Key findings:
- Total Activity Index at three-month low of 40.3 in March
- Slower declines in new orders, employment and purchasing activity
- Expectations – though still pessimistic – reach highest for over three years
Germany’s construction sector ended the first quarter still firmly in contraction territory, with the rate of decline in activity even quickening slightly amid a dearth of incoming new work, the latest HCOB PMI® survey results showed.
Building firms remained in retrenchment mode as they reduced both their employment and purchasing activity in March. However, the respective rates of decline were noticeably slower than the month before. This coincided with a further improvement in firms’ activity expectations, which were the least pessimistic for more than three years.
The HCOB Germany Construction PMI Total Activity Index – a seasonally adjusted index tracking month-on-month changes in total industry activity – came in at 40.3 in March. This was down from 41.2 in February and the lowest reading in the year to date.
Of the three broad construction categories monitored by the survey, the residential sector continued to exhibit the fastest overall rate of decline. Its pace of contraction in March was similar to those recorded in the opening two months of the year. Then it was commercial activity, which fell markedly and to the greatest extent since last December. Civil engineering also posted its worst performance for three months, but it remained by far the most resilient of the three sectors.
Demand was severely constrained across the German construction sector during March. This was attributed by surveyed businesses to a number of factors, including slow decision-making among customers, high prices and financing costs, and weakness in the domestic manufacturing sector. The rate of decline in new orders remained sharp, although it eased for the second month running to the weakest since last October.
Building companies in Germany trimmed their workforce numbers at the end of the first quarter, in line with the trend observed throughout the past three years. However, the pace of job shedding slowed sharply to its weakest since April 2023, signalling only a modest drop in employment.
The latest decline in constructors’ purchasing activity was likewise the least marked for nearly two years in March. On this front, however, the pace of contraction was still historically strong.
Lower demand for building materials and products helped to reduce pressure on suppliers and contributed to faster delivery times on purchases. Furthermore, March’s improvement in vendor performance was much greater than that seen in February and the most marked for six months.
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Average prices paid for purchases meanwhile ticked up slightly and for only the second time in a year. The rate of inflation was considerably slower than the average recorded over the series history, however. Constructors also reported an increase in rates charged by subcontractors.
Lastly, March’s survey showed a notable improvement in constructors’ expectations for activity in the coming year. Sentiment remained in negative territory, reflecting concerns over a lack of new orders, high price levels, tight household budgets and weakness in manufacturing. However, plans for a boost in infrastructure spending helped lift sentiment to its highest since February 2022.
Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said, “The sustained decline in activity in the construction sector may at first glance be surprising given the planned 500 billion euro special infrastructure fund. But of course it is much too early to expect a surge in growth just yet. What can be observed is that the index of future activity has jumped. However, it is still in the pessimistic zone, showing that companies are a bit sceptical about when and if the funds will actually be available. Things might look up once the coalition agreement is sorted and the new government is in place. The special fund is definitely a step in the right direction, giving companies some planning security and ensuring that public investment is not just a year-to-year decision.
“Across the board, things are not looking great. Residential construction, commercial real estate, and civil engineering all saw a faster decline in activity in March. Residential activity is under the most pressure, followed by commercial real estate. Civil engineering had shown some signs of stabilizing earlier this year but has taken another hit. However, this sector stands to benefit the most from the new infrastructure program. The approval of special funds means civil engineering companies can expect more follow-up projects, which should boost their willingness to maintain or expand their workforce and invest in new machinery. In fact, job cuts slowed sharply in March, hitting their lowest level since early 2023.
“The availability of subcontractors has risen again, indicating relatively low capacity utilization. This aligns with the 60% capacity utilization reported by Destatis. For once, this is good news for the German economy because it means that the planned increase in infrastructure spending will likely boost construction activity rather than just drive up prices. With the infrastructure fund decision, the conditions are in place for a recovery in the construction sector.”
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