4th August 2023

Key Findings:

Total Activity Index falls further to 42.9 in July, signalling sharp downturn
Employment levels fall as construction sector outlook turns pessimistic
Cost pressures at weakest since October 2020

France’s construction sector continued to worsen at a considerable pace during July, latest HCOB PMI® data showed, with sharp declines seen for both new orders and activity. Employment levels were also reduced at the start of the third quarter, while expectations for the next 12 months were pessimistic.

Elsewhere, the latest survey data highlighted a further cooling of cost pressures, with input costs rising at the slowest pace since October 2020.

The headline HCOB France Construction PMI Total Activity Index — which measures month-on-month changes in total industry activity — recorded below the 50.0 no-change mark for a fourteenth consecutive month in July, indicating a sustained downturn in France’s construction sector. At 42.9, down from 43.7 in June, the latest survey data pointed to a sharp and accelerated rate of decrease in activity levels.

As was the case in June, residential building provided the strongest drag on total activity levels during the latest survey period. Housing construction fell rapidly and at the quickest pace since November 2022. Strong rates of contraction were also seen for commercial and civil engineering activity.

The latest survey data showed another considerable monthly fall in the level of incoming new projects received by French constructors. This was despite the rate of contraction cooling since June to the weakest since February. According to anecdotal evidence provided by panel members, restrained client budgets led to falling intakes of new business.

French construction businesses adjusted to lower workloads by reducing their purchasing activity during July. The volume of inputs acquired fell for the third month running and at the strongest pace for two-and-a-half years.

Additionally, French constructors lowered staffing capacity, extending the current sequence of job cuts to five months. The reduction in employment levels was solid and only marginally weaker than that seen in June, which was the strongest for almost two-and-a-half years. According to survey respondents, the drop in workforce numbers reflected redundancies, retirements and resignations.

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Looking ahead, French constructors turned pessimistic towards the 12-month outlook for activity after being neutral in June. Expectations of weak demand were noted by firms that foresee contraction in the coming year.

Meanwhile, there was a further easing of cos pressures faced by French constructors in July. The increase in average input prices was the softest since October 2020 and considerably weaker than that seen on average across nearly 23 years of data collection.

Finally, the deterioration in France’s construction sector had negative repercussions on subcontractors, with their usage declining at the fastest pace since January 2021. In turn, subcontractor availability improved, reducing pressure on their rates charged which broadly stabilised during July.

Commenting on the PMI data, Norman Liebke, Economist at Hamburg Commercial Bank, said, “The latest HCOB PMI data for the French construction sector bring grim tidings. The ongoing trend of contraction, lasting for more than a year, continued its unwanted visit in July. All three sectors – housing, commercial, and civil engineering – experienced shrinkage, with the pace of decline particularly accelerating in the civil engineering sector.

“It’s clear that the French construction sector is in a recession and the hard data confirms the central message of the HCOB PMIs. The construction sector will struggle in the near-term with continuous declines in employment and new orders highlighting the challenging outlook for construction companies. Indeed, companies turned pessimistic on balance again in July, with over one-quarter of respondents expecting lower activity levels. That said, with 20% expecting growth, negativity was limited.

“Nevertheless, the sector is facing the brunt of reduced market demand. In response, construction companies are adjusting and procuring less material in July. This is despite inflation of input materials continuing to ease and being at its lowest level since October 2020. The weak demand for construction materials should result in a further declining of inflation in the construction sector.”

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