Executive summary

Construction outlook highlights

Tendering conditions and market outlook

Construction in the United States and most European markets registered a slowdown or decline in production over 2022 Q3. On the supply-side, tender prices have universally been elevated by rising wholesale energy prices and a spike in materials costs during 2022. Markets with the greatest dependency on Russia for energy and trade have faced the most intense supply-chain disruption and cost-push price pressures. Shortages of labour are another common bottleneck. On the demand side, the picture began to weaken in the second half of 2022 as rising inflation created uncertainty around spending and investment decisions and prompted a tighter monetary stance by central banks.

Figure 1 displays both tendering conditions (how competitive a market is) and market outlook (the expected position over the coming six months) for Lidl’s selected countries. Tendering conditions are linked to a temperature scale and have been colour-coded, whereas directional arrows denote the perceived market outlook of each country.

Figure 1:

Europe and United States heat map

Current tendering condition

Future market outlook

Current tendering condition

Future market outlook

The majority of markets have tendering conditions that are either warm or lukewarm, although 16.7 percent of markets are hot. These hot markets are predominantly in the southern parts of Europe, such as Italy, Slovenia and Croatia. There are six fewer markets classified as hot when compared to the previous report.

Lukewarm markets makeup 36.7 percent and can predominantly be found in Eastern Europe. This may be attributed to their close proximity, and tight economic links, to Russia.

Nearly half - 46.7 percent - of the markets are classified as warm. This is a slight increase when compared to the previous report as many that used to be hot, settle down.

Source: Turner & Townsend

Regarding the outlook, in a majority - 56.7 percent - of the markets covered there is an expectation for tendering conditions to stay the same. Except for Germany, which is losing steam, hot markets are set to remain hot. Often this is a product of labour shortages limiting the pool of contractors available to take up projects or related to strong public sector construction demand.

Cooling tender price conditions is anticipated in 43.3 percent of countries. None have a warmer outlook. Domestic demand is being squeezed to varying degrees across all the economies covered, but of the markets that are expected to cool, most were either warm or lukewarm.

Tender price inflation forecasts

Inflationary pressures originating in a post-pandemic economic recovery across the globe intensified following the conflict in Ukraine and a surge in wholesale energy and food costs. Higher goods prices quickly filtered into the price for non-tradables, prompting central banks in Europe and the United States to crank up interest rates and unwind quantitative easing programmes.

Monetary tightening operates with a lag; often several quarters need to pass before slack emerges in the economy. In 2023, the effects of higher interest rates will become more perceptible, both in less demand and lower inflation, weighing on tender price growth after rapid increases in 2022. Declining international commodity prices will complement the trend by limiting or reversing price increases for construction materials.

Source: Turner & Townsend

Figure 3 gives a breakdown of tender prices (TPI) estimated for 2022 and projected for 2023. Those economies that experienced the highest tender price increases in 2022 are in Eastern and Central Europe and had a strong dependency on Russian energy. As the natural gas supply was interrupted following the conflict in Ukraine, inflationary pressures in these regions were especially acute. The energy supply crunch was felt widely, however. Two-thirds of the markets covered had a TPI of over 10 percent. Besides higher input costs, supply chain disruptions caused by the conflict added on another layer of disruption, heightening risk and contractor prices.

The European energy market has swiftly rebalanced with new routes for supply into Central and Eastern Europe (mainly via new liquefied natural gas terminals). Tender pricing is expected to subside most in countries that had been worst affected by reduced natural gas supply in 2022. Lithuania and Germany are projected to register TPI falls of 10 percentage points or more in 2023 and rapid declines are also expected in Slovakia and Estonia. Most – 22 - markets are expected to experience TPI falls of between 2 to 8 percentage points.

There are three countries where TPI will be stickier downwards, falling by less than 2 percentage points. This subset of countries, Greece, Portugal and Switzerland, did not witness large increases in tender pricing in 2022 and construction demand has held relatively firm. No markets are expected to register an increase in TPI in 2023.

Labour availability and labour availability outlook

The pandemic resulted in a seismic shakeup of the labour market throughout Europe. Workers have opted to retire early, switch industries or move to different countries. Changes to the market were sudden, making adaptation a challenge. Construction sectors that depend on migrant labour have been the hardest hit. Other low-income European countries have been facing a drain of workers looking for higher wages elsewhere for many years.

In general, skills shortages are a recurring theme limiting capacity in Europe and in the United States. Wage bills are on the rise as workers leverage a more powerful bargaining position, and higher costs are often passed on to clients through TPI.

Source: Turner & Townsend

The chart on the left in Figure 4 shows those markets experiencing a shortage of skills and those that are in balance. Almost two-thirds are reporting labour constraints. The chart on the right details the outlook for labour availability. In 72 percent of markets, the supply of labour is expected to stay the same, 21 percent expect an improvement and 7 percent a deterioration. In most cases where there are labour shortages, there is no expectation for improvement.

However, only one economy - Northern Ireland - has a shortage that is expected to get worse. The handful of countries that anticipate better labour supply, mainly in Central and Western Europe, all report labour deficits currently. Prospects for improvement are based on migration patterns normalising to some extent and governments making it easier for workers from abroad to take up jobs in construction.

Evaluation of the impact of COVID-19 pandemic and conflict in Ukraine highlights

The global economy has rarely gone through a sequence of shocks as powerful and destabilising as the pandemic followed by the conflict in Ukraine. Coronavirus necessitated extraordinary stimulus through fiscal and monetary channels. The conflict prompted a total step-change, with central banks and governments tightening policy to correct for the legacy of easy money in a high-inflation environment. Construction in 2022 Q3 was caught between these two currents.

Construction growth in the quarter was generally slowing after a strong performance in 2021 and early 2022 and, in some cases, activity was starting to fall back. The final quarter of 2022 going into 2023 will be even more challenging as investor uncertainty amplifies.

Source: Various institutions

Construction sectors in the markets covered are evenly split between those that are larger and smaller than before the pandemic, benchmarked as the level of activity between 2022 Q3 and 2019 Q4. Such a mixed performance is itself a testament to the pressures exerted on national economies and construction sectors since the pandemic. On balance, growth has exceeded contraction. Only one construction sector has shrunk by more than 20 percent, whereas four have expanded by that magnitude or more.

Romania and Slovenia have posted increases in production of over 30 percent in the period. The reasons for contractions vary but include a fall in private sector investment (for example in Cyprus and Slovakia), labour costs and a heavy dependency on Russian energy.

Source: Various institutions

As shown in Figure 6, 21 of 30 countries have recruited more workers into the construction industry between 2022 Q3 and 2019 Q4. Ireland and Italy have led in hiring, with the construction workforce being 17.4 percent and 16.9 percent larger in these countries, respectively. Compared with Figure 5, it becomes clear that there is not an obvious association between employment and output.

Ireland was the top employer over the period, even though the Irish construction sector is the fourth-weakest performer of all the countries covered. The paradox runs both ways. Although the Greek construction sector has boomed, 19.5 percent of jobs have been shed.

Source: Various institutions Note: Labour cost data not available for Switzerland

Figure 7 shows that in all markets where data is available barring Slovakia, there has been an increase in labour costs. The range is large. At the top end, wage costs in Hungary have increased by 48.6 percent between 2022 Q3 and 2019 Q4, followed by Ireland (36.7 percent) and Italy (31.3 percent). At the lower end, Spain had the smallest rise of just 0.2 percent, with the next-smallest being Greece (1.8 percent).

Slovakia is the only country to have encountered a fall in labour costs, of 8.0 percent over the period. The country has accepted large numbers of Ukrainian refugees, with over 100,000 being granted temporary residence and work permits, and the extra supply of workers helps to explain why it has bucked an otherwise universal trend of rising wages.

Source: Various institutions Note: Construction output prices for the US correspond to construction costs. No data is available for Serbia

Construction output prices have risen by more than 10.0 percent in all review countries between 2022 Q3 and the pre-pandemic benchmark of 2019 Q4, underlining the severity of cost pressures that Europe and the United States have encountered since the conflict in Ukraine broke out. The most extreme increases are clustered in East and Southeast Europe, followed by Central Europe, with these regions have been the worst affected by energy shortages and spiralling materials costs. In several cases, labour shortages and wage pressures have amplified the uptrend or been the dominant driver.

Bulgaria’s construction output price rose by 90.8 percent over the period, putting it in a different league than the rest of Europe and the United States. Bulgaria’s construction sector has been buffeted by both severe labour market tightness and significant appreciation in materials prices as a country with close trade ties to Russia. The next largest increases were for Hungary, at 49.9 percent, and Croatia at 46.3 percent, where similar cost-push forces have been at work. On the other end of the scale is Greece with an increase of 10.4 percent, Italy (11.2 percent) and Switzerland (12.5 percent).

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