Key findings:
- Further marked drop in new orders drives stronger output fall
- Sharper falls in employment and input purchases
- Input costs rise at slowest rate since last October
The eurozone construction sector remained firmly in contraction territory in March as activity fell sharply again according to the latest HCOB PMI® survey data. The decrease in output quickened slightly on the month, and continued to be driven by substantial contractions in housing activity, which was once again the worst-performing of the three monitored segments. The downturn was led by weak demand conditions and a robust decline in new business. Lower new orders sparked a further round of job shedding, as employment fell at a sharper rate. Retrenchment and cost-cutting were also reflected in a steep contraction in input buying and reduced subcontractor use. That said, cost burdens rose at the softest rate in five months.
The HCOB Eurozone Construction PMI Total Activity Index — a seasonally adjusted index tracking monthly changes in total industry activity — posted at 42.4 in March, down slightly from 42.9 in February. The latest data was indicative of a steep decrease in total output at the end of the first quarter.
The decline in activity across the eurozone was driven by marked contractions in France and Germany, both of which recorded quicker declines on the month. Only Italian construction firms registered a rise in activity, though the rate of expansion was only fractional and unchanged from February.
The housing sector continued to weigh on total output and was the worst-performing sub-sector, recording the steepest reduction for seven months. Commercial and civil engineering firms also saw a decrease in activity, extending the current sequences to two years. Commercial activity saw the slowest downturn in output since last November, however.
Weak demand conditions across the eurozone construction sector continued to drive the overall downturn, as new orders fell again in March, Although easing from February, the rate of decline was marked overall and stronger than the series average. German and French firms registered substantial falls in new business, with Italy bucking the trend and posting a stronger upturn.
In line with new order inflows, eurozone construction firms cut their workforce numbers at the end of the first quarter. The pace of job shedding accelerated slightly though was modest overall. German companies continued to see a marked fall in employment, while French firms recorded the quickest reduction since last July.
Meanwhile input costs increased at a softer pace during March. Inflation of operating expenses eased to a modest pace that was the softest since last October. Italy saw a sharp rise in cost burdens that was nonetheless the softest for eight months, while German construction firms saw only a slight increase in input prices. France was the only monitored country to see an acceleration in cost burdens, though the rate of increase remained weaker than the series average.
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Construction companies showed further signs of retrenchment as input buying fell for the twenty-second consecutive month in March. The rate of decline was the strongest in five months. The downturn in purchasing activity was led by German firms.
In line with weak demand for inputs and lower purchasing activity, eurozone construction firms recorded only a slight deterioration in supplier performance. Lead times lengthened fractionally, amid a solid shortening in delivery times in Germany. This was offset by a marked deterioration in vendor performance in Italy.
Eurozone construction companies remained downbeat in their expectations for output over the coming year in March. The degree of pessimism also worsened since February. Pessimism worsened in Germany and France, while Italian firms expressed the strongest degree of optimism for seven months.
Subcontractor availability improved to the greatest degree in three months at the end of the first quarter, amid weak demand among construction firms. Moreover, subcontractor usage fell markedly and at the steepest rate since May 2020. A further month of decline in the quality of subcontractor work, as adjudged by monitored firms, was at odds with a marginal increase in rates charged. The pace of subcontractor charge inflation was, however, among the softest in the current 47-month sequence.
Commenting on the PMI data, Dr. Tariq Kamal Chaudhry, Economist at Hamburg Commercial Bank, said, “The performance of the construction sector in the Eurozone remains bleak. The Eurozone has been enduring a downturn for almost two years now. In comparison to the previous month, the situation worsened further in March, with an index value of 42.4. To see any signs of life from this beleaguered sector, interest rates would likely need to be cut promptly and significantly in Frankfurt.
“The housing sector is particularly suffering. Among the sub-sectors, housing activity seems to be the hardest hit by the persistently high interest rates and input costs, reaching one of the lowest levels in the past four years. Although the contraction in commercial and civil engineering activity is not as severe, the downturn in those areas also remains at a worrying level.
“Low demand, high inflation. While orders have increased slightly compared to the previous month, they continue to shrink at a significant pace in March. The overall feeble demand has even led to more job cuts in the sector, which is already suffering from a shortage of skilled workers. To make matters worse, the sector is also continuing to struggle with rising input prices.
“Italy stands out as a beacon of hope. Among the three largest economies in the Eurozone, Italy is the only country showing moderate growth in the construction sector. The downturn in economic activity across the Eurozone was driven by significant declines in France and Germany, both experiencing a faster contraction than in the previous month. Surveys indicate that pessimism has deepened in Germany and France, while Italian companies expressed the highest level of optimism in seven months.”
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