Operating conditions across the French construction sector worsened further in August as activity was weighed down by weak client demand and a strong fall in new business, the latest HCOB PMI® data compiled by S&P Global showed. Despite sentiment among construction firms remaining downbeat, the pace of decline in employment slowed notably to the weakest in six months. Nonetheless, signs of retrenchment continued as companies reined in their purchasing activity further.
Higher prices for materials also weighed on input buying, as the rate of cost inflation accelerated midway through the third quarter. Although still slower than most of those seen over the last two-and-a-half years, the uptick in inflation was in conjunction with a renewed deterioration in vendor performance.
The headline HCOB France Construction PMI Total Activity Index — which measures month-on-month changes in total industry activity — recorded 42.4 in August, down from 42.9 in July, to signal the fastest contraction in total activity at French construction firms in 2023 so far.
As has been the case since June, the housing sector remained the worst performing of the three monitored construction categories. The sector was alone in seeing an accelerated decline in activity, and one that was the sharpest since May 2020. All three monitored segments remained in contraction, with commercial building firms recording the slowest decrease in activity.
Subdued client demand stemming from the impact of higher interest rates on customer sentiment and development opportunities, led to a further downturn in new orders in August. The rate of decline was the slowest since January, but historically steep overall.
Subsequently, firms continued to cut workforce numbers in August. Employment fell for the sixth month running, albeit at the weakest rate in this period. Job shedding was often attributed to the non-replacement of voluntary leavers.
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Additional signs of efforts to cut costs came in another sharp decrease in purchasing activity at French construction firms. The cutback in input buying was in part linked to higher costs for materials, with many companies also mentioning lower new orders.
The rate of input price inflation regained speed in August. Although slower than most of those seen over the last two -anda-half years, the increase in purchase costs coincided with a renewed deterioration in supplier performance. The extent to which lead times for inputs lengthened was the most marked since April, despite being only marginal overall.
French construction firms continue to expect lower output over the coming year, amid headwinds from higher interest rates and weak demand. Pessimism across the sector remained solid overall, with the respective index matching July’s reading.
Commenting on the PMI data, Norman Liebke, Economist at Hamburg Commercial Bank, said, “The French construction sector is in a deep recession. Official data from INSEE confirm the picture the HCOB PMIs were painting over the past months. The current situation remains difficult, especially for the housing sector as demand continues to decline due to past interest rate rises and a loss in purchasing power caused by inflation. The newest PMI reading shows a further deterioration of the sector in the third quarter.
“Higher interest rates are hitting the construction industry. This can also be seen in the employment situation and new orders, which have declined again. The decline in employment can be explained by the fact that voluntary leavers were not replaced as part of cost-cutting efforts, showing signs of the challenging economic environment.
“Input prices accelerated in August. Companies surveyed attribute this to supply constraints. This can also be seen in the PMI for suppliers’ delivery times, which fell below the threshold of 50. Suppliers’ delivery times should be closely monitored over the following months due to its potential of igniting the fire of even higher input prices.
“It is a gloomy time for the French construction sector. The companies surveyed remained pessimistic in August for the year ahead due to a challenging economic environment following the interest rate hikes characterized by higher refinancing costs, weaker client demand and high input prices.”
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