UniCredit Bank Austria Industry Report:
Boom on Austria’s construction sites
- Brisk construction activity intensifies in 2018, the upswing affects all construction sectors
- Nominal sales growth in the construction industry of 12 per cent in the first half of 2018
- High demand on the construction labour market drives growth in wage costs
- Residential construction booming, 2018 continues above-average new building output
Commercial construction and civil engineering improve significantly on the weak results of the previous year
The construction industry in Austria has overcome a phase of weakness which lasted several years. After the sector’s nominal sales rose by 7.4 per cent to around 47 billion euros in 2017, the construction industry in Austria gained even more momentum in 2018. In the first six months of 2018, the construction industry recorded its best half-year result since 2007 in nominal terms, with sales growth of around 12 per cent. Although growth is expected to lose momentum by the end of the year, a nominal increase of 8 per cent over the 2017 result is expected for 2018 as a whole. “Our optimistic forecast for the sector is largely based on the fact that building construction will continue to make a strong contribution to growth in 2018 and civil engineering will also gain strength. In building construction itself, in addition to flourishing residential construction, commercial construction has picked up speed again in the last six months,” stresses UniCredit Bank Austria economist Günter Wolf.
The very good order situation, which reached a new record in building construction in the second quarter of 2018, also suggests that the high growth of the sector will continue in the second half of 2018. In addition, the number of construction workers is growing strongly and the business expectations of companies reported in the latest economic surveys have remained optimistic.
Construction activity to lose momentum in 2019
Weaker construction growth must be expected in 2019, above all because investment gaps in building construction and civil engineering have been at least partially closed in previous years - including in residential construction. In addition, the high level of capacity utilisation in the construction industry means that the increase in demand is reflected more strongly than in the past in higher prices, which in turn curbs demand. Finally, interest rates are expected to rise at least slightly during the coming year, with financing conditions losing their push factor, which has benefited the construction sector in recent years.
High demand on the construction labour market drives growth in wage costs
The current development on the construction labour market underscores the very good situation in the construction sector. The number of construction workers has been growing since 2016, with growth of 1.5 per cent over the past two years accelerating significantly so far in 2018. By July, around 3 per cent of new jobs had been created in the sector, as many as in the mid-1990s. At the same time, unemployment has fallen significantly: in August 2018, only 14,600 people in construction occupations were registered as unemployed, the lowest figure since August 2012.
At the same time, it is becoming more difficult for companies to find new workers; there is a significant shortage of labour on the construction market. Since 2017, the shortage of labour has been cited by more and more construction companies as the main reason for limits on construction activity. In addition, wage growth in the sector is accelerating. In 2017, gross wages in construction rose by 3.3 per cent, and in the first six months of 2018 they rose by as much as 6.6 per cent, the strongest increase since the first half of 2007.
Residential construction booming
In 2017, sales in new residential construction rose by 15 per cent to 6.1 billion euros, while sales in ancillary construction industries, which are often dependent on residential construction, rose by 8 per cent to 22.7 billion euros. In the first half of 2018, the sector as a whole lost almost none of its momentum. For 2018, a further recovery could be seen in the continuing above-average number of building permits issued in the first quarter and the high sales growth of more than 10 per cent through May.
“Overall, new construction in Austria is expected to reach over 62,000 new units in 2018, which would also reduce the existing excess demand on the domestic housing market. This does not mean that all supply gaps can be closed at the regional level, especially in metropolitan areas,” says Wolf.
In 2018, commercial construction and civil engineering will be able to significantly improve on the weak results of the previous year
In 2017, industrial and commercial construction was lacking above all in public contracts. Although private clients had already begun to invest more in construction projects in the previous year, the industry’s sales stagnated at 4.9 billion euros. The sector’s economy did not begin a broad-based recovery until 2018. In the first five months, construction companies recorded an average nominal increase in sales of 13 per cent in this sector. The very good sales result reflects the optimistic investment plans of Austrian industrial and commercial enterprises, which have significantly increased the share of their planned building investments. More than one-fifth of their total capital expenditure, or almost 2 billion euros, is earmarked for construction projects, the highest share in years. In addition, the current budget estimate of the federal government foresees an increase in investment expenditure by BIG, the Austrian federal real estate company, of more than 20 per cent in 2018 and 2019.
After several negative years, civil engineering sales recorded a slight recovery in 2017, with a nominal increase of 2.5 per cent. At around 8.7 billion euros, the industry’s sales reached roughly the 2013 level. It was not until 2018 that the industry’s pace of growth accelerated significantly, reaching a nominal 14 per cent by May. Most recently, companies again had an above-average level of optimism regarding their order backlog in August and they expect double-digit sales growth in civil engineering in 2018.
Optimism is supported by the expected additional expenditure for capital investments by ÖBB and ASFINAG, which, according to the budget report of the Federal Government, are expected to rise by 8 per cent in 2018 and by almost 15 per cent in 2019. Stronger growth drivers are also expected in the medium term from the energy industry, which has announced additional investments in network expansion and the expansion of renewable energy sources. Finally, the telecom industry has been accelerating the sector’s growth so far in 2018 and will probably also do so in 2019, with growth in capital expenditure planned as part of the Broadband Billion.
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0)5 05 05-41954;