HCOB Germany Construction PMI®: Civil Engineering Activity Returns to Growth in June but Overall Construction Weighed Down by Housing Sector

Key findings:

• Total Activity Index ticks up to 44.8 in June
• Solid growth in civil engineering offset by slump in residential sector
• Input price inflation accelerates to 28-month high

Although Germany’s construction sector remained in contraction territory in June, the rate of decline in total industry activity slowed slightly and there was a renewed upturn in work across the civil engineering segment, the latest HCOB PMI® survey results showed. Residential activity remained the biggest drag on the sector, and the lack of new work in this area was also a concern for building companies when assessing the year-ahead outlook.

Cost pressures meanwhile continued to build across the construction sector at the end of the second quarter. The rate of inflation in prices paid for materials and products climbed to the highest since February 2023, while there was also a solid and accelerated increase in subcontractor rates.

The HCOB Germany Construction PMI Total Activity Index – a seasonally adjusted index tracking month-on-month changes in total industry activity – came in at 44.8 in June, up slightly from 44.4 in May. The latest reading was once again below the 50.0 threshold that separates growth from contraction, but it was the second-highest recorded in over two years behind April’s recent high.

Data showed considerable variation in trends at the sub-sector level. Civil engineering activity returned to growth for first time since August 2023. Moreover, the rate of expansion was solid and the quickest for more than three years. The decline in work on commercial projects meanwhile eased to the weakest for just over two years. By contrast, the housing sector recorded a sharp and accelerated decrease in activity that was the steepest for three months.

New orders across the German construction sector remained in contraction in June, albeit with the rate of decline easing slightly from the month before and being the second-slowest for more than three years. Reports from surveyed firms highlighted a lack of tender opportunities, with the high cost of having work done cited as a barrier.

A lack of work in the residential sector was a factor weighing on business confidence, anecdotal evidence showed. June saw constructors’ expectations towards future activity tick down from May’s recent high, when they had turned positive for the first time since the start of 2022.

Latest data signalled further decreases in both employment and purchasing activity across the German construction sector at the end of the second quarter. Whilst the pace of staff shedding slowed, the decline in buying levels was slightly quicker than the month before.

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Average lead times for building materials and products quickened in June, the fifth month in a row in which this has been the case. The extent of the improvement was less marked than that seen in May, however.

Purchase prices meanwhile rose for the fourth month running. Moreover, the pace of cost inflation was noticeably faster than in May and at a 28-month high. This was seen alongside the quickest rise in subcontractor rates in almost a year. The steeper increase in prices charged by subcontractors belied a sharp improvement in their availability – the most marked for nine months.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said, “The construction sector remains in recession, although it is not quite as deep as it was in the first quarter and for most of the two years prior to that. Residential construction is the sector that has been hit hardest, while commercial construction is showing the first vague signs of stabilisation and only civil engineering is seeing growth again. However, the expected upturn in civil engineering will not be enough in the short term to bring the sector back to growth overall.

“In civil engineering, the planned infrastructure package is already having an impact. The index has now risen for the third month in a row and, for the first time since August 2023, visible growth is now also being reported. This is not yet direct money from the €500 billion package, but it can be assumed that private companies, anticipating a surge in future projects, have an interest in completing existing orders quickly to make room for new ones.

“Rising construction costs weighed on the construction sector in June, with input price inflation increasing to its highest level in 28 months. The companies surveyed cited higher material costs and rising labour costs, which are being passed on to construction companies by suppliers. Accordingly, the rates that subcontractors are charging have also risen, even though their availability has increased significantly. Against this backdrop, the new German government’s decision to raise the minimum wage by more than 8% to €13.90 from January 1, 2026, will certainly not please companies in the construction industry.

“The confidence that seemed to be emerging in May turned back into pessimism in June. This is mainly due to the housing sector, where the recession has deepened again. The Housing Activity Index has now fallen for two months in a row despite an eighth interest rate cut by the ECB. This is also due to the fact that long-term interest rates remain relatively high, as the rise in public debt, among other things, is preventing a decline in yields.”

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