Sector Report by Bank Austria Economics:
After a good start to the year, growth in the construction industry has slowed again
- Production growth to fall from 4.8 per cent in 2011 to a maximum annual average of 3 per cent in 2012, bringing output value to EUR 30 billion
- New residential construction to serve as a pillar for the construction industry with an increase of roughly 6 per cent for the year; high price level persists in the real estate sector
- Decline in commercial construction: economic downturn dampening investment activity in the private sector; lack of projects from the public sector
- Civil engineering continues to struggle: segment's production output has been falling since 2008; a drop of up to 2 per cent is expected this year
The good news is that in 2011 Austria's construction industry was able to completely offset the losses caused by the recession. Construction output increased by 4.8 per cent to EUR 29.1 billion in nominal terms last year, which represents a return to pre-crisis levels. The bad news is that this positive trend will not last. Although construction activity was still upbeat in the first half of 2012, it will start to lose momentum again over the second half of the year due to the economic downturn. While the sector should still be able to deliver annual average production growth of 2 to 3 per cent in nominal terms, this will only translate to an increase of just under 1 per cent in real terms. This is the result of the latest Sector Report on the construction industry by Bank Austria's economists.
This news comes despite the fact that 2012 got off to a promising start for the construction industry: The sector experienced stable growth in the first half of the year, as evidenced by the full order books at the end of March and the optimism among builders. Weather-related work stoppages in February were quickly rectified, production output climbed by an impressive 8 per cent in the first quarter and employment increased by 1.1 per cent in the first six months of the year. However, growth rates became weaker and weaker as time went on, and unemployment figures rose by roughly 7 per cent in the first half of the year. Overall, construction activity is set to slow considerably in the second half of 2012. "Nevertheless, the moderate sector growth should be sufficient for the output value of the construction industry to reach the EUR 30 million mark," said Bank Austria economist Günther Wolf.
The results will vary considerably the among the individual segments: "Although new residential construction is also losing momentum in 2012, production output is still increasing by about 6 per cent. In contrast, commercial construction and building renovations will grow much slower than in the prior year, with growth of around 2 per cent and 4 per cent, respectively. And we expect to see a decline in production for the fourth year in a row in the civil engineering segment," said Günter Wolf, summarising the outlook.
New residential construction continues to grow in 2012
New residential construction in Austria increased by roughly 20 per cent in the first quarter of 2012, and – in line with the general trend – will lose momentum again over the course of the rest of the year. Nevertheless, the segment is expected to deliver a gain of 6 to 7 per cent compared to the prior year. According to Günter Wolf, "The demand for new housing remains strong in 2012 thanks to rising real income among private households and the persistently attractive financing conditions. In addition, the significant price increases on the Austrian residential market are a sign of an existing demand surplus in individual market segments." Over the last two years, prices for residential properties have increased by 8 per cent in Vienna and by 5 per cent in the rest of Austria. In the first quarter of 2012, the increase in prices accelerated to an average of 10 per cent on the Vienna real estate market and 11 per cent in the rest of the country. "The primary cause for the massive rise in the demand for real estate is the fact that private investors are looking for alternative investment opportunities, which is also a consequence of the uncertainty on the financial market. Against the backdrop of the very weak development of prices prior to 2005, the robust increase seen in recent years cannot be considered a bubble," said Wolf, describing the current developments on the real estate market.
Economic downturn putting the brakes on investment activity in the corporate sector
The construction of office, commercial and industrial buildings as well as public buildings such as schools and hospitals – cumulatively known as commercial construction – is expected to lose all of the momentum seen in the initial months of the year as the year continues. Order backlogs in the segment fell considerably already in the first quarter. And the lack of growth stimulus from industry is not the only factor contributing to this trend. "The commercial construction segment is suffering considerably from the weak investment activity on the part of companies. According to the investment survey from the spring, industry is planning to reduce investments in buildings by 16 per cent in 2012. In addition, new office construction is expected to diminish again following the record years seen in the past two years," said Wolf, describing the development of the construction industry. Along with the general economic downturn and the associated negative effects on investment activity in the private sector, the budget restrictions of public sector entities are playing a role in the very subdued development of this segment. After all, the construction of new public buildings contributes roughly a third of the segment's output value, which totals EUR 3 billion. In contrast, the demand for renovation services will increase further in both the commercial and residential construction segments.
Civil engineering continues its downward spiral – no improvement in sight
The civil engineering boom of the previous decade reached its climax in 2008, and the segment's production has been shrinking ever since. Unfortunately, the downward trend did not stop in 2011 despite the very good economic developments: The production output of the civil engineering segment decreased by an additional 3 per cent to EUR 5.5 billion, which makes for a total decline of 25 per cent since 2008. "Civil engineering will not be able to reverse the trend this year, either. We expect to see an additional production decline of roughly 1 to 2 per cent on average for the year. The robust growth in orders in the first quarter, which can be attributed to the construction of tunnels, will taper off again in the second half of the year," said Wolf with regard to the negative development of this segment. Companies in road construction – the largest segment of civil engineering – have not been able to pass on the significant price increases (5.5 per cent on average) seen from the beginning of 2011 to the end of May in their prices. This is a clear sign of the tense earnings situation and still unutilised capacities.
Public contracts are responsible for at least 60 per cent of the production output of the civil engineering segment, which means that the increased austerity measures in the 2011 stability pact will have a significant impact on production figures. For the period from 2012 to 2017, investments in railway infrastructure are budgeted at a level that is roughly 7 per cent lower than in the previous planning period. Investments in road construction will be reduced by nearly 25 per cent. In addition, the civil engineering segment cannot expect to receive any growth stimulus from energy and water utilities or the telecom industry in the coming years. On one hand, intense price and earning pressure is causing mobile communication providers to push back investments. On the other, the constant stream of investments planned by the energy industry in the coming years will only exceed the investment expenditures seen in recent years by a small margin. "Due to the unfavourable framework conditions at the moment, there is still no light at the end of the tunnel for the civil engineering segment," said Wolf in conclusion.
Enquiries: Bank Austria Press Office Austria
Julia Wegenstein, tel. +43 (0) 50505 - 52803
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