Further increasing material shortages

The outlook for construction in the European Union has changed. Back in September last year, we noted in our EU construction outlook that supply chain disruptions, due to the Covid-crisis, were decreasing the supply of building materials. This was just as construction output bounced back after the first wave of the virus. This resulted in shortages and price hikes.

In August, a record percentage (18%) of EU contractors indicated lower production due to a lack of building materials or at least a delay in their delivery. This percentage shot up (29%) in January 2022, with the highest shortages in France and Germany.

New French regulations cause material shortages

In France, most contractors are faced with high material shortages compared to other main European countries. As French construction volumes haven’t fully reached pré-corona levels yet, strong demand isn’t the whole narrative. France has recently implemented a new law requiring half of the materials used in public buildings to be timber or other bio-based materials. This leads to increasing demand for these specific materials and shortages, especially as timber is still scarce.

Supply chain disruptions in other countries

Shortages are also high in Germany, Austria and the Netherlands as production levels, and therefore demand for inputs are, and have remained high, in these countries. We expect that building material shortages will continue for a while, not least becuase of China’s ‘zero-Covid’ strategy and restrictions put in place to contain the virus in cities and ports that are very important to global production chains. However, there are very few construction firms that mention a shortage of building materials in Belgium, Spain and Turkey.

Higher sales’ prices

Supply chain disruptions and higher energy prices lead to higher building material prices. This puts pressure on profit margins and building companies are therefore passing through price hikes to their sales prices. This results in a record number of building companies that are planning to increase their prices at the beginning of 2022.

On balance, 36% of EU building firms plan to increase prices in January 2022. This is the highest percentage for the last 20 years. German, Austrian and Dutch construction firms, in particular, expect to raise their sales price. These are the same countries that face material shortages due to high demand as we discussed above.

EU Construction confidence indicator positive

Despite price pressure, business confidence at the beginning of 2022 is positive among most contractors in the European Union and back to pre-covid levels. The highest values are registered in Austria and the Netherlands. Optimism among contractors in both countries was already high before the Covid-19 outbreak and recovered quickly after the first wave.

Furthermore, construction volumes in these countries were barely hit during the lockdowns as construction sites remained largely open. Spanish construction sentiment has been hovering around neutral in the last few months though order books are improving. In Turkey, construction sentiment in January withered away, probably due to high inflationary pressure at the moment.

Issuance of residential building permits stable

The issuance of residential permits is a strong indicator for future production. Huge housing shortages in many European cities ensure sufficient demand in the residential sector. The number of approved new home permits in the EU has been stable in the first three quarters of 2021. It has been hovering around the pre-corona level since the end 2019. We, therefore, don’t expect high growth figures in the EU residential building sector in the coming year. However, there are huge differences between countries.

Europe at a glance

France and Spain back to pre-Corona levels

Spain has made up for the decrease it faced during the first corona wave. In the third quarter of 2021, it has even issued slightly more building permits than at the end of 2019. Spanish new residential output can profit from this in 2022. French permit-issuing has made a comparable move, although recovery started a bit earlier.

Residential markets in Spain and France are also being boosted by the renovation market. France’s MaPrimeRenov scheme offers generous grants (circa 30% of renovation costs), and interest-free loans to help households to finance the job. In Spain, the Recovery Plan includes €6.8 billion for incentive measures for housing renovation, plus another €1.0 billion for public rental housing.

Stable permit numbers in Belgium, Germany and Austria

Residential permit issuance in Belgium, Germany and Austria has mainly been moving sideways in the last few quarters. All three countries, like many other European countries, have a strong demand for new houses but shortages of building land, high prices and time-consuming permit procedures constrain further growth. For Austria, the graph shows that the number of Austrian permits was still below the level seen at the end of 2019. However, this is due to a peak in Austria’s permit issuance in the last quarter of 2019.

Low growth infrastructure sector

The EU infrastructure sector has shown moderate growth (+1.5% YoY) in November 2021. This after almost no growth (+0.2% YoY) in the same period a year earlier. However, there are large differences between countries. The infrastructure sector in Spain for example showed a sharp decline as many construction sites were closed during the first lockdown and the sector wasn’t yet in a good shape from the aftermath of the financial crisis. However, Spanish infrastructure companies are at the beginning of 2022 positive about their future building activities, as Spain will be one of the biggest beneficiaries of EU Recovery and resilience funds.

Huge differences in the long run

In the whole European Union, production levels in the infrastructure sector have been quite stable for the last 10 years. However, it dipped a bit during the aftermath of the financial crisis when central governments were cutting budgets but caught up after that. The infrastructure volumes in Belgium, The Netherlands and France are also around the same level as 10 years ago.

In Germany, investment in rail and roads increased by more than 30% in the last decade. That is needed because German infrastructure is in a patchy state. For instance, the Tallbrücke Rahmede viaduct, which is part of an important highway through the Ruhr Area, is neglected in such a way that it’s impossible to renovate and has to be torn down and rebuilt. Despite the high growth rate, the infrastructure sector is still relatively small in Germany compared to many other European countries.

More growth expected for EU construction sector

In general, our EU Construction Outlook remains optimistic. Despite the shortages of building materials and structural shortages of labour, we expect further growth in the EU construction sector in 2022 and 2023. Building volumes can be boosted by new investments from the EU Recovery fund.

Ongoing housing shortages and high house prices provide structural demand for new residential construction. Furthermore, non-residential construction will see a rebound as the Covid-crisis fades, and entrepreneurs are less reluctant to invest in new company premises or renovate their existing properties.

The construction sector in Germany has been quite resilient during the Covid crisis. It was the only country that did not witness a decrease in construction volumes in 2020. However, construction output development was almost flat in 2021. Bad weather at the beginning of 2021 and pull-forward effects due to the termination of a VAT reduction at the end of 2020 hampered growth last year.

In addition, German contractors are among the most constrained by labour and material shortages at the moment. Nevertheless, we expect that German construction will resume growing. The growth of permit-issuing for residential building is moderate, order books are at their highest peak this century and supply chain disturbances will probably diminish in 2022.