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European forecasts slash UK expectations but rivals still lag behind

Major revisions have slashed UK construction’s growth prospects, but the longer-term picture points to a resilient market.

The last Euroconstruct conference, which brought together construction economists and forecasters from across Europe, was held 13 days before the UK’s EU referendum.

It’s unsurprising then that the forecasts produced from that conference in June have been heavily revised in the latest set of predictions released at the end of November.

Growth projections for the UK’s construction output have been slashed: Euroconstruct figures now point to a decline both this year and in 2017, with output falling by 0.2 per cent each year.

And although UK construction will return to growth in 2018, it will be at a much slower rate than previously expected.

It is not just the UK that has seen downwards revisions to its growth prospects. France, once the EU’s second largest construction market ahead of the UK, has seen projections for the next three years revised down, while Germany will see a slowdown in 2019.

However, the Euroconstruct forecasts show the UK will maintain its place as Europe’s second largest construction market in spite of ongoing uncertainty, highlighting the underlying resilience of the sector.

Bearing this in mind, which countries are set to be growth hotspots over the next four years as the UK makes its unprecedented exit from the European Union – and which areas are set to struggle?

Major UK revisions

Of the changes to the forecasts between June and November, the UK’s have seen the largest revision. This is not only a consequence of the EU referendum, but also a wider slowdown reported in the industry.

Output fell 1.1 per cent in Q3 quarter on quarter, according to the Office for National Statistics, marking the second consecutive fall following a 0.1 per cent decline in Q2.

“The UK’s forecast has been revised significantly downwards since June”

And in the immediate aftermath of the referendum, Markit / CIPS reported a sharp decline in construction activity in both July and August, though its construction purchasing managers index has recovered somewhat since then.

All of this is reflected in the November Euroconstruct UK output forecasts, which have been revised downwards significantly since the previous predictions.

In June, the forecasts pointed to output growth of 2.1 per cent in 2016, 2.9 per cent in 2017, and 2.6 per cent in 2018.

However, these have since been slashed to a decline of 0.2 per cent in 2016 and 2017, followed by a 0.9 per cent increase in 2018. November’s forecasts also include predictions for 2019, when output in the UK is expected to grow by 2.9 per cent.

The predictions of a decline this year and next year largely follow the data released by the ONS, which points to an ongoing slowdown in industrial and commercial work, while the future recovery is expected to be propped up by continuing housing demand.

This is in contrast to countries such as Italy and especially Spain, where housebuilding activity is still only a tenth of pre-recession levels.

UK in second place

It is this contrast that is important to note with the UK’s figures – it would be easy to point to a UK industry that is in crisis and staring down the barrel of two consecutive years of declining output.

But the reality is that the UK will maintain its position as Europe’s second largest construction market, having overtaken France in 2015.

UK output is forecast to be €223bn (£188bn) in 2016, 9.2 per cent higher than France’s €204.33bn. This lead over France will be maintained, albeit with the gap tightening over the coming years owing to the UK’s slowdown.

In 2017, output in the UK will be 5.1 per cent higher than France, narrowing to 2.9 per cent in 2018 and 2.8 per cent in 2019.

This suggests that, while the UK will see an initial hit from a combination of a Brexit shock and a wider industry slowdown, the decline will not be a sudden, severe fall into recession, but rather a short-term hit that will translate into a slower recovery by 2019.

Of the leading five markets, the UK is now closest to its pre-recession high, with Italy, Spain and France all lagging far behind.

Coupled with the measures announced by the chancellor to invest in housing and infrastructure in the Autumn Statement, these forecasts suggest the UK market is still in better shape than many of its European counterparts, despite the hit to growth from the EU referendum.

Slowdown in Germany

In spite of a predicted decline in 2016 and 2017, output in the UK will actually see an overall increase of 3.4 per cent between 2016 and 2019, with output rising in both 2018 and 2019. This will be faster than in Germany, which will only record output growth of 1.1 per cent over the same three-year period.

Germany remains Europe’s largest construction market by some distance – output this year is expected to be €297bn (£251m), more than a third higher than the UK and two-and-a-half times larger than Spain.

But the forecasts point to a gradual slowdown there too, with output due to fall by 0.6 per cent in 2019 after growth of just 0.2 per cent in 2018 and 1.5 per cent in 2017.

“Ireland will comfortably be the fastest growing construction market by 2019”

Only Spain, which saw construction output crash during the recession, is expected to record double-digit growth between 2016 and 2019. However, this too has been revised down since June, with wrangling over the formation of a new government continuing to hit public funding and deficit reduction targets.

While varying in degree, output in all these countries remains below pre-recession levels, indicating that while growth will be both slow and fragile across mainland Europe’s largest markets, a prolonged downturn seems unlikely.

Ireland marches on

Away from these markets, the forecasts also highlight some of the continent’s fastest-growing countries by output, with Ireland again leading the way.

In June’s forecast, Ireland’s was expected to be the fastest-growing construction market over the next four years, and November’s predictions are no different – albeit with the same caveat that output remains below pre-recession levels.

Euro markets change in value

Euro markets change in value

November’s forecasts show growth in Ireland of 12.5 per cent this year, followed by 8.5 per cent in 2017, 7.1 per cent in 2018 and 9.2 per cent in 2019. This makes Ireland comfortably the fastest growing market by 2019, with only the Czech Republic (8.3 per cent) and Hungary (7.1 per cent) approaching that level.

However, Ireland’s market remains far below its pre-recession 2006 high, leaving significant scope for the market to grow further.

Five countries – Poland, Norway, Belgium, Sweden and Switzerland – will exceed their pre-recession high this year, the only five countries covered by the forecasts to do so.

The European construction market is still grappling with recovery, with some countries including France encountering greater difficulty in the last two years than many expected.

That puts the resilience of UK construction into even clearer focus – evidently the market has outperformed its peers over the past three to four years, and while Brexit could wreak havoc in an increasingly uncertain market, the UK is currently expected to remain resilient and its longer-term growth prospects from 2019 are strong.

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