IHS Markit Germany Construction PMI: Supply Shortages & Price Pressures Continue to Impede Sector

Key Findings:

• Lack of available materials holds back activity in June
• Record rise in input cost adds to supply chain troubles
• Expectations towards year-ahead outlook remain

Supply bottlenecks impeded Germany’s construction sector June, contributing to further declines in output and new orders, as firms struggled to source materials and demand was impacted by surging price pressures. Employment remained in decline, as did the availability of sub-contractors. With many of these brakes on output expected to continue, constructors maintained a negative outlook for future activity.

The headline IHS Markit Germany Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry output – registered 47.0 in June. The decline in the activity signalled by the index was slower than in May (44.5), however, owing in part to a marginal rise in residential work following four months of decline. The drag from falling civil engineering activity eased, but this was offset by a steeper contraction in the commercial sub-sector.

Declines in activity were often linked to shortages of building materials and products. Constructors’ purchases were down for a second straight month in June, albeit only modestly amid efforts by some to build stocks. Furthermore, latest data showed a further sharp lengthening of input lead-times, with the number of reports of delays in the receipt of purchases second only to that seen in May.

Another factor weighing on activity was a continued decline in new orders at German constructors. The rate of contraction accelerated in June, showing the sharpest decrease for 12 months. A number of firms reported greater difficulty winning new business due to a cost-driven rise in their average prices charged. Capacity constraints were also cited.

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Construction costs continued to soar in June, with the rate of input price inflation edging higher and posting a new all-time record for the third straight month. Insulation, plastics, steel and timber were key drivers of the increase in costs, with each of these items widely reported to be in short supply.

June also saw a record rise in sub-contractor rates, adding to overall cost pressures. Meanwhile, the availability of subcontractors worsened during June, as has been the case in each month since November last year.

As well as a fall in sub-contractor usage, constructors noted a further reduction in employment at the end of the second quarter. The decline in payroll numbers was modest, however, and the weakest for three months.

Looking ahead, constructors’ expectations for activity over the next 12 months remained in negative territory. Material shortages and associated price pressures were seen as key threats to the outlook, anecdotal evidence showed, alongside the linger effects of the pandemic on demand. Firms were slightly less pessimistic than in April and May, however. 

Commenting on the latest survey results, Phil Smith, Economics Associate Director at IHS Markit, said, “Construction activity in Germany is being held back by supply bottlenecks. Not only are building firms reporting difficulty sourcing materials, but sellers’ market conditions across a range of products, from insulation and plastics to steel and timber, are driving up constructors’ expenses at the fastest rate for over two decades. Some customers in the market for building work are experiencing prohibitive costs for new projects as a result. “Housing activity remains a rare bright spot, while the strong drag from falling commercial activity continues. Even with the rest of the economy in recovery mode, constructors expect conditions to remain difficult over the next 12 months.”

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