Faced with rising energy costs, inflation and sluggish demand the European construction sector is braced for a negative landing in 2023, according to CIC-Market Solutions. With the autumn expected to see a modest decline in construction investments, Europe could well dip into a slight recession next year. CIC-Market Solutions has forecast a decline in construction investment of -1.1 per cent in 2023 following a post-pandemic high of 5.9 per cent growth.

The French analysts suggest that France will see the largest momentum fall of 2.7 per cent in construction investment. This is despite huge construction projects being underway, such as the Paris Expressway and complexes and infrastructure for the 2024 Olympic Games. The hike in interest rates is slowing residential construction and renovation, while short-term household spending on restoration and DIY is expected to fall away due to the lack of household purchasing power.

Meanwhile, Germany is forecast to see a construction investment decline of 1.8 per cent in 2023, states CIC-Market Solutions. Much of the difficulties for German industry will be around obtaining sufficient and price-competitive gas which makes up 40 per cent of the energy mix.

The UK is also expected to suffer a construction investment decline of 1.2 per cent as the housing sector is hit by higher interest rates to prop up the pound. Italy and Spain are also likely to return negative construction growth in 2023 of -0.9 and -1.9 per cent, respectively, according to CIC-Market Analysis.

The biggest decline in construction investment is expected to be seen in Finland, which could witness a -4.3 per cent fall in 2023, says CIC-Market Analysis. It is better news for Iceland and Greece, where construction investment is likely to grow by 1.5 and 1.4 per cent, respectively. 

Inflation, war, material shortages and low water levels
The causes for this disruption in the construction sector are widespread. Trevor Balchin, economics director at S&P Global Market Intelligence, said: "the latest downturn is being driven by a darkening economic outlook amid high inflation and uncertainty caused by the ongoing war in Ukraine."

Many construction companies are also reporting a shortage of materials. In April 29 per cent of companies in the sector admitted they were short of materials, while in August this remained high at 23 per cent, according to The Construction Index. A further problem is low water levels. Waterways remain a main mode of transport for many raw building materials, but low water levels on routes like the River Rhine mean barges cannot be loaded to full capacity. 

Margins squeezed
On top of these difficulties, building material companies are under pressure to increase prices following those already initiated in January and April-May 2022. Cement producers in France are expected to add EUR22-25 per tonne of cement in 2023 but could bring this forward to November if energy prices do not slow, says CIC-Market Analysis.       

This week, the European cement association, CEMBUREAU, also warned that European cement producers are at risk of increased competition from imports. The EU emissions trading scheme (ETS) puts European cement manufacturers at a disadvantage to producers outside the region. At Cemtech 2022 in Barcelona, Isidoro Miranda, CEMBUREAU president, said, "Today the EU industry is paying EUR8/t more to produce cement than countries outside the ETS." 

Incredibly, EU imports have risen by 300 per cent over the last five years, albeit from a low base, reports Eurostat. They now make 10 per cent of EU cement consumption.