Eurozone construction sector sees 34 months of decline

The Eurozone's construction sector has been experiencing a prolonged downturn, with the latest data marking the 34th consecutive month of decline. According to the HCOB Eurozone Construction PMI, the index rose from 42.9 in December to 45.4 in January, indicating a continued contraction, albeit at a slower pace. Any figure below 50 signifies a decline in activity.

Germany and France, the Eurozone's largest economies, have been significant contributors to this downturn. The construction PMI for Germany improved to 42.5 in January from a dismal 37.8 in December. Despite this upturn, the sector remains under significant pressure.

France's index rose to 44.5 from 42.6 in December. The country saw declines in both housing and commercial construction activities, partially offset by growth in civil engineering projects. Companies have cited weak demand as a primary challenge, with many managers expressing pessimism about improvements in the coming year.

In contrast, Italy reported a modest increase in construction activity for the second consecutive month, offering a glimmer of hope amid the broader regional downturn. This resilience is noteworthy, especially given the challenges faced by its larger counterparts.

Economists are now describing the outlook for the Eurozone's construction sector as "bleak," noting that business expectations are at "rock bottom." The European Central Bank (ECB) faces challenges in this environment, especially with concerns about potential inflation resurgence driven by the services sector. HCOB Economics anticipates only two more rate cuts in the first half of the year, a move that could adversely affect the EU construction sector, as earlier market expectations had priced in more substantial rate reductions.

The crisis is profound, affecting all subsectors - residential construction, commercial construction, and civil engineering. High property prices, elevated interest rates and increased construction costs have also significantly hindered new residential projects. The residential renovation market is contracting, with declines observed so far this year and further reductions anticipated next year.

The commercial sector mirrors the residential downturn, with reduced investments and project delays becoming commonplace. Businesses are exercising caution amid economic uncertainties, leading to postponed or scaled-back commercial developments.

While civil engineering has shown some resilience, primarily due to public infrastructure projects, it is not entirely insulated from the broader downturn. Budget constraints and shifting governmental priorities are likely to impact the initiation and continuation of large-scale infrastructure projects.

Inflation and cost dynamics

However, there is a silver lining. The decline in demand is helping to suppress inflation. Price growth for both inputs and subcontractors has slowed, providing some relief to this beleaguered sector. Nevertheless, challenges persist. The construction sector continues to grapple with uncertainties stemming from international instability, political tensions and economic fluctuations. These factors have tempered expectations, leading to cautious optimism within the industry.

Looking ahead, there are some modest signs of recovery. The European construction sector is expected to see slight growth in 2025, with forecasts predicting a 0.5% increase following a 2% decline in 2024. Optimistic indicators have emerged, with monthly construction volume data showing growth in late 2024. Similarly, the European Steel Association (EUROFER) projects a 1.1% recovery in the EU construction sector in 2025, suggesting a gradual rebound.

While the Eurozone's construction sector remains in a prolonged downturn, recent data indicates a potential easing of the decline. Key economies like Germany and France continue to face significant challenges, but modest improvements and positive forecasts for 2025 offer a glimmer of hope. Stakeholders will need to navigate ongoing uncertainties carefully, balancing cautious optimism with strategic planning to foster a sustainable recovery.