Economic overview
A year of contradictions
2023 was a year of contradictions, as the economy saw both escalation and stagnation. The material price escalation has now largely stabilised, and even some small regressions have occurred. At the same time, the number of construction contracts have continued falling, with approximately five percent fewer construction orders in 2023 compared to 2022. With 2023 being a year of flux, change that has been on the horizon has now started to materialise.
The German economy began 2023 with a slight escalation, followed by two quarters of stagnation before it decreased by 0.3 percent in Q4 - an overall decrease of 0.2 percent. Most experts estimate further stagnation in 2024, with the economy expected to start to recover again in 2025.
Source: Destatis
Source: Destatis
Germany is Europe’s biggest economy and yet is entering 2024 among the weakest. Germany was the only G7 economy that shrank during 2023. Predictions for the German economy in 2024 are either stagnation or slight growth. However, any growth is predicted to be at a slower pace compared to growth expected from other advanced global economies.
Both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) predict that Germany’s GDP will expand slightly in 2024, at about half of the predicted rate of the Eurozone and far below 50 percent of the average rate of the remaining G7 countries.
Inflation, as measured by the Consumer Price Index (CPI), has had a relatively consistent drop over 2023, starting at 8.7 percent in January and ending in December at 3.7 percent. The lowest value recorded was in November at 3.2 percent. In January 2024, rates slowed even further to 2.9 percent, the lowest rate since 2021. Tighter monetary and fiscal policies, as well as shaken consumer confidence will likely impact investment, with the knock-on effect being both constrained price and economic growth. Experts forecast that the CPI in 2024 could approach the Central Bank inflation target of two percent.
Source: Statista.com
In contrast, long-term interest rates rose steadily in 2023 between January and October, where they peaked at 2.82 percent. Two months of steep drops followed, before landing finally at 2.1 percent in December - the lowest point of the year.
Source: Ycharts
The interest rate from the European Central Bank (ECB) held steady in January 2024, although experts anticipate that falling inflation is expected to push the ECB into dropping their interest rates in 2024 – with the aim to avoid creating a recession in the euro area.
Meanwhile, the German labour market remains tight, with the unemployment rate remaining stable at around 5.7 percent in December 2023, averaging just below 5.7 percent throughout 2023, and jumping to 6.1 percent in January 2024. Experts forecast that the unemployment rate is expected to fall in 2024.
A lack of skilled labour across the construction industry is still being felt, with projects suffering from lower productivity and efficiency during the construction phase. The ongoing demand and lack of skilled EU migrants needed to counteract the country’s ageing construction skilled workforce in Germany, is also having an impact on project delivery.
Apart from the economic downturn, geopolitical instabilities, as well as challenges emerging from global events, such as the Red Sea shipping route disruptions, have started to impact both the German economy and the construction industry. The industry started to see a reduction in the number of new order contracts in 2023, which is approximately five percent less in comparison to 2022 (according to Statistisches Bundesamt (Destatis), 2024).
Source: Destatis
Contractors are also seeing a slowdown in the market. Our regular general contractor survey, conducted in Q1 2024 and completed by a selection of the largest contractors in Germany, shows the market has continued to cool over the last year, with the majority labelling the current market as cold.
Source: Turner & Townsend contractor survey- Q1 2024
In the same survey, contractors were asked about their anticipated workload over the next two years, which, as expected, regressed from year to year. Continuing the trend from last year, contractors are still seeking additional work opportunities as the number of new orders decreases.
Source: Turner & Townsend contractor survey - Q1 2024
Deteriorating workloads, coupled with a lack of confidence in the current market was reflected in our latest survey among German general contractors. This lack of confidence remains in the top two challenges cited by contractors and the supply chain. Political instability jumped to the top, however, pushing lack of confidence off the top spot, as well as competition for work and bureaucracy, or delayed building permits.
Source: Turner & Townsend contractor survey- Q1 2024
With all economic indicators showing that the German construction sector is cooling, experts are predicting a slow 2024, with the potential to pick up in 2025. Whether this slow-down slides further than expected, the softening economy and decline in business sentiment will pose significant challenges to the construction industry. Meeting those challenges successfully will require careful planning and pragmatic action.
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