IHS Markit Germany Construction PMI: Sector Sees Ongoing Supply Disruption, But Tentative Signs of Pressures Easing

Key Findings:

• New orders move closer to stabilisation
• Least marked downturn in supplier performance since March
• Input cost inflation remains elevated, but eases to six-month low

Latest PMI® data pointed to another lethargic performance from the German construction sector in September, with supply bottlenecks, capacity constraints and strong price pressures each continuing act as headwinds to activity and new orders. More positively, however, employment rose for the first time eight months, while the rate of input cost inflation retreated to a six-month low amid fewer reports of supply delays.

The headline IHS Markit Germany Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry output – registered 47.1 in September. This was still below the 50.0 no-change threshold but up from August’s 44.6.

The weakest-performing area of construction activity in September was civil engineering, which recorded a rate of decline that was little-changed from the previous month. By contrast, the downturn in commercial activity eased noticeably to the weakest since March, while work on residential projects moved closer to stabilisation.

Inflows of new orders in the construction sector remained subdued in September, with firms reporting difficulty securing new work due to a cost-driven rise in prices, as well as capacity constraints. That said, there were signs that the adverse impact of these factors were beginning to ease as intakes of new work declined to the smallest extent in just over a year-and-a-half.

Efforts by building companies to expand operating capacity saw employment levels rise – albeit marginally – for the first time since January. A lack of availability of sub-contractors remained an issue, however, with September’s survey indicating a further sharp decline. Consequently, there was further strong upward pressure on rates charged by sub-contractors, which rose to the greatest extent in the series history since 1999.

Constructors reported paying higher prices for building materials and products in September, particularly insulation, steel and timber. However, while remaining elevated by historical standards, the rate of purchase price inflation eased notably for the second month in a row to the weakest since March.

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The softening of the rate of increase in costs coincided with a further reduction in the number of German constructors reporting longer lead times on purchases from a record high May. That said, in a historical context, the latest data still pointed to severely stretched supply chains.

Indeed, material shortages were factor weighing on constructors’ purchasing activity during September. Buying levels have now fallen in each of the past five months, with the rate of decline showing little-change from that recorded in the previous survey period.

Looking ahead, German constructors on balance maintained a slightly negative outlook for activity over the coming year. Many firms reported concerns that higher prices – linked to supply chain issues – would curb demand. 

Commenting on the latest survey results, Phil Smith, Economics Associate Director at IHS Markit, said: “Supply bottlenecks, capacity constraints and rising costs all continued to take a toll on the German construction sector during September. Latest survey data showed ongoing sluggish trends in activity and new orders, as firms reported disruption from material shortages as well as a negative impact on demand from having to raise prices in line with higher costs.

“For some building companies, skill shortages remained an issue, with the survey indicating a sustained sharp decline in the availability of sub-contractors during the third quarter. Employment at constructors rose during the month, though only slightly.

“As well as reporting a record increase in rates charged by sub-contractors, the majority of building firms faced higher purchase prices for materials in September. However, the rate of input cost inflation has come down further from July’s all-time peak, while the number of businesses reporting longer lead times on building materials and products has dropped from the highs in the second quarter. These trends provide tentative signs of supply beginning to catch up with demand.”

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