Though UK output is still short of its pre-crash peak, comparisons to Europe’s major markets paint a brighter picture. But why is the UK continuing to outperform its European peers while the likes of Italy and France stagnate?
- Italy and Spain struggle
- Stagnant outlook for Germany
- Housing leads UK recovery
- Foreign investment boosts UK
The UK is now Europe’s third biggest construction market, surpassing Italy in 2014 as total output on these shores hit €167.9bn, according to estimates from EuroConstruct.
This means only France and Germany, with estimated outputs of €199.5bn and €285.4bn last year respectively, are ahead of the UK on output.
These five markets represented 66 per cent of total output in the countries covered by EuroConstruct data – Germany alone accounted for 22 per cent, while France stood at 15 per cent and the UK stood at 14 per cent.
But these markets’ historical output and their forecasts point to stark differences between their performance and that of the UK.
Italy and Spain struggle
It is no secret that markets such as Italy and Spain have suffered heavily as a result of Europe’s recession.
Between 2007 and 2013, construction output in Spain plummeted by a whopping 77.1 per cent, while in Italy it dropped by 27 per cent. Over the same period, UK construction output fell by 12.3 per cent.
These markets have suffered “heavily from structural problems”, according to Experian head of construction futures James Hastings.
“Italy is still mired in the sovereign debt crisis; it has significant structural problems and is very much an underperforming market,” he says. “To an extent, the same is true of France.”
Spain’s output has fallen from €115.5bn in 2011 to an estimated €64.5bn in 2014, driven by an overreliance on residential starts, according to Mr Hastings.
“The Spanish construction market has tumbled enormously from its peak: the value of starts stood at around €284bn in 2007, which was larger than the UK’s in the same year,” he says.
“This was driven by huge growth in residential – 2006 saw around 865,000 residential starts. It’s a market where the bottom was inevitably going to fall out.”
While the UK’s output remains below pre-recession levels in spite of 18 months of growth, recovery has been consistently strong since 2013 – output grew by 1.8 per cent in 2013, followed by an estimated 5.3 per cent growth in 2014.
“Italy is very much an underperforming market”
James Hastings, Experian
This is in stark comparison to Europe’s four other largest markets. Italy has seen four years of declining output, with an estimated fall of 2.2 per cent in 2014, while in France falls of 3.2 per cent in 2013 and 2.5 per cent last year suggest a construction market that is failing to recover.
Aside from the UK, only Germany posted growth in 2014, with output increasing by an estimated 2.4 per cent, but this followed two consecutive years of decline.
Stagnant outlook for Germany
While the UK has historically outperformed Europe’s other major markets, how do the forecasts compare?
Output in the UK is expected to grow 5.1 per cent in 2015 – the highest of the five major markets mentioned above and the joint-third highest with Hungary of all countries covered by the EuroConstruct survey, after Ireland (9 per cent) and Poland (7.1 per cent).
Growth in the UK of 3.5 per cent is forecast in 2016, followed by 2.4 per cent in 2017.
In contrast, Europe’s top two construction markets by output will see stagnation. France is set for a decline of 0.4 per cent in 2015, followed by growth of 1.8 per cent in 2016 and 1.6 per cent in 2017.
Germany meanwhile is expected to grow 1.8 per cent in 2015, but this will be followed by 0.2 per cent in 2016 and a decline of 0.4 per cent in 2017.
Spain will see stronger recovery, with 1.8 per cent growth in 2015 followed by 3.6 per cent in 2016 and 5 per cent in 2017.
This will still leave output in Spain far below pre-recession levels, Mr Hastings points out. “That’s the problem Spain has: there’s such an oversupply of housing, they were building far more than they needed,” he says.
“Now, there’s not a lot of scope for new build houses at all. We’ve seen a huge decline in residential starts up to 2014, and we won’t see much recovery until 2015.”
During the next three years, even with growth forecast in residential building, new residential output in Spain will still stand at 20 per cent of pre-recession output in the sector.
Overall in the EuroConstruct countries, new residential output is estimated to have grown by only 0.1 per cent in 2014, with forecasts predicting 2.6 per cent growth in 2015 followed by further growth of 4.7 per cent in 2016.
Housing leads UK recovery
In contrast, the UK’s growth has been spurred on by an increase in housebuilding.
“The UK has the opposite problem: we haven’t been building enough houses and that’s spurred on the increase in residential building and the growth in overall output,” Mr Hastings says.
“But largely it’s been swings and roundabouts in terms of helping the latent demand for housing realise its goal.”
Aside from residential improvement, foreign investment has helped drive growth in the UK market and will continue to contribute to an increase in output.
“In Spain, there’s not a lot of scope for new build houses at all”
James Hastings, Experian
A report by Arcadis last year placed the UK as the 10th most attractive global market for infrastructure investment and the third highest in Europe overall, after Sweden and Norway.
Major infrastructure projects including Hinkley Point are set to go ahead with significant foreign investment.
Foreign investment boosts UK
Aside from infrastructure, overseas funds for housing and commercial have been crucial in boosting output, according to Mr Hastings, though he argues that these effects are “primarily London-based”.
“Foreign investment has played a role in the UK’s recovery; investment in areas such as commercial is more marked than in many other European markets, and the UK has always been good at attracting international investment,” he says.
“2014 saw plenty of investment in housing, particularly high-end properties in London, but how much of an effect this has on the wider housing market is hard to measure.”
The recovery of the UK’s construction market has been consistent for the past two years, but the strength of the recovery is all the more stark when compared with Europe’s four largest markets.
Perhaps more importantly, the sustainability of the recovery – while it is widely expected to slow down – points to future growth, while other major markets such as Germany and France are set to stagnate and fall short of pre-recession peaks.
“Compared to the UK, at least three of the four of the five largest markets have seen severe structural problems – and some are still dealing with that,” Mr Hastings says.