Executive Summary

Residential construction is stumbling but still standing. As higher interest rates drive up mortgage costs, house prices have decreased significantly in Germany (close to -10% in Q2 2023) and decelerated in most other European countries and in the US. Residential building permits have also modestly declined in most countries for over a year now. In Europe, credit surveys suggest a dip in construction output similar to that of 2008 but survey data have already bottomed out and renovation activity remains supportive. In the US, new house builds are holding up, thanks to a tight supply of existing homes. Going forward, the sector should get a boost from the second quarter of 2024 as interest rates start to decrease and the macroeconomic backdrop improves.

Meanwhile, non-residential construction is reaching for the sky in the US while Europe lags behind. The Inflation Reduction Act (IRA) and the CHIPS Act have resulted in a significant rise in non-residential construction spending in the US. Manufacturing construction in particular has been growing very rapidly over the last couple of years, with spending up +62%y/y in September 2023, led by computer, electronic and electrical manufacturing, which has nearly quadrupled since early 2022. In Europe, however, non-residential growth has been sluggish. Infrastructure growth in the US is also outpacing that of Europe and this divide is likely to continue into 2024 as we expect stronger growth in the US over Europe.

Easing input prices are being somewhat offset by wage pressures but profitability remains solid. Prices of cement, concrete products and other soft products have decelerated. However, prices are still oriented upward: For instance, cement prices are still growing by over +17% y/y in the Eurozone. Wages are also growing as the sector grapples with labor shortages amid the still inflationary context. The latest data suggest wage growth for construction workers above +4% in all regions. Nevertheless, output prices are rising faster than input prices, both in the US and in Europe, supporting corporate profitability. Looking ahead, the outlook for both output prices and input prices is on the downside, which should preserve margins. However, the interest-rate burden will likely remain an issue, especially in Canada, Sweden, Norway and the US, where net gearing is above 75%.

Liquidity remains the issue for smaller players as insolvencies pick up in the sector. The construction sector is mainly composed of SMEs that face a longer cash-conversion cycle. These companies have been quite exposed to rising input costs and financing issues amid rising interest rates and tightening financial conditions. Consequently, in Western Europe, the construction sector keeps on posting a large number of business insolvencies, contributing to more than 20% of the national count when combining cases in pure construction and real estate activities in Germany, France, the UK and Italy.