Key Findings:

  • Total Activity Index retreats to three-month low of 42.9
  • Firms in retrenchment mode as demand continues to falter
  • Construction input costs rise at slowest rate since October 2020

Latest PMI® data from S&P Global showed a weak end to the first quarter of the year for the German construction sector. Total activity and new orders both fell at quicker rates, leading building companies to cut back on purchasing activity and scale down workforce numbers. Firms remained pessimistic towards the outlook.

On a brighter note, the cost of building materials and products rose at the slowest rate for almost two-and-a-half years in March, which coincided with the most marked improvement in supplier delivery times since March 2010.

The headline S&P Global Germany Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – fell sharply in March to 42.9, reversing all of its rise in February (48.6) and leaving the index at its lowest in 2023 to date.

Among the broad construction categories covered by the survey, housing activity was the weakest performer by some margin. Here, the rate of contraction accelerated sharply and was among the fastest seen since the global financial crisis. Commercial activity likewise fell at a faster rate, the quickest for three months, while work on civil engineering returned to contraction after having risen – albeit modestly – for the first time in almost a year in February.

The decline in new orders accelerated in March to the fastest since last November, thereby ending a sequence of slowing rates of contraction seen from last December to February. Underlying demand for construction work remained under pressure from a series of factors, including rising interest rates, high prices and client uncertainty, anecdotal evidence showed.

Falling workloads meant that German constructors were firmly in retrenchment mode in March, reducing both their purchasing activity and payroll numbers. The rate at which buying levels fell was the quickest seen for almost three years, whilst jobs were cut to the greatest extent since December last year. German constructors’ use of subcontractors also fell, contributing to an improvement in their availability – the third in the past four months.

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March’s survey showed further signs of cost pressures easing across the construction sector. Alongside a slowdown in the rate of inflation in subcontractor rates, which dropped to a 25-month low, there was a sustained cooling of construction input price increases. Here, the rate of inflation slowed for the fourth time in the past five months to its lowest since October 2020 and was comfortably below the series long-run average (since 1999).

The softening of inflationary pressures was partly attributed by surveyed businesses to reduced supply-demand imbalances. Indeed, March data indicated an overall improvement in lead times on purchases, the first time this has been the case since September 2014.

Looking ahead, German construction firms generally remained downbeat about the outlook for activity over the coming year, citing headwinds from tightening financial conditions, squeezed budgets and a sluggish economy. Furthermore, after having improved in each of the previous four months, rebounding from last October’s near-record low, expectations ticked down in March.

Phil Smith, Economics Associate Director at S&P Global Market Intelligence, said, “March’s PMI data showed a setback for the German construction sector, with activity and new orders both falling at accelerated rates and business confidence ticking down.

“The steeper decline in activity in March was perhaps payback from the slowing rates of contraction seen during the opening two months of the year, when unusually mild weather had boosted activity to a degree. That being said, the underlying trend has moved in the right direction, with the headline PMI averaging 45.0 in the first quarter from a low of 42.3 in Q4 last year.

“At a sector level, residential activity in particular remains under pressure, as a combination of rising interest rates, economic uncertainty and a squeeze on real incomes weighs on the housing market.

“There were some encouraging developments elsewhere in the data, however, including the most marked improvement in lead times on building materials for 13 years, which pointed to rapidly easing supply-chain bottlenecks and the cooling of price pressures. Input cost inflation has come off the boil, while improving subcontractor availability also means less upward pressure on labour rates.”

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