5th September 2024

Key Findings:

Housing sector continues to weigh the most on construction activity
New orders fall rapidly and business sentiment remains pessimistic
Input price inflation accelerates to eight-month high

France’s construction sector continued to deteriorate at a rapid pace midway through the third quarter. Activity levels in al l three monitored segments fell, with housing once again seeing a substantial decline compared to the previous month. A lack of interest in new construction projects was also evidenced by a further sharp reduction in new orders. Purchasing activity and employment decreased in August, while business expectations for the next 12 months remained pessimistic.

The headline HCOB France Construction PMI® Total Activity Index — which measures month-on-month changes in total industry activity — was little-changed from July’s six-month low of 39.7. Ticking up only marginally to 40.1 in August, the headline index pointed to another steep month-on-month contraction in total construction activity midway through the third quarter. Nearly 39% of survey respondents reported lower work volumes during the latest survey period, compared with just under 7% that experienced an increase.

All three of the monitored construction segments posted contractions in activity during August. As has been the case since June last year, the housing sector was the primary area of weakness across the French construction industry. Residential building activity sank at a considerable rate once again. A sharp decline was also seen in commercial construction work, while civil engineering was the only segment to post an accelerated fall. The decrease in activity at the latter was the fastest for ten months.

Weighing on activity was a further drop in the volume of incoming new work placed with French constructors. Where lower demand was mentioned, firms commented on a general lack of interest from clients. While sharp, the pace of decrease in new orders was the weakest for three months.

French construction companies continued to reduce their purchasing activity during August, the sixteenth month running that this has been the case. The rate of reduction was slightly weaker than in July, which was the fastest in just over three-and-a-half years.

Amid shrinking new orders, employment across France’s construction sector decreased in August. However, the extent to which workforce numbers fell slowed to a marginal pace that was the softest across the current four-month job shedding sequence.

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Deteriorating construction sector conditions were also evidenced by other data compiled from the survey. Subcontractor usage decreased rapidly in August, boosting subcontractor availability by its strongest pace in over nine years.

Additionally, suppliers’ delivery times shortened to the greatest extent since December 2017, suggesting that spare capacity at vendors rose.

Nevertheless, despite less strain on suppliers, input prices increased at the fastest pace in the year-to-date during August.

Lastly, looking ahead, French constructors remained pessimistic towards the 12-month outlook for activity. Fears of a worsening in demand led some companies to forecast a contraction over the coming year, anecdotal evidence showed.

Commenting on the PMI data, Norman Liebke, Economist at Hamburg Commercial Bank, said, “There is no sign of improvement in the French construction sector anytime soon. The HCOB Total Activity Index remained at a level almost ten points below the expansion threshold. Constructors are struggling with weak demand due to restrictive interest rate levels and high charges. Significant interest rate cuts by the ECB are needed to revive the French construction sector. Unfortunately, we only expect one more rate cut by September for the rest of the year.

“The housing sector continues to weigh down construction activity. Although all three sectors – housing, commercial and civil engineering – are declining at a rapid pace, housing is performing the worst, by far. The downturn in civil engineering is the mildest of the three subsectors, but even here the decline accelerated notably in August. This is especially due to lower demand for large-scale infrastructure projects.

“French constructors are expecting tougher times ahead. Even though the corresponding Future Activity Index improved a bit in August, it was still well below the 50 mark and its historic average. This shows that builders are still feeling relatively down about the outlook, with sluggish demand being the main factor contributing to this gloominess.”

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