Why recession is looming over German construction industry

Construction work being carried out on a site in Frankfurt, Germany. (Image: Lukassek via AdobeStock - stock.adobe.com)

Recession is looming over the construction market in Germany, as contractors and developers battle a combination of challenges exerting downward pressure on activity there.

Turnover among construction companies with 20 employees or more fell by 7.3% in real terms year on year in the January-May 2023 period, according to analysis by German construction industry body Bauindustrie.

Split down by different segments, building saw a 9.4% real terms year-on-year decline in revenue in January-May 2023 (stripping out the effects of inflation), while civils saw a 4.5% drop.

Forward indicators look even more worrying. Bauindustrie’s figures show a 14.7% decline in new construction orders between January and May 2023 compared to the same period a year before.

May also saw a month-on-month decline in new orders of 5.7%, making it the 14th consecutive monthly drop in new orders.

Revealing the figures late last month, Bauindustrie’s general manager Tim-Oliver Müller said the 14th decline in a row showed that the “downward pull has construction firmly in its grip”.

So what has caused the decline in the fortunes of Germany’s construction industry?

Bauindustrie, which represents medium- to large-sized contractors in the building and civils segments, put the situation down to a combination of rising interest rates, set by the European Central Bank (ECB), and price inflation that reared its head in the wake of the covid pandemic and the Ukraine war.

Speaking to International Construction, Peter Hingott, chief financial officer of German specialist foundation contractor Bauer echoed that view. “High inflation and material shortages, together with rising interest rates, are already leading to a downturn of the construction market in Germany, particularly for residential construction and real estate development. We are already noticing this in our geotechnical solutions segment and our business in the area of brownfield remediation.”

Hingott expects Bauer to manage to maintain its revenues for 2023, following a strong increase of 14% in the previous year but there is little doubt that the German construction market is challenging.

Higher prices and higher interest rates have contrived to put the brakes on housing construction in many different countries.

But Germany’s housing construction market had previously been running quite hot, with 295,000 dwellings completed last year against a government target to build 400,000 apartments to cater to a growing population which swelled by a million people in 2022.

Housing demand is set to moderate to around 320,000 apartments annually from 2023 to 2025..

But with interest rates and higher prices squeezing buyers out of the market, residential construction is seeing a precipitous decline from those high numbers.

Analysis of building permits for new dwellings in Germany provides a stark illustration of the problem.

Over the January to May 2023 period, the number of building permits for new residential projects overall declined 30.5%. Within that, there was a drop of 53.5% for two-family houses, a 35.1% fall in permits for one-family homes, and a 26.5% decline for multiple-family dwellings.

Civils drop and insolvencies tick upwards

The challenges don’t stop at residential construction either.

German construction companies have seen turnover for road construction projects decline by 10.1% in real terms between January to May 2023, accounting in large part for the 4.5% overall decline in the civils segment.

That, according to Bauindustrie, is because the vast majority of local infrastructure work, including roads, is procured by public bodies who budgets have been capped. That leaves them able to fund less construction work with their money in the face of inflation.

Meanwhile skilled construction workers are still in demand in Germany but that demand is starting to moderate. Figures show an average of 15,237 open posts for construction workers in 2023, down from 18,242 in 2022. But the number of unemployed in the sector has risen slightly over the same period, from 12,700 to 13,864.

And in the first four months of 2023, there were 437 construction company insolvencies, up 20.4% on the same period a year before, with companies active in new construction mainly affected.

Bauindustrie warned that companies are still ‘living’ on their order backlog. The decline in permits suggests that the situation is likely to worsen by the autumn.

Ways to combat recession

In response to fears of a looming recession in the German construction market, Bauindustrie is lobbying for more support for the industry from government and more investment in the housing sector.

It has set out a series of key points that it argues would give construction companies some breathing space in a difficult trading environment.

Those points include:

• Digitalisation of planning and construction permit procedures
• Hamonisation federal, state and local building regulations and planning law
• Interest rate reductions
• A more generous regime for investors that allows them to depreciate a greater proportion of their investments over time
• Promoting the use of repeatable, modern methods of construction to speed up construction schedules
• Access to discounted public land on which to build
• Federal subsidies for social housing
• A lowering of what it called “unnecessarily high standards” in construction when it comes to energy performance

Meanwhile, Reuters reported that politicians, ministries and the property industry will meet with Chancellor Olaf Scholz in September to try to find solutions to the problem.

Failure to find solutions could spell bad news for the German construction sector, as well as potentially exacerbate social issues around the shortage of housing, according to Bauindustrie.

“Residential construction is still in freefall. Price adjusted, 21.5% fewer orders were placed in May. For the first five months of the year, we are already at -32.1%. If something doesn’t change soon, we’ll not only run out of apartments but companies will also run out of work,” Tim-Oliver Müller warned.