A construction site with new apartments in newly built condominiums.
Patrick Pleul | Image Alliance | Getty Images
The German construction sector has gone from bad to worse in recent months.
The economic data paints a worrying picture and industry leaders seem uneasy.
“The housing sector is, I would say, a bit of a crisis of confidence,” Dominik von Achten, president of German building materials company Heidelberg Materials, said on CNBC’s “Squawk Box Europe” on Thursday.
“There are too many things that have gone in the wrong direction,” he said, adding that the company’s volumes have fallen significantly in Germany.
According to data from the Ifo Institute for Economic Research, both current sentiment and expectations for the German residential construction sector fell to historic lows in January. The economic climate reading fell to negative 59 points, while expectations fell to negative 68.9 points for the month.
“The outlook for the coming months is bleak,” Klaus Wohlrabe, Ifo’s head of polling, said in a press release.
Meanwhile, the January construction PMI for Germany conducted by Hamburg Commercial Bank also fell to its lowest ever level of 36.3, after December’s reading was also the lowest on record. PMI values below 50 indicate a contraction, and the lower the zero, the greater the contraction.
“Among the broad construction categories tracked by the survey, real estate activity remained the worst performer, showing one of the fastest rates of decline on record,” the PMI report said.
The issue has also weighed on Germany’s overall economy.
German Economics and Climate Minister Robert Habeck said on Wednesday that the government is reducing expectations for gross domestic product growth in 2024 to 0.2% from the previous estimate of 1.3%. Habeck pointed to rising interest rates as a key challenge for the economy, explaining that these have led to a reduction in investment, especially in the construction sector.
Light at the end of the tunnel?
Ifo data showed the number of companies reporting order cancellations and lack of orders fell slightly in January compared to December. But even so, 52.5% of companies believe that not enough orders have been placed, which, according to Wohlrabe, is weighing on the industry.
“It is too early to talk about a turnaround in residential construction, as the difficult conditions have hardly changed,” he said. “High interest rates and construction costs do not make things easier for developers.”
Heidelberg Materials’ Von Achten suggested there could be at least some relief on the horizon, however, saying there could be good news on the interest rate front.
“I’m sure that inflation is really coming down now in Germany, perhaps thanks to the ECB [European Central Bank] actually the decrease in interest rates happened sooner than we all think and wait and see, and if that happens, obviously confidence will return as well,” he said.
Although interest rate cuts are a slow process, von Achten says that as soon as “people see the turning point” confidence should return.
Speaking to the German parliament on the economic outlook on Thursday, Habeck said the government expects inflation to continue falling and return to the target level of 2% in 2025.
The European Central Bank said at its last meeting in January that discussing rate cuts was “premature”, even though progress was being made on inflation. While the exact timing for rate cuts remains unclear, markets are largely pricing in the first decline to come in June, according to LSEG data.