Construction in CE with multi-year high results prior to coronavirus outbreak

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In 2020, the coronavirus pandemic will certainly drag down the construction activity in Central Europe. Nevertheless, implementation of projects entitled for EU co-funding and record pipeline of residential projects will provide consistent support to avoid sharp reduction in most countries.

In recent years, the construction industry in Central Europe has recorded solid growth in most countries. According to PMR, since 2016 the highest growth rates in construction activity in the region have been recorded in residential construction. The region’s healthy macroeconomic conditions, mirrored by a more dynamic increase in individual purchasing power and the recovering financial and property markets, have been primarily responsible for the robust recovery of the residential construction market in the last few years, with multi-year high annual completion levels observed in all countries.

In Poland, all-time high results in terms of dwellings completion were recorded every year between 2017 and 2019. Last year, all-time high dwellings completion numbers were also achieved in Romania and Slovakia. In Romania, the amount of dwellings activated in 2019 is 13% higher than a year before and 0.4% more than the previous peak level recorded in 2008. In 2019, a multi-year high residential completion level was also registered in Czechia. Last year, 36,419 dwellings were competed throughout the country, which is the highest figure since 2010 and 13% short of the all-time high level achieved in 2007. As for Hungary, the number of dwellings completed in 2019 reached the highest level since 2009, but is still 52% short of the all-time high record observed in 2004.

PMR suggests that the key factors which recently contributed to the increase in construction activity in the region include surging personal income, all-time low mortgage rates, booming fixed capital investment propelled by deposit and interest rates at record lows, as well as by boost in the amount of EU funds disbursed in accordance with the EU’s 2014-2020 funding programmes.

The recent upward trend in construction activity has also boosted construction of cement in the region. As has been the case with residential construction, Poland has been also the major the major cement consumer in Central Europe, with over 500 kg per inhabitant annually. Czechia and Slovakia have been at the bottom of the ranking, with only around 400 kg capita in recent years.

In 2019, the upward trend in construction activity in Romania accelerated, with a double-figure year-on-year upsurge, following a rebound of more than 7% a year before. The positive trend probably continued in the first quarter of 2020. Official data on growth rates in February and March have yet to be published, but January created a substantial cushion, when a 48% year-on-year increase was observed. The striking positive performance in January was boosted by civil engineering activity, where output rose by 54%, although this was achieved on a low base for comparison, as, in the equivalent month a year before, an almost 6% reduction was recorded.

The expectation of positive growth in the first quarter is also supported by a solid confidence index. In March 2020, the construction industry’s business confidence index in Romania was at the highest level recorded since September 2019, reflecting a 2.9 p.p. improvement in comparison with the figure published a month beforehand. In March 2020, the index was 1.6 p.p. higher than the figure calculated for the corresponding month a year before and 8.5 p.p. higher than that of March 2018. Furthermore, in February 2020, the Romanian authorities issued building permits for the construction of 16% more residences in comparison with the amount permitted for the equivalent month a year ago. The indicators in question suggest that the coronavirus pandemic struck Romania just as its construction industry was experiencing considerable positive momentum.

Unlike Romania, Czech construction industry growth has been slowing significantly since Q2 2019. Official data indicate that the country’s construction output rose by almost 3% in 2019, following an increase of more than 9% a year before. Furthermore, the 5.6% increase reported for the first two months of 2020 was not encouraging, as it was achieved on low base after the almost 2% reduction observed in January-February 2019. In recent quarters, the Czech construction industry has been dragged down mostly by non-residential construction, whereas residential construction has been at its highest level since 2008.

The probability of negative growth in the first quarter is also buoyed by the rapidly deteriorating confidence index. Although, in March 2020, the construction industry’s business confidence index in Czechia was at its highest level since July 2019, reflecting a 5.9 p.p. improvement in comparison with the figure published a month before, it was still 8.6 p.p. lower than that reported for March 2019. Nevertheless, in January 2020, the construction of 14% more new homes began in the country in comparison with the analogous month of last year.

Between 2017 and 2019, a positive trend in construction activity was also reported in Hungary. In 2019, official data revealed a 22% increase in production volume in the industry, following the 21% expansion observed in 2018. The recent positive rate of growth in construction activity mostly reflected the civil engineering subgroup. However, a negative rate was apparent in January 2020, for which a reduction in excess of 2% was reported. the results for February and March have yet to be published, but there is a very high probability that the negative trend continued.

In March 2020, the construction industry’s business confidence index in Hungary was at the lowest level recorded since January 2017, showing a 4.2 p.p. deterioration in comparison with the figure published a month earlier. In addition, in March 2020, the index was 29 p.p. lower than the figure calculated for the corresponding month a year before and 22 p.p. lower than that of March 2018. Furthermore, in the first two months of 2020, building permits for the construction of 27% year on year less residential space were issued in Hungary. Given these indicators, Hungary is probably among those countries whose construction industry was declining when the coronavirus pandemic started to gain ground in the country. However, the negative impact of the pandemic on the industry in the country will probably be more severe than that in Romania and Czechia, given that its property construction market had already been adversely affected by the return to the normal VAT rate (from 5% to 27%) for building construction at the beginning of 2020.

The coronavirus pandemic struck Slovakia when its construction industry was also strugling. In 2019, the country’s construction output value underwent a 4.5% year-on-year reduction, following a combined 12% increase for 2017-2018. The contraction was caused mostly by civil engineering, with a 14% fall observed. Non-residential construction also contributed to the market decline, with a 4% reduction in output. Only residential construction boasted a positive result in 2019 in comparison with 2018, offsetting, in part, the contraction of the country’s total construction output.

Nevertheless, construction output in Slovakia started the year 2020 with a 5.3% increase in the first two months, although over the period in question an almost 5% reduction was recorded in residential output. There is a high degree of probability that the positive rate of growth in construction continued in February and March, given the movement of the construction industry’s business confidence index. In March 2020 the index was at its highest level since August 2018, reflecting an 8.5 p.p. improvement in comparison with the figure published a month before. Furthermore, in March 2020, the index was 11 p.p. higher than the figure calculated for the corresponding month a year before and 2 p.p. higher than that of March 2018.

The construction sector will certainly be disturbed by the coronavirus pandemic in 2020. As was the case in 2009 when in the previous year the construction industry was at record high level in the region, particularly in residential construction, same trend is set to re-emerge in 2020, but the reductions will be most likely less dramatic. Both at the beginning of 2009 and 2020, property developers were holding record number of building permits and less than half of the EU co-funding allocated per country for the respective programming periods has been absorbed. Nevertheless, by far the most substantial difference between the two crisis is that the banking industry is in a much better shape than in 2008. Furthermore, caution is higher and the regulators and governments more powerful and better informed. However, the weakness today lies not primarily within the financial sector, but in the high proportion of over-indebted companies, to a great extent because of record low interest rates in recent years. Governments have understood that the coronavirus pandemic is an exogenous shock to the economy and therefore support cannot be limited to reducing interest rates or purchases of bonds on the open market, but should also encompass patience and targeted help and similar policies. Targeted support for construction companies in each country are yet to be updated, as measure will depend mostly on the scale of damage reported in the coming months. In Q2 2020, most construction firms are expected to continue with the projects that do not require external funding, whereas in other cases a wait and see approach will be embraced.

Value of construction markets in Central European countries (billion €) and construction output per capita (€ per resident), 2019

	Poland	Romania	Czechia	Hungary	Slovakia
Value of construction markets (billion €)	56.1	23.4	19.9	9.7	5.5
Construction and assembly output per capita (€)	1,461	1,211	1,869	989	1,002

Source: PMR, 2020