The eurozone construction sector continued its downward trajectory in August 2024, with the latest HCOB eurozone construction purchasing managers’ index report showing a sharp decline in activity across the region’s three largest economies: Germany, France and Italy. The PMI (purchasing managers index) total activity index remained unchanged at July’s six-month low of 41.4, indicating a sustained reduction in construction output. This marks the 28th consecutive month of declining activity, signalling a prolonged slump in the sector, the bank said on Thursday.
Decline in new orders
New orders fell markedly during the month, exacerbating the contraction in the construction industry. According to the report, the weakness in new business led to further reductions in employment and purchasing. This retrenchment was broad-based, with all three economies showing declines in housing, commercial and civil engineering segments. Housebuilding recorded the sharpest decline, with the reduction in activity the steepest since April 2020. Commercial construction output fell at the same rate as in July, while civil engineering activity saw the slowest decline, though it remained significant.
Weakness in demand
The downturn in the construction sector can be attributed to persistent weakness in demand. The report noted that new orders had now decreased for the 29th consecutive month. Although the rate of decline in new business eased compared to the previous survey period, it remained substantial. As a result, firms across the eurozone continued to scale back both employment and input purchases in August. Construction employment fell for the 18th straight month, with the most significant job cuts occurring in Germany, where employment fell at its fastest rate since May. Meanwhile, France and Italy saw only marginal declines in workforce numbers.
Purchasing activity in the construction sector followed a similar trend, decreasing for the 27th consecutive month. However, the pace of contraction eased to the softest level since April, though it remained marked. Despite the ongoing reduction in purchases, suppliers’ delivery times improved for the fifth consecutive month, driven by weaker demand for inputs. Germany reported the sharpest improvement in vendor performance, while French firms recorded the most significant improvement since December 2017. In Italy, lead times shortened for the first time since October 2012.
The continued decline in subcontractor usage mirrored the broader contraction in the sector, with the report noting the steepest fall since April 2020. As subcontractor demand waned, their availability improved markedly. Rates charged by subcontractors increased only marginally, with the softest rise observed in 2024 to date.
The HCOB Eurozone Construction PMI, produced by S&P Global and the Hamburg Commercial Bank, is based on monthly surveys of 650 European construction firms.
Cost pressures
Price pressures in the construction sector remained moderate, with a modest rise in input prices midway through the third quarter. The pace of inflation quickened to a six-month high, though it was still considerably below the long-run average, according to the report. German construction firms saw input costs decrease at the fastest rate in 10 months, while input prices in Italy and France rose at the quickest pace in three and eight months, respectively.
Despite some easing in pessimism, companies in the euro area construction sector remained generally downbeat about the year-ahead outlook. Both French and German firms maintained a negative outlook for future activity, although the degrees of pessimism were slightly reduced compared to the previous month. Meanwhile, Italian construction firms recorded their weakest growth expectations in two years, signalling further uncertainty ahead.
Monetary policy implications
The ongoing challenges in the eurozone construction sector, particularly the weakness in demand and continued decline in activity, come at a time when economic pressures are mounting across the region. Given the current economic and employment conditions in the three largest euro area economies, it is expected that the European Central Bank’s governing council, its rate-setting body, will face increased pressure during their meeting on Thursday 12 September.
The speculation that the ECB may opt to lower interest rates to address the rising borrowing costs faced by construction companies, as well as to reduce mortgage rates to stimulate demand for housing purchases is growing. Lower rates could provide a much-needed boost to both the construction sector and the housing market, which have been hit hard by rising costs and decreasing demand.