5th November 2020

Key Findings:

Headline PMI slips to four-month low of 45.2
Job losses continue as outlook darkens
Housing activity remains the only bright spot

Germany’s construction sector remained stuck in a downturn at the start of the final quarter of 2020, latest PMI® survey data from IHS Markit showed, with October seeing sustained declines in activity and new orders. With firms’ expectations also deteriorating, there were further cutbacks to both employment and purchasing activity during the month.

October saw a further slippage in the headline seasonally adjusted IHS Markit Germany Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry output – from 45.5 in September to 45.2, its lowest since June. It marked the eighth sub-50 reading in a row.

Lower levels of activity were recorded across both the commercial and civil engineering categories in October. The former contracted at a marked pace, but one that was slower than in September, while the latter recorded its steepest decline since July. Housing activity was once again the only category to see growth, rising for the fourth month in a row, albeit only modestly.

October’s survey continued to show a drop in new orders across the construction sector, which anecdotal evidence from panellists generally linked to the impact of the coronavirus disease 2019 (COVID-19) pandemic on client budgets and decision-making. Although slower than seen back in the spring, the rate of decline in order book volumes remained marked by historical standards and was little changed from September.

Concerns about the pandemic’s impact on investment going forward also weighed heavily on constructors’ expectations for activity over the year ahead. Sentiment, in fact, worsened for the second month in a row to the lowest since May, although it remained notably higher than March’s near record nadir.

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Falling workloads and a bleaker outlook for activity were reflected in a further drop in construction sector employment in October. It was the eighth decrease in payroll numbers in as many months, with the rate of job shedding remaining broadly unchanged from the solid pace seen in September. Data also showed a sustained decline in the use of subcontractors at the start of the fourth quarter.

The decline in purchasing activity among German constructors evident since March accelerated in October. Buying levels fell sharply and at the quickest rate for four months. Despite the drop in demand for inputs from constructors, lead-times on purchases continued to lengthen, and did so to the greatest extent since April.

On the cost front, latest data showed an increase in average prices paid for construction materials and products. However, the rate of inflation ticked down from September and was relatively low by historical standards. Charges levied by subcontractors meanwhile rose at the fastest pace since March, though the rate of increase was still comfortably below that seen before pandemic struck, partly weighed down by improved availability.

Phil Smith, Principal Economist at IHS Markit, which compiles the survey, said, “Construction activity in Germany lost further ground in October, with the PMI signalling a downturn that has now lasted eight months. The residential sector continues to defy the broader slowdown, but its rate of growth is slow and being offset by declines in both commercial and civil engineering activity.

“COVID-19 continues to weigh on demand for building work, and constructors have turned more pessimistic about the outlook for activity over the coming year through growing fears of its impact on investment among businesses, households and local authorities alike. This suggests the pandemic’s impact on the construction sector is set to linger on.”

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