Around the globe
General economic overview
After a drop in growth in 2020 to -6.4 percent, the Eurozone rebounded with growth of 5.3 percent in 2021 (IMF April 2022). European governments have made varied interventions to keep their economies growing, including investment incentives and tax breaks. However, new challenges are acting as a brake on progress.
The January IMF forecast for 2022 was for further growth of 3.9 percent in 2022, but this was significantly reduced in its April report to 2.8 percent. Russia’s war in Ukraine is leading to shortages of factory inputs supplied by both nations, as well as exacerbating ongoing port bottlenecks and shortages of truck drivers, which is all serving to extend the duration of the recovery.
Inflation in the Eurozone area surged to 8.1 percent in the year to May 2022 with energy prices 44.7 percent higher than a year ago. The Euro area unemployment rate was down to 6.8 percent in February 2022 with solid improvements in Spain (12.8 percent), Italy (8.6 percent) and France (7.5 percent). German unemployment has decreased to pre-pandemic levels of 5 percent and job vacancies are rising, but the war in Ukraine is weighing on business confidence which has fallen to a 14-month low.
Ireland was one of Europe’s best performing economies in 2021. The economy grew by 11 percent in the year to March 2022. Employment levels are 150,000 higher than pre-COVID, and unemployment is down to 4.7 percent. Cost of living pressures are increasing with inflation reaching 8.2 percent in May; however, this remains slightly below the UK and the majority of other Eurozone countries.
Construction sector performance
The construction sector is running hot across most countries in Europe as they strive to complete the backlog of projects put on hold during the pandemic. They face a perfect storm of inflated material prices, shortfalls for key manufacturing inputs and labour shortages. This backdrop is driving high rates of tender price inflation, in some cases of in excess of 10 percent per annum.
The German construction sectors have been strongly affected by price escalation, but all European markets are reporting higher construction cost increases than in previous surveys. Labour shortages are widely reported in all regions with plumbing and electrical trades especially undersupplied.
Efforts are increasing to work around the congestion in the supply chain, including early engagement with suppliers, seeking alternative materials, and more use of factory prefabrication. In February, the EU announced a €43bn plan to establish more semiconductor manufacturing in an effort to reduce dependence on Asian suppliers.
Credit for investment is not holding the construction sector back at present, although inflation is likely to cause higher interest rates later in 2022 and some projects with tight margins may be delayed. Similarly, higher construction costs could force some contractors into insolvency.
Despite rising inflation, construction is strengthening in most sectors including industrial manufacturing and logistics, and transport sectors across road, rail and air. The European data centre sector is booming with considerable investment flowing in from North American investors, in particular.
Major German cities, including Hamburg and Berlin, are especially active in the commercial fit-out sector where businesses are experimenting with the changing economics of having more staff working from home. Munich remains attractive as a European base for tech companies with projects from Apple, Microsoft, Google and Amazon. It is a similar story in Dublin, which has recently attracted a range of new tech occupiers including TikTok who kicked off a new Irish campus development in 2021.
The Netherlands and particularly Amsterdam continues to be a magnet for global business with the likes of Uber and Amazon delivering major fit-outs in this market in recent years. The latest quarterly figures show that the commissioning of office space in the Netherlands in the first quarter of 2022 amounted to 185,000 square metres, on a par with Q1 2021, showing the sector’s ongoing resiliency.
In Stockholm, the corporate occupier market is strong, being driven by shortages of floor space. The technology and manufacturing sector is also strong, but Sweden is highly reliant on migrant labour, so skills shortages are a problem.
Switzerland has less demand for office space, but pharmaceutical projects are leading the construction sector. The housing sector in Switzerland saw the highest number of new houses built in the last 20 years. There are also plans for a new CHF5bn rail link between Zurich and Italy. In France, “Le Grand Paris Express” is a major expansion to the rapid transport rail system. The 2024 Olympic village is France’s largest construction site measuring 175,000 square metres.
Progress of the environmental agenda
In common with many industrialised nations, Germany increased its carbon emissions as the country emerged from the pandemic. As the largest European economy, it is significant that Germany is introducing legislation to require 100 percent renewable energy by 2035 in the production of electricity. This is a major goal in a country where 43 percent of electricity still comes from fossil fuels and which is closing all its nuclear power plants. It is also remarkable, given Germany’s heavy reliance on Russian gas, but the war has increased the urgency of moving away from this to improve energy security and reduce emissions.
Meanwhile, the uptake of electric vehicles in Europe continues to grow, with Europe being the largest market globally. The European Union is introducing “zero emissions” zones in several urban areas and financial incentives which have helped push the EV share of car sales to 11 percent of the total.
At a time when all the signs were positive for further recovery coming out of the pandemic, there are significant obstacles ahead for construction and growth. Labour skills shortages, supply chain disruptions and inflation are likely to continue for much of 2022. Furthermore, Russia may choose to limit energy supplies in retaliation for sanctions, or Germany may choose to join a European energy embargo. In either case, the result looks set to create difficult conditions ahead for Europe’s largest economies which face an energy shortfall.
Additional LNG, or alternative energy sources, and more use of renewables take time to implement, so it is possible that some form of energy rationing may need to be undertaken. Even if the energy shortfall turns out to be manageable, rates of inflation are increasing well above target levels and higher interest rates are becoming more likely. As a consequence, this would dampen demand and growth could slow significantly by the end of 2022.
Current tendering condition
Future market outlook
“The construction sector is running hot across most countries in Europe as they strive to complete the backlog of projects put on hold during the pandemic. They face a perfect storm of inflated material prices, shortfalls for key manufacturing inputs and labour shortages.”
Martin Londra, Managing Director
Top three regional
of respondents said that excessive lead times had a significant or high impact on the delivery of construction projects
of respondents said that rising costs of construction had a significant or high impact on the delivery of construction projects
of respondents said skilled labour shortages had a significant or high impact on the delivery of construction projects
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