And construction companies “aren’t expecting a swift recovery.”
By Nick Corbishley, for WOLF STREET:
The signs of strain continue to come thick and fast for the Eurozone’s economy. At the end of last week, it registered a fall-off-the-cliff collapse in its all-important services sector. Also confirmed was a vertiginous downturn in manufacturing. Now it’s the construction industry.
The IHS Markit Construction PMI for the Eurozone, which tracks how executives of unnamed companies perceive various aspects of business at their own company, suffered its steepest decline since February 2009, when Euro Area economies were grappling with the fallout of the first installment of the Global Financial Crisis.
In these Purchasing Managers Indices, 50 is the no-growth line; above 50 means expansion; below 50 means contraction. The lower the number below fifty, the more dramatic the decline. The construction PMI collapsed from moderate growth in February (52.5) to 33.5 in March, its lowest level in 11 years.
The downturn in construction activity was broad-based across both geographical regions, with all three of the biggest economies — Germany, France and Italy — experiencing steep declines, and sub-sectors. Both home building and commercial construction projects were hit hard by the downturn while civil engineering work was hit even harder, suffering its fastest contraction in eight years.
Here are some more sobering takeaways from the report:
- With most of the industry’s activity paralyzed, “eurozone construction firms cut their staff numbers for the first time since January 2017” and at the fastest rate in a decade.
- “The downturn in construction activity also saw firms scaling back their purchases of raw materials and other building inputs for the first time since October 2016. Moreover, the decline in purchasing activity was the steepest recorded in the survey’s 20-year history.”
- “Despite the sharp reduction of input purchases, suppliers’ delivery times in the eurozone construction sector lengthened further in March, and at a rate not seen since the survey started in January 2000.”
- “New business plunged in March, falling at the fastest rate for over 11 years. National data showed a broad-based decline across the eurozone, led by severe falls in Italy and France.”
At the national level, the sharpest decline was registered in Italy, which got hit first by the COVID-19 crisis and was the first European country to halt all non-essential activities, including construction. As a result, its construction PMI collapsed nearly 35 points from 50.5 in February to 15.9 in March, which goes down as the “quickest [rate of contraction] seen since the survey began in 1999.”
Markit does not produce a monthly PMI for the Spanish construction sector. But it’s safe to assume that the collapse of its all-important construction industry is not far behind Italy’s in terms of both sequence and scale, given that Spain was the second Eurozone economy to impose a lockdown on all non-essential activities. That was just over a week ago. Before that, only 34% of construction projects had been halted.
In France construction activity slumped by 15 points from 50.2 to 35.2. It was the sector’s fastest decline for just over five years. March data also revealed tumbling demand, with new business placed with building firms falling at the sharpest rate since the nadir of the financial crisis over 11 years ago.
In Germany, the arrival of Covid ended the country’s multiyear construction boom, which was one of the last remaining growth drivers of its stuttering export-led economy. The headline PMI plunged from 55.8 in February to 42.0 in March, its lowest level in over 7 years. Housing activity, which had been the strongest performing sub-sector, registered its steepest decline since March 2013. Commercial activity fared even worse, suffering its biggest drop in eight years, while the worst hit sub-sector, civil engineering work, recorded its sharpest decline since early-2010.
“The near 14-point fall in the headline Construction PMI in March is somewhat comparable to those seen previously during times of inaccessible conditions on site during very heavy snowfall, in late-2010 and early-2012 for example, which gives some context as to the severity of the collapse in building activity brought on by the COVID-19 outbreak,” said Phil Smith, another principal economist at IHS Markit. “The difference now is that constructors aren’t expecting a swift recovery – business confidence towards future activity has shown an unprecedented collapse and firms have begun cutting staffing numbers for the first time in almost five years.”
During the Global Financial Crisis and the Euro Debt Crisis, back-to-back between 2008 and 2012, tens of thousands of construction companies hit the wall, taking thousands of suppliers with them. The destruction was particularly pronounced in countries that had experienced large housing bubbles such as Ireland and Spain. But some of the big, heavily indebted, well-connected ones had their debt loads restructured by their ECB-supported banks and their most toxic assets taken off their books and hidden in taxpayer-supported “bad banks.” This time around, the locus has expanded. Now, the biggest housing and construction bubbles are in cities like Amsterdam and major cities in Germany. By Nick Corbishley, for WOLF STREET.
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