6th June 2023

Key findings:

New orders fall at steepest rate since last December
Input price inflation cools to three-year low
Supply chains improve for first time since August 2012

The eurozone construction sector remained mired in contractionary territory during May, latest HCOB PMI® data showed. Activity levels fell for the thirteenth consecutive month as firms continued to signal weak demand for new projects, as indicated by the sharpest reduction in new orders since the end of 2022. In line with output, demand for inputs reduced further, which aided a further easing of inflationary pressures and a rare improvement in supply chains. Input prices rose at the softest pace since May 2020, while suppliers’ delivery times shortened for the first time since August 2012.

The HCOB Eurozone Construction PMI Total Activity Index — a seasonally adjusted index tracking monthly changes in total industry activity —dipped from 45.2 in Aprilto 44.6 in May to signal the sharpest monthly reduction in overall construction activity in 2023 so far.

By country, the steepest reduction in activity was in France, where activity has now fallen consistently for a year and at the sharpest rate for five months. German construction companies noted a similarly marked reduction, while Italian firms signalled the second-weakest reading in the year to date.

Underlying data showed a broad-based contraction across the three monitored sub-sectors in May. The strongest fall was in housing activity, while commercial construction work declined at the fastest rate in five months. The only sub-sector to report a slower contraction was civil engineering, although the rate of decline was still solid overall.

Both France and Italy saw reductions in housing and commercial activity quicken on the month in May, compared with a slight softening in contraction rates among German companies. Concurrently, firms in France signalled a renewed decline in infrastructure activity, as opposed to softer downturns among German and Italian firms.

New orders placed with eurozone construction companies declined for the fourteenth month running in May, with the rate of contraction the strongest since last December. Panel members often attributed the drop in new work to high economic uncertainty, while some firms noted that they had adopted a wait-and-see approach to new projects. Data broken down by country showed quicker reductions in all three monitored countries, led by Germany.

The seasonally adjusted Employment Index posted below the neutral 50.0 threshold to signal a further fall in workforce numbers at eurozone construction companies in May. The rate of job shedding was only modest but slightly sharperthan that seen in April. A number of firms mentioned the non-replacement of voluntary leavers as the key factor behind the latest round of job shedding. Employment levels at both French and German firms fell at faster rates in the latest survey period, while Italian companies signalled the strongest rise in staffing levels for three months.

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Eurozone construction firms signalled a twelfth consecutive decline in input buying during May. Notably, the rate of reduction quickened to a sharp pace that was the joint-fastest since August 2022. The steepest fall in purchasing activity was seen in Germany, while the drop at French constructors was the strongest in five months. Italy saw a sustained, albeit softer contraction in May.

Average vendor performance across the eurozone construction sector improved for the first time since August 2012 in May. The improvement was solid, and marked the greatest shortening in lead times since July 2009. France and Italy saw less widespread delays that were only mild overall. Germany bucked the trend by noting a third consecutive improvement that was the strongest in the series history.

The rate of input cost inflation cooled further midway through the second quarter, and was only moderate. Notably, the latest increase was the softest seen in three years. Anecdotal evidence suggested that raw materials prices were stabilising amid depressed demand. Companies in France saw the strongest price pressures, followed by those in Italy. German firms meanwhile saw input prices fall for the first time since July 2009.

Latest data showed a stronger degree of pessimism among eurozone construction companies regarding the year-ahead outlook. The degree of negative sentiment was the strongest since December 2022 amid concerns regarding the impact of cost inflation, rising interest rates and economic uncertainty. Pessimism was centred among German and French firms, while Italian companies were at their least confident since February.

The use of subcontractors at eurozone construction firms fell for the fourteenth month running in May, albeit at a softer rate than in April. At the same time, subcontractor availability improved to the greatest degree since November 2012.

Rates charged by subcontractors meanwhile continued to rise sharply, though inflation eased to a 27-month low. The sustained upturn in charges was despite a further solid reduction in the adjudged quality of outsourced work.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said, “Higher interest rates in the euro zone are taking their toll, causing a further decline in construction activity which, according to the HCOB PMI survey, has even accelerated in residential and commercial construction compared with the previous month. In civil engineering, which is more dependent on orders from the public sector and therefore less sensitive to interest rates, the index value increased marginally and is approximately at the long-term average.

“According to Eurostat, the weakness of the construction sector in the euro zone already began in the second quarter of last year, interrupted by a weather-related plus in activity at the beginning of this year, Eurostat figures show. A look at the PMI indices for the three major eurozone countries, Germany, France and Italy, reveals that the downturn is set to continue in Q2 and is particularly pronounced in France, closely followed by Germany, while in Italy the construction sector appears to be under somewhat less pressure.

“The further deterioration in the order situation coincides with the surveyed companies’ assessment that they will be building less in twelve months’ time than at present. Higher interest rates and tighter credit conditions imposed by banks are dampening demand, while falling house prices and the limited scope for rent increases due to the economic situation are making new projects less attractive for construction companies.

“The construction sector in the euro zone has probably not yet bottomed out. While the demand situation has deteriorated significantly, some companies were still able to profit from orders from the past. In this respect, a few more quarters of a construction recession can probably be expected.”

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