7th November 2023

Key findings:

Worsening demand conditions spark faster drop in output
Input cost inflation picks up to five-month high
Input buying falls at sharpest rate in three-and-a-half years

Construction activity in the eurozone contracted at the sharpest pace in ten months in October, according to the latest HCOB PMI® survey data. In line with the trend seen for over a year, the housing sector remained a particular point of weakness. Driving the downturn in output was a marked decline in new orders, as demand conditions deteriorated. Although falling at a softer pace, the latest decrease in new business sparked the fastest contraction in purchasing activity since May 2020 and a further solid decline in employment. Meanwhile, business confidence worsened, with expectations at their joint-lowest since last December.

On the price front, input costs continued to rise, and at a quicker pace. That said, the rate of inflation was muted in the context of the series history.

The HCOB Eurozone Construction PMI Total Activity Index — a seasonally adjusted index tracking monthly changes in total industry activity — dropped from 43.6 in September to 42.7 in October, to signal the fastest decline in construction activity since December 2022.

The latest contraction extended the current downturn to a year-and-a-half, with firms in Germany and France registering a decrease in output. Moreover, German construction firms recorded the sharpest drop in activity since April 2020. Italy was alone in signalling growth in output.

All three monitored sub-sectors indicated downturns in activity, with the housing segment continuing to lead the decline. Rates of contraction also accelerated across the commercial and civil engineering sectors, with the two segments registering similarly strong declines.

Contributing to the further decline in total construction activity was a further decrease in new orders in October, with the current sequence of contraction extended to 19 months. In line with the trend for output, Italy was the only monitored country that recorded an expansion in new business. In contrast, Germany saw the sharpest drop in client demand for three-and-a-half years.

Input prices at eurozone construction firms increased further in October, and at a faster pace. Nonetheless, the rate of cost inflation was well below the series average and those seen earlier in the year. The pace of increase was the steepest for five months, however, as French and Italian firms recorded sharp upticks in operating expenses. German construction companies signalled a marked reduction in input prices, with costs falling for the sixth successive month. Despite historically muted increases in cost burdens, construction firms remained in retrenchment mode, as input buying fell at the steepest pace in three-and-a-half years. A rise in Italian input buying was insufficient to offset further contractions at firms in Germany and France.

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Lower input buying relieved pressure on supplier capacity, as lead times for materials were reduced for the sixth month running. The extent to which delivery times shortened was the least marked in the aforementioned sequence, however, as only construction firms in Germany registered an improvement in vendor performance.

Meanwhile, weak demand conditions led firms to cut employment again in October. The rate of job shedding was broadly in line with that seen in September and solid overall. Construction firms in Germany saw the fastest drop in workforce numbers since April 2020, while companies in France cut headcounts at only a fractional pace. At the same time, construction businesses in Italy recorded a further expansion in staffing numbers.

The reduction in new order inflows led to firms remaining pessimistic in the outlook for output over the coming 12 months. Eurozone construction companies recorded the joint-lowest degree of confidence since December 2022. At the country level, negative sentiment was driven by German and French businesses, as the former saw a marked level of pessimism and the latter registered the most downbeat expectations regarding future output since May. Although construction firms in Italy stayed positive, the degree of optimism sank.

In response to the sharpest drop in subcontractor usage since May 2020, their supply rose at the quickest pace in almost 11 years. The greatest reduction in demand for subcontractors was seen in Germany, where availability grew at the steepest rate on record. Nonetheless, subcontractor rates continued to increase, albeit at the weakest rate since December 2020.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said, “The eurozone’s construction sector is still in the doldrums. In October, total activity fell again significantly and this time faster than last month. Housing got hit the hardest, but commercial building and civil engineering also felt the pinch. New orders declined at a slower pace, but they are still waving a big red flag for new projects. Therefore, and fitting with downbeat business expectations, we are not holding our breath for a quick turnaround.

“The high interest rate sensitivity of the construction sector is unmistakable. Back in March 2022, when ten-year German Bund rates, the yield benchmark, began their serious climb, it took just two months for the eurozone’s housing sector to start shrinking, according to the PMI data. We reckon rates will stay elevated, but the European Central Bank (ECB) is probably done with its moves, and there are signs that long-term rates won’t be able to climb much higher from here. So, maybe next year, we will finally see the construction sector hit rock bottom before starting its recovery.

“Among the three big Euro countries, Italy’s construction sector seems to be dancing to its own beat. Instead of getting caught up in the downturn drama like Germany and France, Italy’s builders have made a comeback into growth territory. Their Total Activity Index reading of 51.8 is a world apart from Germany’s 38.3 and France’s 41.0. And it’s not some random fluke, because this solid number is fueled by growth across the board, in housing, commercial building, and civil engineering.”

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