HCOB France Construction PMI: Activity Continues to Fall Sharply in France Amid Strong Drag from Residential Building

Key Findings:

• Construction work falls for sixteenth successive month
• Sharp and accelerated drop in new orders amid lower calls for tender
• Purchasing activity declines at quickest pace since December 2020

According to the latest HCOB PMI® data, compiled by S&P Global, French construction activity fell sharply during September as companies struggled to win new projects. The downturn in output volumes was especially sharp in the residential building sector, although strong declines were also seen for commercial and civil engineering activity. Purchasing activity fell rapidly as a result, while employment levels also declined.

The headline HCOB France Construction PMI Total Activity Index — which measures month-on-month changes in total industry activity — recorded 43.7 in September, well below the no-change threshold of 50.0 and therefore signalling a sharp contraction in activity levels when compared with the previous month. This was despite the fact that the headline index rose from 42.4 in August. Overall, the latest data marked a sixteenth successive month of contraction in French construction work.

All three types of activity monitored by the survey fell at the end of the third quarter. The fastest rate of decrease was seen in residential building, as has been the case since June. Although the contraction slowed since August, it was the second-fastest since last November. Lower activity levels were also recorded for commercial and civil engineering projects, with rates of contraction strong overall and slightly faster than seen in the previous month in both cases.

According to surveyed businesses, weak demand conditions were a key drag on activity in the French construction sector in September. The latest data signalled a sharp and accelerated fall in new orders. Overall, the rate of decrease was the quickest in four months. Some panel members mentioned they had fewer calls for tender.

Amid a faster deterioration in order books, French construction companies trimmed their purchasing activity at the end of the third quarter. In fact, the decline in buying volumes was the strongest seen since December 2020. With activity levels falling, surveyed companies commented on lower material requirements. Amid lower input demand, supplier performance stabilised during September.

French construction companies remained pessimistic towards the 12-month outlook during September, marking a third successive month of negative business sentiment. In turn, firms showed little appetite to expand their workforces, with employment levels contracting once again. The reduction in payroll numbers was moderate but faster than seen in August.

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Meanwhile, the latest survey data showed an intensification of cost pressures amid reports of rising prices for oi l-based products. The rate of input cost inflation was sharp and the quickest in four months.

Subcontractor data also revealed weakness across the construction sector as their usage continued to fall at a marked pace. While availability improved, their rates charged rose at the fastest pace in three months.

Commenting on the PMI data, Norman Liebke, Economist at Hamburg Commercial Bank, said, “The French construction sector is in a deep recession. All three segments – housing, commercial and civil engineering – are in contraction according to the PMI survey. While the housing sector stands out with its upward movement in September, it is still the segment with the sharpest decline overall.

“New orders plummeted, continuing the streak of below-50 data since April 2022. Weaker demand signals the risk of a further tumble in construction activity in the coming months. We expect construction to decline further in the fourth quarter of the year. Ultimately, this leads to construction output shrinking for 2023 as a whole.

“The French construction sector faces a complicated situation with rising prices and lower demand. Just like in the services sector, prices have risen at a faster pace in September due to higher energy prices. Higher interest rates have played their part in cooling inflation, but this has been through demand, and the lagged effects of higher borrowing costs mean the construction industry is likely to remain under pressure.

“Builders are cutting back on hiring. The trend of cutting jobs in the construction industry will keep going for some time before demand picks up again and activity increases. According to official data by INSEE, it looks like we have been at a peak of employment levels in the second quarter this year. The PMI data suggests that we will see a downfall in these numbers.”

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