6th October 2020

Key Findings:

Total industry activity contracts at faster rate
Continued decline in new orders sees constructors extend job cuts
Sentiment towards future activity remains negative

Latest PMI® survey data from IHS Markit showed a fresh setback for the German construction sector, with total industry activity falling at a faster rate in September. Furthermore, amid an ongoing decline in new orders and pessimistic expectations for activity over the year ahead, building companies continued to scale back workforce numbers during the month.

After rising in each of the previous four months, the headline seasonally adjusted IHS Markit Germany Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry output – slipped to 45.5 in September from August’s 48.0. This was the lowest reading for three months, although it remained notably higher than those seen between March and June.

The main drag on total industry activity in September was from the commercial building sub-sector, where work fell sharply and at the fastest rate for three months. Civil engineering activity also remained in contraction, albeit with the decline easing to the weakest since February. The only bright spot was housing activity, though even here data showed the softest growth for three months.

Undermining the construction sector’s performance was a continued decline in new orders. Surveyed businesses often commented on a reluctance among clients to commit to new projects, often linked to the coronavirus disease 2019 (COVID-19) pandemic. September’s decrease in order book volumes was marked and broadly in line with those seen in July and August.

Constructors reported worries about the pandemic’s potential impact on client investment over the coming year. Accordingly, expectations towards future activity remained pessimistic, with sentiment even falling – albeit slightly – for the first time in six months.

Amid this backdrop, September saw a seventh straight monthly decrease in construction sector employment. The pace of job shedding was the quickest for three months, though still slower than seen throughout the second quarter. Building companies also reduced their use of subcontractors.

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Demand for construction materials and products fell further at the end of the third quarter. The decline in purchasing activity was slightly steeper than those seen in July and August, though still relatively modest compared with the rates of reduction recorded during the peak lockdown months. Lead times on inputs meanwhile deteriorated, and to the greatest extent since May, with anecdotal evidence highlighting ongoing supply issues related to the pandemic.

Turning to costs, latest data showed a slight uptick in the rate of purchase price inflation faced by German constructors to the highest since March. That said, it remained mild by historical standards. Similarly, September saw a marginally faster, but still only modest increase in rates charged by subcontractors. Improved availability was a factor weighing on sub-contractors’ pricing power.

Phil Smith, Principal Economist at IHS Markit, which compiles the survey, said, “Construction activity had looked to be stabilising, so the drop in the PMI to a three-month low in September comes as a disappointment and shows the sector is not quite out of the woods yet.

“The downturn in the PMI owed almost entirely to a sharp reduction in commercial activity, with the current environment causing businesses to think twice about commissioning new work. Tellingly, constructors aren’t confident of a turnaround any time soon and remain pessimistic about the outlook for activity. Housing activity remains the only real positive.

“After years of rising employment in the constructor sector, the survey has pointed to a sustained period of retrenchment. There’s also less work for sub-contractors, which, for one thing, is helping to limit rises in fees and thereby overall costs for construction businesses.”

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