Economic overview

High inflation continues to erode disposable incomes, reducing consumer spending and holding back economic growth. Data from Destatis, the Federal Office of Statistics (Statistisches Bundesamt) shows that Germans’ real incomes fell by 4 percent in 2022, compared to the end of 2021, the highest drop in almost 15 years.

Inflation, as measured by the Consumer Price Index (CPI), stood at 7.4 percent in March 2023 and dropped to 6.2 percent in July. While the CPI may have peaked in Q4 2022, cost pressures could remain elevated in 2023 before reducing in 2024. Tighter monetary and fiscal policy as well as higher interest rates, which will affect investment, should then constrain price growth, with inflation cooling further as supply bottlenecks ease and energy prices fall.

It is expected that long-term interest rates will continue to slowly rise reaching over 3.0 percent in 2023, before stabilising and possibly regressing slightly in 2024. Any reduction in interest rates will come gradually, as the European Central Bank will be wary of allowing inflation to surge back.

Meanwhile, the German labour market remains tight, and the unemployment rate has been stable at around 5.5-5.6 percent, although a lack of skilled labour across the construction industry is being felt. This is expected to rise further over the next 10 years or so, as the so-called ‘baby-boomer generation’, who encompass a good portion of the skilled labour market, enters their retirement years. Germany has been forced to reach beyond its borders as a large amount of construction companies require more and more skilled EU immigrants in order to counteract the countries ageing construction skilled workforce.

Even with the challenges the German construction industry has been seeing, the construction industry was quite resilient through to mid-2022. However, since then and early in 2023 this trend has started changing, with a regression in the number of new orders/ contracts of 21 percent (January 2023) when compared to the same time the year before. The total revenue of these new orders during the same period, on the other hand, increased by 5.8 percent, which is due to the approximately 16.5 percent construction price escalation that occurred during this time. In ‘real numbers’, the revenue shrunk by approximately 9.5 percent from the year before.

Looking forward, the contractors were queried in the same survey regarding their workload over the next few years, which, as expected, regressed from year to year. Unlike at this time last year, however, the vast majority of contractors did not have full books as of yet, which corroborates the trends that we are seeing.

Looking more closely at the statistics of new orders from the data from Destatis, new orders have dropped to the lowest rate that has been seen since 2015. Accordingly, this is being reflected in contractors’ expectations for activity in the year ahead which has dipped along with their confirmed workload, beginning to drive contractor preliminaries down along with expected profit margins. This has been offset by the rising material and labour prices, which continue to drive tender prices up.

This deterioration in sentiment is also reflected in Turner & Townsend GmbH‘s latest survey among German contractors. A lack of confidence in the market to invest in new projects has crept into the top three construction challenges borne by contractors. At the top of the list and by far the most impactful, is skilled labour shortages, followed by excessive lead and delivery times in second place. The impact of COVID-19 on the other hand has dropped to the bottom of the list.

While the economic indicators are still giving mixed messages, it’s clear that both the economy and the German construction industry are slowing down. Whether this slow-down slides further into the technical definition of a recession or not, the softening economy and decline in business sentiment will both pose significant challenges to the construction industry. Meeting those challenges successfully will require careful planning and pragmatic action.