HCOB Eurozone Construction PMI: Activity Falls at Quickest Rate for Seven Months

Key findings:

• Sharper decline in activity as new orders continue to contract rapidly
• Input cost inflation lowest in over seven years
• Business confidence slips to lowest since December

The latest HCOB® survey signalled a sharp and accelerated decline in construction activity across the eurozone during July. The reduction was underpinned by a sustained and rapid fall in new order intakes. As a result, firms cut back on their buying activity again, and downwardly adjusted their workforce numbers. Weaker demand for inputs contributed to the most pronounced improvement in suppliers’ delivery times since March 2009, which in turn helped to ease cost pressure. Notably, input costs increased at only a fractional rate.

The HCOB Eurozone Construction PMI Total Activity Index — a seasonally adjusted index tracking monthly changes in total industry activity — dropped from 44.2 in June to 43.5 at the start of the third quarter, to signal a sharp and accelerated decline in overall construction activity. The pace of contraction was the sharpest seen in the year to date, and extended the current sequence of reduction to 15 months.

Underlying data revealed that construction firms in Germany recorded the steepest decline in activity in July, and one that was the quickest since February 2021. French constructors also saw a sharp fall in activity levels in the latest survey period, that was the second-fastest in the year to date. In Italy, construction activity decreased at a slightly faster, but still mild pace.

As has been the case since May 2022, all three broad areas of the eurozone construction sector registered lower activity during July. Leading the downturn was a rapid drop in home building construction that was the most severe since April 2020. Commercial work fell at the steepest rate for seven months, while civil engineering activity contracted at a solid pace that was little-changed from June.

The sustained decline in construction activity across the eurozone coincided with a further substantial deterioration in customer demand. New business fell for the sixteenth successive month in July. Although easing to the weakest since March, the rate at which sales declined remained historically sharp. Panellists often mentioned that a weaker economic environment, greater market uncertainty and higher interest rates had weighed on sales. German construction firms reported the fastest contraction in new work, followed by France. That said, in both cases rates of reduction softened from June. Construction companies in Italy meanwhile saw a slight rise in new orders for the second month in a row.

The level of buying activity at eurozone construction firms likewise decreased further at the start of the third quarter. The rate of decline softened slightly, but was nevertheless the second-quickest recorded since August 2022. Input buying dropped at weaker rates in Germany and Italy, with the latter seeing the weakest reduction in eight months. However, purchasing fell at the steepest pace since January 2021 in France.

The time taken for purchased inputs to be delivered to eurozone construction companies continued to shorten in July.

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Furthermore, the latest improvement in vendor performance was the most pronounced since March 2009. Germany registered a rapid improvement in lead times that was only fractionally slower than June’s record high. Supply chain performance meanwhile improved for the second month running in France, and at the fastest rate since January 2018. Italy bucked the wider trend, and recorded a modest deterioration in vendor performance.

The latest survey pointed to a further easing of cost pressures amid reduced demand for inputs and greater material availability. Moreover, the rate of input price inflation eased to a fractional pace that was the slowest in 89 months. Rates of cost inflation moderated in both France and Italy, with the former seeing the weakest upturn in 33 months. At the same time, construction companies in Germany registered the quickest drop in expenses since May 2009.

July data revealed a reduction in eurozone construction sector employment for the fifth straight month. The rate of job shedding eased from June’s more than three-year record, however, and was mild overall. Workforce numbers fell at softer rates in Germany and France. In contrast, Italian construction firms added to their payrolls for the ninth consecutive month, albeit only marginally.

When assessing the one-year outlook for activity, constructions firms across the eurozone remained downbeat in July. Notably, the degree of negative sentiment was the most severe since December 2022. Data broken down by country showed that business expectations hit a seven-month low in Germany while renewed pessimism was seen in France. Italian firms meanwhile remained upbeat about the year-ahead, although the level of optimism slipped to the lowest since February.

Subcontractor usage at eurozone construction firms continued to decline sharply in July. Concurrently, the availability of subcontractors rose further. Rates charged by subcontractors increased solidly, despite a further reduction in the quality of their work.

Commenting on the PMI data, Norman Liebke, Economist at Hamburg Commercial Bank, said, “The latest HCOB PMI data indicate that the Eurozone construction sector is in deep contraction. Construction activity has declined at an accelerated pace in all three sectors – housing, commercial and civil engineering. The housing sector in particular stands out negatively, weakening especially in Germany and France. In Italy, on the other hand, there is only a slight contraction.

“The discrepancy in performances between Germany and France on the one hand and Italy on the other has become more pronounced since the pandemic. New orders in Germany and France, for example, continued to decline due to weak demand, which is why construction companies have also hired fewer staff. In Italy, companies were able to record an increase in new orders and staff, albeit marginal.

“Price pressures are indeed easing. The index measuring input prices is hovering close to the neutral 50.0 threshold and is at its lowest level in over seven years. Additionally, the prices charged by subcontractors are also showing a visible slowdown, and increased at the weakest pace for two-and-a-half years.

“Higher interest rates have been cited by some surveyed companies as a significant area of concern for many months. This is evident in the business expectations index, which gauges optimism around the next twelve months, which has posted below the neutral level of 50 for the past seventeen months.”

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