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European construction markets are optimistic and UK market is no exception | Euroconstruct conference

European Union

There was something strangely counter-intuitive about the optimism emanating from the latest meeting of European construction economists in Amsterdam.

Especially for UK experts, worried about Brexit in the wake of the surprising and inconclusive general election.

Delegates were meeting under the auspices of Euroconstruct, the umbrella body that brings together market consultants and forecasting organisations from 19 European countries.

They gather twice a year and provide short- and medium-term forecasts for the main European construction market sectors.

Hotel

Hotel

The 83rd Euroconstruct conference took place at the NH Collection Grand Hotel Krasnapolsky, Amsterdam.

On the political front – and the health of construction is obviously closely tied to the political fates – the prevailing atmosphere was one of gloom and uncertainty.

Yes, there had been a successful push back against more extreme and protectionist forces in Germany, France and the Netherlands and the potentially negative impacts on business and investment.

But over the Atlantic, President Trump was showing no appetite for diluting his “America first” message.

And the British electorate had, in their infinite wisdom and for the second time in a year, decided to throw all available balls up in the air to see where they might land.

Yet the Euroconstruct output forecasts in Amsterdam in June were notably more optimistic than the last edition published in Barcelona last November, predicting real terms output growth of 7.5% by the end of 2019 compared with 2016, up from 6.5% previously.

A14 upgrade road progress

A14 upgrade road progress

Source: Highways England

Upgrades on the A14 road, England.

Given Brexit and the general election, the UK market attracted particular attention, but it was no exception to the prevailing upbeat mood, even if the analysis came with more caveats than elsewhere.

UK construction output is now predicted to grow in real terms by 4.3% by 2019 compared with 2016. Six months ago, that figure was 3.6%. The change is hardly a cause for unrestrained celebration – but it is nonetheless good news.

Most eye-catching within the UK forecast were the figures for road building. The UK roads market is already one of the biggest in Europe, but output is forecast to increase by 39% by 2019 over 2016 to €11.7bn, at 2016 prices.

“In the UK the picture for civil engineering is very positive,” said James Hastings, head of construction futures for Experian, who provide the UK market expertise for Euroconstruct.

“Last year, 2016, saw a bit of a hiatus in the civil market with Crossrail winding down, the amount of work coming through Network Rail’s capital investment programme slowing and delays on some big energy projects such as Hinkley Point nuclear power station.

Housing construction

Housing construction

Benchmarks on house building in the UK could be optimistic.

“But despite this, we see growth increasing as there are a lot of projects in the pipeline.”

Apart from Hinkley Point, these include the enabling works at the Wylfa nuclear plant, HS2, the Thames Tideway Tunnel and the huge Hornsea Wind Farm in the North Sea off the Yorkshire coast.

In road construction, the market is being buoyed by a number of major projects coming on stream, such as the A14 upgrade between Cambridge and Huntingdon, the M4 motorway upgrade and the A9 Perth to Inverness dualling project in Scotland.

As a result, Euroconstruct sees UK civil engineering output increasing strongly – by 3.8 per cent in 2018 and a massive 8.7 per cent in 2019.

Euroconstruct said that a strengthening UK civil engineering market will offset a slowing housing sector. But they also warned that the impact of a “hard” Brexit – their forecast is based on a “soft” outcome – allied to worsening skills shortages could yet mean their predictions are over-optimistic.

We are not expecting a recession in the construction industry, whether caused by Brexit or otherwise. 

Experian head of construction futures James Hastings.

The UK non-residential market – including office, retail and industrial building – is the sector most likely to be affected adversely by a “hard” Brexit. Even given a “soft” Brexit scenario, the sector is expected to grow by just 0.6% in 2018 and then contract by almost the same amount in 2019.

Hastings also warned of the negative impact on construction – directly and indirectly – of any significant tightening of immigration policy.

“The direct impact is the availability of skilled labour. Of course this is not just an issue in the UK but elsewhere in Europe as well.”

He said that around 13.5% of the workforce came from outside the UK, and 8.5% – or 182,000 workers – from the European Union.

“So a tighter immigration policy will inevitably exacerbate the skills shortage.”

Polish road infrastructure

Polish road infrastructure

Road infrastructure in Poland’s Swina Poreba area. Overall declines in civil engineering in Europe last year were attributed partly to eastern Europe.

Concern about skills also impacts Euroconstruct’s – and Hastings’ – view of the UK’s residential construction market, concluding that the politicians’ aspiration to build 250,000-270,000 new homes a year from 2020 onwards looks overly optimistic.

“We have not built that many houses since 1979 and that was when we had a major contribution from the public housing sector. So it looks like a very challenging target to get to that level and our forecasts do not support getting to that level,” Hastings added.

Such a major increase in house building will involve fundamental political and financial market support, for example by encouraging more small and medium-sized house builders to enter the market. The number of house builders registered with the National House Building Council has fallen by 50 per cent since 2007.

The UK also needs to boost the provision of social and genuinely affordable rented housing to cater for the large numbers priced out of home ownership.

“We are building 162,000 now and perhaps we can get to 200,000, but getting to 250-270,000 by 2020 would be a stretch.”

But despite these concerns, Hastings remained positive about the prospects for UK construction. “We are not expecting a recession in the construction industry, whether caused by Brexit or otherwise”.

And if we exclude Italy, we can see that in the remaining 17 countries the amount of construction activity exceeds pre-crisis levels.

Experian head of construction futures James Hastings

And paradoxically, the UK market may see an upturn beyond 2019.

“We think there may well be an upturn post 2019 when the Brexit uncertainty begins to come to an end. Businesses will deal with the situation when they know what it is, and some projects that have been held back will come through.”

In Europe as a whole, a similar picture emerges – a growing market driven by a strong civil engineering demand, although markets outside the UK will see stronger support from residential and commercial sectors.

Europe-wide, civil engineering is driven by expanding road, rail and telecoms markets with the latter benefitting from investments in fibre optic cables and the 5G investment programmes.

As a result, Euroconstruct is predicting real terms growth in civil engineering construction of 9.2% by the end of 2019, compared with 2016.

The root of their increasing optimism is the gradual recovery in the European economy since 2014, boosted by relatively low oil prices, the Euro exchange rate and the stimulus policies followed by the European Central Bank.

Dutch Economic Institute for Construction and Housing deputy director Oebele Vries hosted the conference, and says that last year, civil engineering was still in decline due to sharp falls in Euroconstruct’s four Eastern European markets – the Czech Republic, Hungary, Poland and Slovakia.

This had been caused by the delays in many infrastructure projects, especially in Poland, and the end of the last European Union funding cycle, but now they will be boosted by the start of a new funding cycle.

“Construction went through some very tough years after the financial crisis, but now the market is recovering again, and the European market is much more stable now than in 2007, before the crash, ” he said.

“When we look at the whole construction market in all 19 countries the level is still 15% below 2007, but when we exclude Spain there is a big change – for the remaining 18 countries we can see that the market has recovered from the crisis.

“And if we exclude Italy, we can see that in the remaining 17 countries the amount of construction activity exceeds pre-crisis levels.”

Some observers expressed concern that the German construction market – Europe biggest – is stagnating, but Vries stressed that although the figures for Germany predict very slow growth, the country did not suffer the sharp declines felt by some other states.

More important now is for Europe as a whole to develop a new “investment agenda”, he stressed.

“We should be looking at measures we can take to ensure that we do not suffer the cyclical variations we have in the past.”

Total Construction Output (% change in real terms)
   
          Forecast  

Country

2013

2014

2015

2016

2017

2018

2019

Austria

-0.9

-0.1

-0.6

1.3

1.6

1.4

1.1

Belgium

-0.9

1.5

1.7

3.3

1.1

1.5

2.0

Denmark

-0.1

3.2

3.7

4.5

2.2

2.7

3.2

Finland

-3.3

-2.2

2.3

7.6

1.7

-0.3

-0.1

France

-1.3

-6.0

-2.0

3.3

4.4

3.8

2.5

Germany

-0.6

1.8

0.4

2.4

2.0

0.4

-0.4

Ireland

1.8

9.9

8.5

12.5

7.0

6.8

9.4

Italy

-3.4

-2.2

0.8

1.9

2.3

2.2

2.1

Netherlands

-3.5

0.5

7.6

6.8

4.1

3.9

3.3

Norway

2.3

1.4

1.4

6.6

5.6

3.6

2.6

Portugal

-14.5

-1.0

3.5

-1.5

3.0

4.5

5.0

Spain

-18.7

-1.7

2.9

1.8

3.0

4.1

3.6

Sweden

0.9

8.6

5.3

7.1

8.1

2.9

-0.3

Switzerland

3.4

3.5

2.0

0.1

1.2

2.8

2.1

United Kingdom

1.6

8.6

4.2

2.7

1.3

1.3

1.7

Western Europe (EC-15)

-2.3

0.8

1.6

3.1

2.8

2.2

1.7

Czech Republic

-7.0

4.1

7.1

-5.8

0.0

4.9

8.3

Hungary

6.0

8.4

2.9

-20.1

19.7

16.0

9.3

Poland

-4.3

4.9

4.0

-4.7

4.9

6.5

5.0

Slovak Republic

-5.2

-3.5

18.5

-11.4

4.0

1.7

0.4

Eastern Europe (EC-4)

-3.9

4.6

5.4

-7.2

5.3

7.0

6.0

Euroconstruct Countries (EC-19)

-2.4

1.0

1.8

2.5

2.9

2.5

2.0

Source: Euroconstruct, June 2017

 

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