region. The huge investment into Israel can been seen, with the like of Amazon Web Services (AWS) opening a regional data centre in Israel in the first half of 2023. The Israeli government’s massive Nimbus project has aimed to move the government’s IT infrastructure to the cloud, investing some NIS 4 billion.
Commercial was one of the hardest hit sectors, and is expected to remain weak, contracting by 3.1% this year. Following a 5.3% contraction in 2020, 3% growth is expected in industrial in 2021, and it constitutes one of Israel’s strong sectors, benefiting from a highly-skilled workforce, advanced technologies, and extensive research and development. Residential was the largest sector for Israeli construction in 2020, amounting to over 55% of total industry value, and recorded a 10.7% decline in 2020.
In the short to medium term, we can see a sharp increase in the construction material price index currently trending at 4.2% for 2021. This is reflective of the current global market due to the increased construction activity and demand for material following the COVID-19 pandemic. According to the CBS steel construction price index is trending at 22.9%.
The OECD is forecasting economic growth of 5% for Israel in 2021 and 4.5% in 2022. The country’s construction industry is forecast to record growth of 3.5% in 2021, after the sizeable 2020 contraction mentioned above. In 2022, further recovery is anticipated, with 3.1% expansion, with an average of 2.9% growth between 2023 and 2025.
The development of infrastructure, as well as energy and utilities on the government’s part is expected to be a key contributor. Consumer and investor confidence is on the rise, and positive regional economic conditions will also spur on recovery. However, the extent of the government’s focus on improvements in the quality of transport infrastructure will prove fundamental, as the severe congestion in urban areas is deemed to be a critical infrastructure bottleneck. Although development of the public transport network is crucial, plans may be reconsidered and rationalised as COVID-19 impacts the usage of this mode of transport. Projects underway include a number of light rail systems (Tel Aviv, Jerusalem and Haifa-Nazareth), the electrification of the Israel Railways network, and an additional track on the Ayalon highway. ILS107 billion is set to be invested in mass public transportation projects, compared with ILS21 billion in new highways.
Commercial is expected to remain subdued due to the pandemic and weak investment, with GlobalData forecasting a 3.1% contraction in real terms in 2021, before growth resumes from 2022 to 2025, at an average annual rate of 4.1%.
Construction activity in residential is projected to increase by 4.2% in 2021, after its 2020 decline, followed by average annual growth of 2.4% from 2022 to 2025. The government’s plan to build new houses to meet the demands of a rising population and increased urbanization will provide a sectoral boost.
Contributor: Ashley Baum
The Dutch economy has weathered the pandemic relatively well, with a smaller recession than the eurozone in 2020 and indicators pointing to a convincing recovery so far in 2021. According to Statistics Netherlands (CBS), the Dutch economy contracted by 2.4% in Q1 2021 on a year-on-year basis, driven largely by a decline in national expenditure and a fall in household consumption. This followed the 3.8% contraction in 2020 after a 1.7% increase in 2019, which marked the weakest post-WWII annual performance, after the 3.7% contraction recorded in 2009.
The Dutch economy is considered to be particularly resilient, and unemployment has now almost converged on pre-pandemic lows, with bankruptcies lower than usual, owing to policy interventions to secure this, in order to stabilise the financial industry.
Household consumption plummeted by 6.6% in 2020 and was the weakest of the main expenditure categories, which almost all declined across the year. However, this year has seen an improvement, and the latest August figures are again an improvement for the most part, with four indicators improving and two less favourable than they had been in July.
Inflation in 2020 decreased to 1.1% from 2.7% in 2019, and although it was a lower rate, it still constituted one of the highest rates in the eurozone last year.
Unemployment in the Netherlands increased from 3.4% in 2019 to 3.8% in 2020, peaking at 4.4% in both September and October.
Ultimately, the Netherlands has retained its relative fiscal strength in spite of the pandemic, and after three consecutive years of surplus, a deficit of 4.3% of GDP was seen in the fiscal balance in 2020, which is expected to grow to 6.1% in 2021.
In 2020, unlike many other countries in the eurozone, the Dutch construction industry saw only a moderate decline of 0.8% in real terms as a result of sites remaining open, with output value measured at constant 2017 US dollar exchange rates falling from US$124.3 billion to US$123.3 billion in 2020. Turnover in Dutch construction for the year rose by circa. 8.5%, according to the Netherland's National Statistics Body, CBS StatLine. After a buoyant 2018, the construction sector in the Netherlands began slowing down in 2019, mainly due to skilled labour shortages and problems associated with the implementation of a long-term plan to reduce nitrogen emissions.
According to the CBS, the construction industry’s value-add declined by 1.6% on an annual basis in Q1 2021. However, the total number of building permits issued grew by 18.7% year-on-year in the first four months of this year, according to the Dutch government.
The commercial sector contracted by 3% in 2020, and is not envisaged to recover meaningfully until 2022. Infrastructure accounted for 18% of the industry’s total output in 2020, at a value of US$22.2 billion, and sectoral output grew by 5.1% for the year. As is the case with many other nations, the government is investing significantly in the development of national transport infrastructure, which is expected to support sectoral growth for the foreseeable future, with €25 billion investment planned up to 2028, in addition to a €62 million EU grant for transport network development. As the largest sector for the Dutch construction industry, residential accounted for 52.8% of the total industry value in 2020.
While the Netherlands Bureau for Economic Policy Analysis (CPB) is forecasting 2% economic growth in both 2021 and 2022 as of June 2021, the Dutch central bank (DNB) is more optimistic with 3% growth forecast for this year and 3.7% for next year. The IMF is forecasting 3.5% and 3% respectively. As noted above, the fiscal deficit is expected to hit 6.1% of GDP in 2021, before moderating to 1.5% in 2022. Inflation is expected to sit around the 1.4% mark.
Looking at the construction industry, recovery is expected this year, albeit at a vary moderate rate of 0.4%. Construction output in the infrastructure sector is forecast to increase by 1.6% in 2021, with an annual average growth rate of 1.3% over the three years thereafter. Residential output is anticipated to grow slowly in 2021 by 0.4%, before gathering some pace to hit an annual average growth rate of 3.1% in 2021 and stabilize at an annual average growth rate of 3.1% between 2022 and 2025.
At the beginning of 2021, construction confidence indicators were positive in the Netherlands as many larger construction firms continued to work on longer-term projects. Employment in the sector is expected to stabilise at the same level for 2022.
The industry in the Netherlands is expected to record a CAGR of 8.4% to reach €100.3 billion by 2024. In value terms, the commercial construction market is expected to record a CAGR of 8.3% over the same period.
Contributor: Rian Lagan
As the Eurozone’s second largest economy, France has felt the impact of COVID-19 acutely. Having recorded growth of between 1.3% and 2.2% over the preceding five years, French real GDP declined by 8% in 2020. In Q1 2021, it returned to modest growth of 1.2% year-on-year, according to the Institut National de la Statistique et des Études Économiques (INSEE). This is largely attributable to the recovery of industrial and manufacturing activities, exports, housing completions, and recovering consumer confidence
Inflation has been between 0% and 2% in France over the last decade but decelerated from 1.9% in 2018 to 1.1% in 2019 and slowed further to 0.5% in 2020.
The unemployment rate has been steadily falling since 2013, from 10.5% to 7% in early 2020. Following an increase with the second wave of the virus, it fell again in Q2 2021 to 8% and again to 7.6% in Q3.
Activity in the building category, within the overall construction category, dropped by 15% in 2020, according to the French Building Federation (FFB). Of the Eurozone countries, France’s construction industry experienced the largest contraction in terms of production volumes, with April 2020 volume marking a 65% decline on January 2020’s figure. For the full-year 2020, the industry contracted by 13.2%. While output was up by 10.7% in Q1 2021 on a quarterly basis, output was still 6% below the pre-pandemic, Q4 2019 figure.
Employment in construction had increased over the last few years, from 1.33 million in January 2016 to 1.42 million in January 2020. In the building sector, only 10,000 positions were lost in 2020.
The government is focusing on infrastructure, unveiling a fiscal support package that includes provision for transport, innovation subsidies, healthcare spending, hydrogen subsidies and industrial projects. The package is expected to have created an estimated 160,000 jobs this year.
In terms of specific sectoral performances, commercial recorded a 14.3% contraction in 2020. According to INSEE, the average production and turnover indices of the services sector showed recovery, growing by 0.5% and 1.9% year-on-year respectively in the first four months of the year. The business climate in the sector also improved in June 2021, according to INSEE, with the business climate composite indicator rising from 107.1 in May to 112.9 in June 2021. Looking at residential, as the largest sector in the French construction industry in 2020, it accounted for 39.4% of the industry’s total value for the full year.
Tender prices have seen strong increases over the last four years (3.41% in 2019) and recorded a healthy increase of 2.43% in 2020.
The French economy is expected to rebound this year, with growth of 5.8% forecast by the IMF, followed by 4.2% in 2022. Inflation is expected to reach 1.1%.
The construction industry is expected to rebound for the full-year 2021, but output levels during the year will be flat on a real, seasonally adjusted basis. The industry will be supported by investments in infrastructure, energy, commercial and industrial projects. The commercial construction sector is expected to be in recovery mode this year, posting growth of 9.4% in real terms. Total floor area of office premises authorized in the first five months of the year registered growth of 6.5%.
With the government’s focus on using infrastructure investment to revitalize economic growth while also improving regional connectivity, the country is expected to record growth in infrastructure construction of 12.2% this year, followed by an average annual growth of 1.4% between 2022 and 2025. This push to improve the transport network is unsurprising, in light of the impending 2024 Olympics. Plans include provision to build plans to build 200km of new metro lines, with a total investment of €28.1 billion by 2024. Lastly, the residential sector is expected to expand by 11.8% this year, supported by the ongoing recovery in housing construction and improvement in consumer confidence.
Contributor: Ludovic Lecoeur
The impact of the COVID-19 pandemic has been profound, undoubtably weighing heavily on the German economy throughout the course of 2020 and inciting a severe recession. Decisive government stimulus and rescue measures helped lessen the economic shock and Germany is expected to be amongst the least affected in Europe. With that said, GDP contracted by 4.6% compared with the previous year, according to the IMF, ending a 10-year period of growth since the recession in the wake of the global financial crisis of 2008-09. However, the economy returned to growth in Q2 2021, posting growth of 9.6% year-on-year, according to the Federal Statistical Office Destatis, following a 3.4% contraction in Q1 2021. Growth is thought to have been hampered by the supply chain bottlenecks being seen globally. Household spending is growing as consumer confidence recovers, and combined with government spending, it is driving growth.
The continuous upward trend in the German labour market came to an end in 2020 after 14 years, although Germany still boasts one of the lowest unemployment rates in the EU, at 3.6% in July 2021, and slightly higher in terms of youth unemployment (under 25) at 7.5%.
Consumer prices rose by 0.5% on an annual basis in 2020, which was markedly below the relevant level in the previous year (+1.4%). Inflation overall stood at 0.5% for the year.
Whilst there is little doubt that 2020 made for a muted construction market, the German industry fared better than most others in Western Europe, in what was a challenging year. Industry output recorded strong growth in Q4 2020 of 8.8%, which helped the industry register a cumulative growth of 3.8% for the full year. With the lockdown in early 2021, construction activity was hampered and posted a 5% contraction in Q1. However, the most recent data available for May indicates growth of 0.4% as activity began to pick up.
The Germany Construction Purchasing Managers’ Index (PMI) increased to 47.1 in September of 2021 from 44.6 in August (with below 50 denoting contraction) – the 19th consecutive month of falling construction activity, as supply chain disruption, capacity constraints and upward pricing pressures continue to impact.
The commercial construction sector declined by 1.3% in 2020, as activity remained subdued. Infrastructure posted positive growth of 2.8% in 2020, as the government supported the industry with sectoral investments in the transport network.
The IMF has forecasted a 3.6% and 4.1% increase in real GDP in 2021 and 2022, respectively, although the downside risks around a further resurgence of the Delta variant and supply chain disruption are still present.
Commercial output in the sector is forecast to contract again by 1.1% in 2021, as demand for office spaces remains dampened. Infrastructure construction is expected to register growth of 1.2% this year, and gather pace to 3.3% growth between 2022 and 2025, as the government continues its plans to upgrade and further develop the infrastructure network across the country. With the German government’s ambitious renewable energy objectives, to produce 65% of total power from renewable sources by 2030 and to become carbon-neutral by 2050, 0.8% growth is expected in terms of construction in the sector this year, and 2.8% in the three years thereafter.
Contributors: Michael Waters and Steven Scott
Spain recorded an economic contraction in 2020, with a decline of 11% for the year – with a 10.5% drop in Q1, a 13.8% fall in Q2, a rebound of 11.9% in Q3 and stagnation in Q4. In Q2 2021, 19.8% growth was recorded year-on-year, compared to a year-on-year contraction of 4.2% in 2021. Quarter-on-quarter, growth was 2.8% in the Q2 period.
Inflation for the year declined by 0.3%, according to the IMF. Following the worst unemployment rate for Spain since 2012 with 16.13% recorded in 2020, it dropped to 14& in August 2021 from 14.5% in July – still well above the eurozone average of 7.5%. However, large differences remain for youth unemployment, with the figure in Spain at 33% for those under 25.
The Government’s budget deficit reached the equivalent of 10.09% of GDP for the year, with a previous target of 11.3%. Government spending with regards to supports rose, with some 85% of total public spending aimed at somewhat offsetting the impact of the pandemic, while the tax take for the year fell.
The Spanish construction industry shrank by 14.5% in 2020. While the industry felt the effects of the lockdown restrictions at the start of the year, with output contracting by 10.9% in real terms in Q1 2021, as COVID-19 cases have declined and economic conditions have improved, 12.2% year-on-year growth in output was posted in Q2 2021.
Employment in construction fell from 1.27 million in 2019 to an estimated 1.25 million in 2020.
The Recovery, Transformation and Resilience Plan (RTRP), underpinned by the Next Generation EU (NGEU) Recovery Fund, is expected to be a major driver of growth over the forecast period, with considerable expenditure planned to boost the economy. Spain received €9 billion from the European Commission in August 2021, which is 13% of the total allocated by the EU under the RRF. The government plans to focus investment in the green and digital transition, as well as carrying out upgrades to the transport system.
Looking at specific sectors within construction, commercial contracted by 15.7% in 2020, although there is optimism for its recovery. Although infrastructure declined by 11.7% in 2020 and a number of projects went on hold, the sector is expected to rebound as projects get back on track. Accounting for just 4.5% of industry’s total value in 2020, energy and utilities was the second smallest sector in the industry. A plan to spend €181 million was announced in late 2020 to develop renewable energy infrastructure, in the hopes of attracting investment of circa €550 million from the private sector, as well as reducing greenhouse gas emissions by 712,000 tonnes per year. The residential construction sector contracted by 16% in 2020, as unemployment surged and consumer confidence shrank.
As of July 2021, the Spanish government held its growth forecast for 2021 at 6.5%, and 7% for 2022, while the July 2021 figures from the IMF put growth at 6.2% this year, and 5.8% in 2022. An inflation rate of 1% is forecast for this year.
In terms of construction, growth of 7.4% is forecast by GlobalData for 2021. Infrastructure is expected to grow by 2.5% for the year, and gather pace as significant projects resume, with 4.7% average annual growth between 2022 and 2025. Commercial is expected to grow by 1.9% in real terms for the year, supported by the global recovery and return to offices. Data centres are expected to post robust growth, with Amazon’s recent announcement of a ten-year €2.5 billion investment plan, as well as the commencement of EdgeConneX 8MW facility, to name just two. Lastly, residential is forecast to post a recovery in 2021, with 9.5% growth anticipated, supported by considerable government investment in affordable housing schemes and other residential initiatives. As the recovery gathered pace, the total number of residential units sold in Spain grew by an impressive 77.1% in June 2021 year-on-year, according to the INE.
Contributor: David Colmenero
As a small nation with an open economy that is heavily reliant on foreign trade, the pandemic-induced global downturn has taken its toll on Denmark. Year-on-year, GDP decreased by 3.5% in 2020. However, Q3 and Q4 showed signs of improvement, although the Central Bank of Denmark stated that the economy had not converged on pre-pandemic levels and was in a moderate recession.
Inflation decreased in 2020 to 0.4% from 0.7% in 2019. Unemployment rose again at the beginning of this year to hit 5% in February 2021, before declining again to a low of 3.3% in August.
Stimulus and support packages have been prolonged, with private consumption strengthened by cash transfers to households. Investment has remained robust throughout the pandemic, and is bolstered by the government’s ‘recovery package’, which is equivalent to approximately 1.6% of GDP.
Turnover in Danish construction increased in 2020 by about 6.6%, with the industry contracting by an estimated 3.5% for the full year, which is largely attributable to a marked slowdown in building investments and civil engineering works.
The government announced major infrastructure spending plans to support the sector over the next ten years, temporarily suspending the cap on the construction budget provided to municipalities to fund development work.
Investments in commercial construction are expected to be pushed back in the short run, as confidence remains subdued, while residential was the largest sector in the Danish construction industry, accounting for 43.6% of the industry’s total output in 2020.
With the government’s focus on renewables and plans to produce 55% of its total energy from renewable energy sources by 2030, it is a sector with significant potential. Following the passing of the new Climate Act in mid-2020, to ensure that the country reduces greenhouse gas emissions by 70% by 2030, significant investment is expected in this sector.
The Central Bank of Denmark expects the economy to grow by 3.6% in 2021 and 2.3% in 2022. The IMF puts 2021 growth in real terms at 3.5%. Inflation is anticipated to stand at 0.9% for the full-year 2021.
The Danish construction industry’s output is forecast to grow by 1.7% in real terms this year, before registering an annual average growth rate of 2.4% between 2022 and 2025. Like many other countries, this will be driven by government investment in transport infrastructure, particularly rail and road projects, as well as the abovementioned investments in renewable energy, in addition to healthcare and residential construction.
Contributor: Rian Lagan
The Swedish economy plunged into contraction in Q2, declining 8% and 7.7% year-on-year, following the COVID-19 outbreak, marking the worst performance on record. This is against the backdrop of having decelerated in 2019, with slowing domestic demand and unstable external demand, coupled with a falloff in private consumption, and volatile external demand. It recovered in the second half of 2020, and GDP was estimated to have declined by 2.9% for the full year. This is, in fact, significantly better than the 7% drop expected by the Government as of May 2020 and milder than the performances of many of its European peers, which is largely attributable to the key economic sectors at play. Many have pointed to Sweden opting not to adopt the stricter lockdowns implemented upon the outbreak by a number of other countries as having softened the impact.
The inflation rate dropped from 1.7% in 2019 to 0.7% in 2020. Sweden’s budget balance deteriorated significantly in 2020, with Moody’s estimating the deficit at 3.8% of GDP. However, given that the contraction was relatively mild, as referenced above, the budget balance deterioration has been less dramatic than initially feared.
Unemployment peaked in June at 9.2%, before declining again at a moderate rate, standing at 8.6% as of December 2020.
Construction output remained positive until Q3 2020, dropping 5.7% in July 2020 and remaining in contraction mode in all months since, bar September. The most recent figure, for January 2021, indicates a 4.4% drop in construction output.
While building permits had dropped off significantly as of early 2019, the remained steady throughout 2020, and increased from 12,633 units in Q3 to 14,135 units in Q4.
While reporting statistics lag with regards to employment in construction in Sweden, it is worth noting that as of 2019, the number stood at 679,186, which is a 26.8% increase on 2010. The narrow construction sub-sector constituted 62.7% of these individuals, according to a 2020 report by the European Construction Sector Observatory.
A recovery is anticipated for 2021, with real GDP growth set to reach 2.7% and then 4% in 2022, as projected in the European Commission’s Winter Economic Forecast. However, this rebound is not expected to gather momentum until H2. Private consumption is expected to grow, boosted by resilience in the labour market.
The financial risks on Sweden’s Central Bank, Riksbank’s balance sheet have increased, due in part to the monetary policy measures implemented in 2020 to mitigate the effects of the pandemic. The Riksbank has therefore decided to make a provision of SEK 5 billion to strengthen resilience against any future losses, which is a longer-term measure that reduces the risk of the Riksbank’s equity falling too low or becoming negative.
Contributor: Gary Lavelle
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