HCOB France Construction PMI: Activity Declines at Sharpest Rate for Three Years

Key Findings:

• Steep drops in residential and commercial building activity
• Downturn in demand for construction projects intensifies
• Firms cut workforce numbers as business outlook remains pessimistic

France’s construction sector remained mired in a deep downturn at the start of 2024, with the contraction in total activity worsening further to its sharpest for three years. Work carried out on all types of building projects fell in January, with housing and commercial construction activity exhibiting especially-notable slumps. The outlook was gloomy, with business confidence staying subdued amid a further rapid reduction in new orders.

Input costs faced by French constructors rose, albeit to the slowest extent since April 2020.

The headline HCOB France Construction PMI® Total Activity Index — which measures month-on-month changes in total industry activity — slid further into contraction territory during January, falling from 42.6 in December to 39.6. This was the lowest reading of the headline measure for three years and indicated a steep and accelerated decrease in overall activity levels within France’s construction sector.

All three types of building activity were a drag on the sector during January. After improving marginally at the end of the year, civil engineering projects fell moderately and at the fastest pace for three months. That said, it was in the other two areas of construction -—housing and commercial building —where weakness primarily stemmed from. Work carried out on residential projects saw the sharper downturn of the two, although commercial activity shrank at the fastest pace in over three-and-a-half years.

Volumes of incoming new business deteriorated rapidly in January. According to survey respondents, fewer calls for tender and high borrowing costs led order books at French constructors to shrink. The decline was steep and sharper than seen on average across the current 22-month sequence of contracting demand.

Expectations among surveyed companies were subdued, with many anticipating a further reduction in activity over the next 12 months due to weak demand conditions. Nearly one-third (32%) foresee lower construction work being carried out in the next 12 months, although this was slightly lower than in December (39%), pushing the HCOB Future Activity Index slightly higher from the previous month’s 44-month low.

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With activity requirements decreasing, and firms’ expecting this trend to persist, French constructors lowered their purchases of raw materials at the start of the year. The reduction was sharp, having accelerated since December to its fastest for just over three years.

Employment was also reduced in January, extending the current period of jobs cuts to 11 months. The decline in workforce numbers was moderate, but the steepest since last July. The non-renewal of temporary contracts was one method used by survey respondents to cut their headcounts.

Input prices rose further in January, although the rate of inflation cooled notably on the month to a 45-month low. This was despite supply-chain pressures intensifying, with average input lead times lengthening to the greatest extent since last April.

Commenting on the PMI data, Norman Liebke, Economist at Hamburg Commercial Bank, said, “The French construction sector is starting the new year poorly. Business activity declined for another month and at the fastest pace in three years. Weak demand is putting further pressure on the sector, as also shown by the new orders PMI. There is no recovery in sight either, with an outlook for the coming twelve months being dominated by pessimism.

“The recession in the construction sector is broad-based. Activity in all three segments – housing, commercial and civil engineering –declined in January. Activity in civil engineering fell moderately compared to the commercial and housing sector, where business is depressed. Official national accounts data confirm the picture the HCOB PMIs paint. High interest rates and rising prices are putting a lot of pressure on the sector.

“The Houthi attacks may also be having an impact on construction businesses. As seen in the corresponding PMI, suppliers’ delivery times worsened significantly in January. These delays are yet to affect prices, however, as input price inflation softened further. If the attacks continue, this might have an impact, although it should be relatively low compared to the supply shortage seen in 2021/2022.”

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