Key findings:

  • Work on residential projects falls at quickest rate since February 2010
  • Companies remain in retrenchment mode amid marked drop in demand
  • Building input costs fall for third month in a row

Construction activity across Germany continued to fall sharply at the start of the third quarter, according to the latest HCOB PMI® survey compiled by S&P Global, led by a deepening decline in work on residential building projects. A further sharp fall in new orders signalled weakening demand for building work across the eurozone’s largest economy, which in turn led constructors to scale back both purchasing activity and employment as they expressed growing concern towards future output.

Weaker demand for building materials was meanwhile reflected in a further marked improvement in supplier delivery times and a third straight monthly decline in average purchase prices.

The HCOB Germany Construction PMI® Total Activity Index – a seasonally adjusted index tracking changes in total industry activity – fell for the fourth time in the past five months in July, thereby moving deeper into sub-50 contraction territory. At 41.0, the headline index was down from 41.4 in June and the lowest since February 2021.

Underlying data showed a reduction in activity across all three of the three broad construction categories monitored by the survey. Housing activity recorded the sharpest rate of contraction by some margin, posting its steepest decline since February 2010. Work on commercial building projects also fell at a faster rate, the quickest in 2023 so far. However, civil engineering went against the trend and recorded its slowest contraction for five months, and one that was only modest overall.

Demand for construction work remained under pressure at the start of third quarter, with surveyed firms citing the influence of rising interest rates, still-high building costs and a generally sluggish economy. New orders were down for the seventeenth month running in July, and, although easing, the rate of contraction remained sharp by historical standards.

Constructors remained deeply pessimistic about the outlook, with around 47% of surveyed businesses anticipating a fall in activity over the next 12 months, compared to only 8% predicting a rise. Expectations ticked down for the third month in a row to the lowest in the year-to-date.

Accordingly, July saw a further decrease in employment as builders looked to pare back staffing capacity. It marked the sixteenth successive month of job losses across the sector. That said, the rate of decline eased to the weakest since April.

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There was also another decline in constructors’ purchasing activity as the second half of the year got underway. Although cuts to buying levels were less marked than in June, the rate of decline was still historically strong.

Lower demand for materials in turn eased the pressure on construction supply chains, contributing to a fifth consecutive monthly improvement in input lead times. Furthermore, the extent which to delivery times quickened was just shy of June’s series record.

The rate of decline in prices paid for building materials and products meanwhile continued to gather pace. Input costs fell at the fastest rate since May 2009, reflecting ever softer demand for construction supplies.

Commenting on the PMI data, Norman Liebke, Economist at Hamburg Commercial Bank, said, “The German construction sector is in a tough spot right now. Activity in the construction sector in Germany fell again at an accelerated pace in July. Our nowcast model, which also takes into account the HCOB PMI values, now indicates a sharper slump for the third quarter construction output of around 0.8%.

“Specifically, the housing and commercial sectors took a steeper hit in July, while civil engineering also experienced a decline, but it went against the prevailing trend. Based on our nowcast, it appears that the construction sector likely contracted during the second quarter and, according to the new orders and suppliers’ delivery times PMI, this downward trend might persist into the third quarter.

“Weaker demand in the construction sector is leading to falling input prices. These have declined for the third month in a row and are now approaching the pace of the 2009 housing crisis. Even though the PMI is below 50 and therefore signalling falling prices, it is important to note that prices remain at historically high levels in absolute terms.

“A mixture of higher interest rates, a stagnating economy and continued high construction costs make construction companies deeply pessimistic for the coming months. That is shown by the renewed low index value for future activity in July, which provides another signal that business conditions for construction firms are likely to get worse before they get better.”

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