Bears Give Way to Bulls In Germany

31 January 2007 (Last Updated January 31st, 2007 18:30)

European architects and contractors can look forward to three more years of strong growth. In addition, the German construction market will experience its first upturn for more than a decade, according to the latest forecasts from construction economists at Euroconstruct. Graham Anderson reports.

Bears Give Way to Bulls In Germany

According to predictions from Euroconstruct, by 2009 the European construction market will have grown in real terms year-on-year since 1993 – and by a staggering 17% since 2001.

Euroconstruct is a loose affiliation of research and forecasting institutes from 19 European countries (i). It meets twice a year to produce a unique set of reports on the state of the European construction industry, categorised according to country
and type of work.

The last meeting in December 2006 in Munich saw experts upgrade their predictions from the previous meeting in Amsterdam in June, when they predicted real growth of 6.2% from 2005 to 2008. Now they say the market will expand by 6.9% in real terms by
2008, and by a further 1.4% in 2009.

Germany is expected to recover from a fall of 3.6% in 2005 to post a rise of 1.6% in 2006, with a further increase of 1.2% predicted in 2007.

"Germany's upturn may not be huge, but the figures delighted the Bavarian minister of economic affairs."

The upturn may not be huge, but the figures delighted the Bavarian minister of economic affairs, Erwin Huber, who opened the meeting. "In Germany, everything has changed," he announced. "We now have bulls instead of bears. Finally, after so many years
of waiting, the economy is reviving. Indeed, we might even have to reforecast our numbers upwards."

Not everyone is quite so upbeat, though. Gebhard Flaig of the prestigious German IFO Institute for Economic Research warned: "The macro-economic framework produces a very positive picture, but there are risks – unexpected rises in interest
rates, oil prices, the stability of the euro."

Also, despite the feeling of optimism in Munich, Germany looks to have lost its crown as Europe's biggest construction market for the foreseeable future. It was overtaken by Spain in 2005 and is predicted to slip to third by 2009, losing out to the
UK.

CAN SPAIN'S HOUSING BOOM LAST?

Spain's boom has been fuelled by its strong residential market, which, like Italy, Ireland and Portugal, was given a huge fillip by the sharp cut in interest rates when it joined the euro.

In Spain's case, demand was further boosted by the second homes market, tourism and immigration. As a result, housing completions rose from 429,000 in 1996 to 718,000 in 2006 and are predicted to rise again in 2007 to 760,000.

"China is the only country that will be able to challenge the economic might of the US."

At that point, say the experts, the market will cool. But as Norwegian forecaster Bjorn-Erik Oye admitted, the experts have misjudged the Spanish market in the past: "We must admit that in our previous report we underestimated the appetite for risk.
The developers continued building, even though they knew demand would have difficulty absorbing their product, and the financial sector continued adjusting the money supply to the steady increase in real estate prices."

Aggregated, the European residential market is showing signs of slowing down, with the value of total growth predicted to fall from 3.7% to 0.5% in real terms from 2006 to 2009.

But those headline numbers conceal huge variations from country to country. The fastest growth is still in Eastern Europe, although that is slowing down quickly as well. For example, in 2005 Slovakia grew at 17.3%; by 2009 it is predicted to be
3.3%.

Of the big five in Europe, the UK is the clear winner, showing growth at a steady 3%-plus in the three years to 2009.

UK DOMINATING NON-RESIDENTIAL BUILDING

The figures for non-residential building highlight the dominance of the UK in educational, office, commercial and health-related building – all of which makes it the biggest market in this sector by some distance.

In fact, this looks set to continue; the UK is predicted to grow at 3.1%, 3.4% and 2.1% in 2007, 2008 and 2009, respectively, compared with 2.6%, 2.3% and 1.8% for the market as a whole:

Patrick de la Morvonnais from economist and forecaster BIPE said the UK's performance raised serious questions about the future of Europe's economy: 'In education, half of the total European market is represented by the UK. Demand was neglected for a
long time and now the UK has initiated a fantastic programme in this area.'

The UK office market is the largest in Europe – bigger than France's and Germany's put together – and looks set for another period of expansion. Euroconstruct predicts it will grow by a further 11% between now and 2009, with a similar
outlook for the commercial sector.

"Spain's boom has been fuelled by its strong residential market."

However, a bigger story perhaps is the forecast performance of Germany. After falling sharply for three years in a row, the market turned around in 2006, and is expected to show steady if unspectacular growth all the way through to 2009.

Overall, the non-residential market will show average annual growth of roughly 2.5%, at constant 2005 prices.

CIVIL ENGINEERING BOOMING

Although in value terms it represents just 22% of the total European market, civil engineering projects – roads, railways, airports – can have a huge impact on a country's economic performance, and hence the construction market as a
whole.

If that theory holds, there is reason to be cautiously optimistic about the construction industry's fortunes, as civil engineering is predicted to grow by 9% above inflation from now until 2009.

As in housing, the market leader is Spain, whose civil engineering output is almost twice that of its nearest rival, Italy, and is predicted to rise by an average rate of 4.8% in each year to 2009.

Germany's recovery has boosted its figures, as has the ongoing investment in Eastern Europe. And after four years of decline, the UK is experiencing growth, driven by investment in roads, energy and water.

WHAT NEXT?

Construction's prospects might look good in the short term, but there were warnings that Europe was lagging behind the US and rapidly being overhauled by the BRIC countries (Brazil, Russia, India and China).

"The UK office market is the largest in Europe – bigger than France's and Germany's put together."

According to Deutsche Bank chief economist Norbert Walter: "China is the only country that will be able to challenge the economic might of the US. In Europe, the countries that stand out will be those with dynamic population growth and a will to
improve education. The losers will be those that don't invest in human capital and don't have population growth."

And who will those winners and losers be? "The UK and France will gain in relative terms. Spain is going well. But Germany seems incapable or unwilling to improve its human capital."

So, while the big story is Germany's resurgence after years in the doldrums, it clearly still has plenty of ground to make up.

(i) The countries represented are: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland and the UK.