Key Findings:

  • Activity growth slows sharply in March as new orders fall
  • Input cost inflation accelerates closer to 2021’s record highs
  • Expectations at near two-year low amid fresh supply disruption

The German construction sector lost considerable momentum at the end of the first quarter, registering a sharp slowdown in activity growth and a decline in new orders amid elevated levels of uncertainty, fresh supply disruption and heightened inflationary pressures. Building companies faced the steepest rise in input costs for seven months, alongside a record increase in subcontractor rates, latest PMI® data from S&P Global showed.

The outlook darkened as a result, with constructors recording a notable deterioration in their expectations for activity in the year ahead to the lowest since May 2020.

The headline S&P Global Germany Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – registered 50.9 in March. While this was above the 50.0 threshold that separates expansion from contraction, it signalled a notable easing of growth compared to the opening two months of the year, with the PMI having hit a two-year high of 54.9 in February.

The slowdown was led by the residential sector, which after recording strong growth in the prior two months (including a four-year high in January) registered a renewed contraction. Work on commercial building projects continued to increase, though the pace of expansion eased considerably since February. Of the three broad construction categories monitored by the survey, civil engineering activity maintained the most momentum in March, registering a further solid rate of growth that was only slightly slower than the 55-month high recorded in the previous survey period.

Overall inflows of new orders across the German construction sector fell in March, thereby partially reversing the increases seen in the prior two months. Surveyed firms attributed the decline to a number of factors, including elevated prices, material shortages and hesitancy among clients, all of which had been exacerbated by the war in Ukraine.

The level of purchasing activity among German constructors rose for the fourth month running in March, in line with growth in activity. However, having reached a 44-month high in February, the rate of increase in buying levels slowed sharply to its weakest in the year so far.

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March saw a sustained rise in employment at German construction companies, stretching the current sequence of job creation to seven months. The pace of hiring slowed for the first in this sequence, although it remained solid by historical standards. Latest data likewise showed a further, albeit slower, rise in the use of subcontractors across the sector. A severe lack of availability of subcontractors nevertheless helped to maintain strong upward pressure rates charged, which rose at a record pace for the second month running.

At the same time, German constructors reported an acceleration in rate of input price inflation, taking it closer to the record highs seen in the second half of last year. Panellists attributed this to sharp increases in energy, material and transport prices, with the war in Ukraine and an associated squeeze on supply cited as contributing factors.

The incidence of supplier delays increased sharply to its highest for eight months in March, and was among the greatest in the series history since 1999. Surveyed businesses often commented on a shortage of steel.

The Ukraine war served to heighten constructors’ concerns about supply, prices, and demand for investment, leading expectations to fall sharply to their lowest since May 2020.

Phil Smith, Economics Associate Director at S&P Global, said, “After an excellent start to the year, the construction sector lost momentum in March, with the headline PMI dropping sharply from February’s two-year high and signalling a near-stalling of activity growth.

“A number of the survey’s indicators point to the war in Ukraine as having had a detrimental impact on the construction sector’s performance, including a drop in new orders amid increased hesitancy amongst clients, as well as renewed pressure on both supply chains and prices.

“Material shortages and supply delays have worsened notably in the past month, and this extra imbalance between supply and demand, alongside the surge in energy prices, has caused the rate of cost inflation to accelerate sharply and closer to last year’s record highs.

“These recent developments have exacerbated constructors’ pre-existing concerns about elevated prices and supply bottlenecks. Expectations towards future activity have slumped to their lowest in almost two years, as firms anticipate a tougher task securing new work.”

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