Europe’s Construction Markets See Light at End of the Tunnel

Construction markets across Europe are poised for a gradual recovery in activity beginning this year, following a protracted two-year slump, Bain & Company forecasts in its new Building Blocks Construction Indicator.

Strengthening growth in activity in the infrastructure sector, which has been more resilient than other construction markets in the past two years, is projected to combine with a recovery in residential construction in most European countries, as well as a rebound in office development fuelled by demand for more sustainable spaces, to drive a recovery in Europe’s construction industry, Bain’s analysis shows.

The forecast recovery in European construction is expected to benefit from a very low starting position, after two years of declining activity, coupled with falling interest rates and inflation. In 2023 and 2024, construction businesses were hit hard by what Bain calls a “perfect storm” of multiple years of high inflation in costs for both labour and materials, alongside material supply constraints, resulting in a slump in construction demand. But Bain now expects the worst of these severe headwinds to abate, sparking a slow but steady recovery in demand.

The challenging conditions for construction over the past two years were felt consistently across most of Europe, Bain notes. But its analysis indicates some countries are closer to an inflection point and a sustained pick-up than others.

The UK construction market is set to be in the vanguard of the projected recovery, with strengthening activity expected from early 2025. Other markets are expected to contend with a longer period of weakened activity into next year, notably Germany, where particularly acute inflation for the industry in prior years has weakened consumer confidence and is therefore expected to forestall recovery until 2026.

The Nordics are expected to see the strongest overall growth in construction activity in the 2025-2027 period, meanwhile, with activity increasing by a robust compound annual growth rate (CAGR) of between 3% and 5% in the period. In the UK, construction activity is expected to see a CAGR over the same 2025-2027 period of 2% to 4%, with rates of 1.5% to 3.5% in France, 1%-3% in Italy, and 0.5% to 2.5% in Germany. 

The forecast growth is in stark contrast to the 2023-2024 period where Bain’s estimates show construction activity declined at a compound rate of 6.5% to 8.5% in France, 4%-6% in Italy, 3% to 5% in the Nordics, 1.5-3.5% in Germany, and 1%-3% in the UK.

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Adrien Bron, partner in Bain & Company’s Infrastructure, Construction and Building Products practice, commented: “In the current European construction landscape, talking about growth is almost taboo these days. Yet we see positive prospects for several construction sectors across Europe, developing over the next two to three years, and expect recovery in most construction market segments after the perfect storm the industry experienced over the past two years or more. The construction recovery will be fuelled by structural pent-up demand from the protracted period of declining activity as well as structural long-term drivers of demand from continuing urbanization, requirements for more affordable housing and more sustainable, efficient offices, and the ongoing need for investment in infrastructure renewal and modernisation.”

Infrastructure construction will continue to provide good baselines for stronger growth in the market through to 2027, Bain concludes. Activity is forecast to be underpinned by national budget commitments across countries for spending on an ageing infrastructure asset base requiring upgrades, as well as needed modernisation of Europe’s energy grids, and development of new fibre optic networks. Infrastructure construction activity in 2025-2027 is expected to grow at a compound annual rate of 2.5% to 4.5% in Italy as well as the Nordics, by 2% to 4% in the UK, by 1.5%-3.5% in Germany, and by 0.5-2.5% in France.

Office construction is also expected to see strong activity growth across Europe. This is expected to be boosted by new sustainability standards for office premises requiring both upgrades to existing building as well as new construction, as well as demand for ultra-modern spaces to help companies to attract and retain talent to their businesses, especially in light of hybrid work models that companies continue to experiment with and adjust. Office construction activity in 2025-2027 is expected to see compound annual growth of 2.5% to 4.5% in the Nordics, 1.5% to 3.5% in the UK, 1% to 3% in both Germany and Italy, and 0.5% to 2.5% in France.

Residential new construction is forecast to revive in 2025 to 2027 in most countries in Europe, except for Italy, Bain concludes. A renewed wave of construction is expected to be driven by strong structural demand in much of Europe. The Nordics, with compound growth in activity of 6.5% to 8.5% and France (5% to 7%) are expected to see particular strength. Activity in the UK is forecast to grow by 3% to 5% over the period. But Germany is projected to see a slower upturn in activity with growth of 0%-2% while in Italy this sector is expected to see further contraction of up to 2%. New residential construction in Italy is expected to be weakened due to after-effects of a boom in the sector’s activity from 2020 to 2022.

Bain’s new Building Blocks Construction Indicator also includes spotlights on two key markets outside Europe, in India and Saudi Arabia, which provide attractive pockets of growth for the sector. 

In India, the construction sector is expected to see strong activity, with compound annual growth of around 9% in the period to 2026. After a slump in the India market during the pandemic, developments in infrastructure, particularly in transport and energy, are expected to lead the sector’s growth.

In Saudi Arabia, compound annual growth of 3.5 to 4.5% is projected in the period to 2026, also led by infrastructure, while a government push to increase home ownership is expected to spur residential construction and commercial construction is expected to be buoyed by the government’s ambitions to expand the kingdom’s role as a hub for leisure and tourism.

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