6th October 2022

Key Findings:

Headline Total Activity Index sinks to 19-month low of 41.8
Soaring energy prices drive up input cost inflation
Expectations plummet amid deepening decline in new orders

Construction firms in Germany recorded a deepening downturn in activity and rising cost pressures in September, latest PMI® data from S&P Global showed. Elevated prices, combined with tightening financial conditions and a growing hesitancy amongst customers, weighed heavily on both demand and firms’ expectations – the latter sinking to a near-record low.

The headline S&P Global Germany Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – fell further into sub-50 contraction territory in September. At 41.8, down from August’s 42.6, the latest reading was the lowest since February 2021 – a month in which activity had been badly disrupted by severe wintry weather – and pointed to one of the worst performances over the past decade.

Activity fell sharply across each of the broad construction categories monitored by the survey. Housing activity saw the steepest fall, contracting at the fastest pace since April 2020. It was followed by commercial activity, although here the rate of contraction eased slightly. The final segment, civil engineering, recorded a sharp and accelerated decline that was the fastest since October last year.

Weakening demand for construction work was evidenced by a seventh straight monthly fall in new orders across the sector in September. Furthermore, the rate of decline accelerated sharply from the previous survey period to the quickest since May 2020. Reports from surveyed businesses suggested that customers were being increasingly put off by rising prices, higher interest rates and uncertainty towards the economic outlook.

September saw a renewed surge in price pressures across the construction sector, driven by the soaring cost of energy. Input price inflation accelerated to a three-month high and was well above the long-run series average since 1999 (although still below the record highs in 2021).

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Longer lead times on building materials and products remained a feature of the survey data in September. The incidence of delays even picked up slightly since August, amid reports of some suppliers scaling back production, although it was still the second-lowest in the past 21 months.

German constructors remained in retrenchment mode at the end of the third quarter, paring back both purchasing activity and workforce numbers, and at quicker rates. Buying levels fell for the sixth month running and to the greatest extent since February 2021, while the decline in employment – which likewise stretches back to April – quickened to the fastest since May 2020. September also saw a sharp and accelerated decline in subcontractor usage.

German constructors were much more pessimistic about the year-ahead outlook for activity Index in September than in the previous month, reflecting growing concerns about price pressures and the implications for interest rates and demand. Expectations were close to a record low, reaching a level not seen since the initial COVID-19 shock in early-2020.

Phil Smith, Economics Associate Director at S&P Global Market Intelligence, said, “Business conditions facing Germany’s construction firms got a whole lot worse in September, with the PMI data showing a deepening downturn in demand alongside an energy-driven resurgence in cost pressures.

“The survey showed the level of new orders across the construction sector falling at a rate rarely seen in over two decades of data collection, with demand for building work having weakened considerably in September under pressure from rising prices, higher interest rates and concerns about the economic outlook.

“Activity levels fell at a quickening rate, leading constructors to scale back not only purchases of building materials and products, but also employment, as they looked for ways to offset rising costs.

“After slowing quite noticeably in recent months as imbalances in supply chains showed signs of easing, the rate of input price inflation re-accelerated to a three-month high in September, boosted by the soaring cost of energy and possibly also by the scaling back of production by some suppliers.”

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