15
ECONOMICOUTLOOK
Slow recovery
september 2014
international
construction
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Slow recovery
The construction outlook for Europe is brightening, but there is a contrast between strongermarkets
in the north and theweakness still present in southern countries.
Scott Hazelton
reports.
T
he Euro zone’s economic recovery will
remain gradual, with tensions in Ukraine
and theMiddle East adding uncertainty to
an already difficult economic environment. Real
GDP looks to be growing at only lacklustre rates
this year.
Although there has been an improvement for
Spain, there is weakness in Belgium and Italy.
Even Germany is now showing only marginal
gains, despite a strong first quarter. On the plus
side,Eurozoneunemploymenthasdipped slightly
and employment and real wages are rising a little.
The Purchasing Managers’ Index (PMI) for
manufacturing suggests that output growth has
slowed and new order growth has stabilised.
IHS Global Insight expects further depreciation
of the Euro, which will improve manufacturing
competitiveness.
On the other hand, the services PMI has
climbed, reinforcing hopes that economic growth
is gaining traction. Since European economies
are typically more dependent upon services than
manufacturing, this is goodnews for construction
on balance. Low inflation suggests that the
European Central Bank (ECB) can sit tight and
wait for interest rate cuts and liquidity measures
to take effect, although further easing is unlikely.
On balance Euro zone real GDP is expected
to increase +1.0% in 2014, improving to +1.5%
in 2015 and +1.6% in 2016 with better than
expected prospects for Spain being offset by
weaker prospects for Italy andFrance.
By contrast, the UK economy is performing
well, with consumer spending and business
fixed investment driving growth. While the
manufacturing PMI confirmed a loss of
momentum, the PMI for the dominant services
sector showed buoyant growth for output,
incomingnewbusiness and employment.
Importantly for construction, the business
investment outlook is favourable, supported by
companies’ healthy cash positions, improved
profitability and easing credit conditions.
Businesses are currently investing to improve
productivity and develop new markets and
products. Over time, there will be an increasing
need to add capacity.
With this strength, the Bank of England is
likely to raise interest rates in the comingmonths.
Increases will be gradual, however, as the central
bank gauges the impact of rising rates in an
environment of high debt burdens and a strong
currency. IHSGlobal Insight’s UKGDP outlook
is for +3.1% growth this year, +2.8% in 2015
and +2.7% in 2016 – nearly twice the Euro zone
performance.
Constructiongrowth
Given thiseconomicoutlook, theview forWestern
Europe construction is one of improvement, but
with anaemic growth. After years of contraction,
total construction spending will expand +1.5%
in 2014 and offer about +2.2% growth over the
following three years.
Infrastructure spending provides most of the
impetus, as theneed for fiscal austeritydiminishes
and countries need to catch up on deferred
projects. Turkey, Germany and the UK lead
growth in this segment, but their growth rates are
not much higher than in recent years. The real
turnaround in infrastructuregrowth for the region
is a return tomarginal growth (or at least smaller
declines) in Greece, Ireland, Portugal and Spain
after the collapse seen in the crisis years.
While uninspiring in the early years of this
forecast, the non-residential structures segment
will goon to see the strongest growthwith average
annual increasesof+2.3%, over thenextfiveyears.
Over the same period, residential construction
will grow at only +1.8%.
Germany (+3.9%)offers thebestnon-residential
structures outlook in the near and medium
terms, withmost of its strength coming from the
manufacturing sector, although Germany will
also leadEuropean growth in the commercial and
institutional segments.
The UK (+3.8%) offers the second largest
growth innon-residential structures andoffers the
strongest growth inEurope in the office sector. A
further indication of the turnaround inEurope is
Ireland, with the fifth highest growth (+3.0%),
behindSweden (+3.4%) andTurkey (+3.3%).
Turkeyhasbecomeoneofthemoredisappointing
economies in Europe as political dysfunction has
increased risk and decreased interest in capital
expenditures, particularly from foreign investors.
Residential outlook
At +4.8%, the UK will be the leader as far as
residential construction growth is concerned,
followed by Turkey (+4.7%). Part of the UK
growth is a price effect, but the country is also
benefitting from housing policy decisions and
sustained economic growth that encourages
residential investment.WhileTurkey has become
less attractive as an investment economy, it still
offers Europe’s most attractive demographic
profiles and improving personal incomes.
On the other hand, residential overhang
remains in Spain, while fiscal policy and a lack of
consumer confidence is dragging on residential
construction inGreece andPortugal.All threewill
continue to contract in the near term, and even
five years from now will have smaller residential
construction sectors than they do today. While
Ireland is improving innon-residential structures,
it will take time for that to filter through to
consumers, and it will also see further residential
sector contraction.
Scandinavia will enjoy moderate growth in the
+2% to +2.5% range, although Norway will be
Total construction growth forecasts
2013
2014
2015
Average2013-2018 Average2018-2023
World WesternEurope
UnitedKingdom France
Germany
Spain Italy
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
