Eurozone construction sees sharpest drop in 10 months

(Sharecast News) - Eurozone construction activity experienced its most significant decline in 10 months in October, according to fresh survey data released on Tuesday. The S&P Global/HCOB eurozone construction PMI showed that the housing sector remained particularly weak, driven by a sharp drop in new orders as demand conditions deteriorated.

That decline in new business led to the fastest contraction in purchasing activity since May 2020 and a continued decrease in employment levels.

Business confidence also worsened, reaching its lowest point since last December.

Input costs continued to rise, albeit at a muted rate in the context of historical data.

The total activity index, which measures monthly changes in total industry activity, fell from 43.6 in September to 42.7 in October, indicating the most rapid decline in construction activity since December last year.

That also meant the downturn had extended for a year and a half, with German and French construction firms experiencing decreased output and Italy being the sole country reporting output growth.

All three monitored sub-sectors - housing, commercial, and civil engineering - saw downturns in activity, with housing leading the decline.

The contraction rates also accelerated in the commercial and civil engineering sectors.

Further contributing to the decline was a decrease in new orders, extending the contraction sequence to 19 months.

Again, Italy was the only country showing expansion in new business, while Germany saw the sharpest drop in client demand in three and a half years.

Input prices at eurozone construction firms increased quicker in October, primarily driven by French and Italian firms.

However, German construction companies reported a marked reduction in input prices for the sixth consecutive month.

Despite the relatively modest cost increases, construction firms reduced input buying at the steepest rate in three and a half years, relieving pressure on supplier capacity.

Weak demand conditions led to job cuts in the sector in October, with Germany experiencing the fastest drop in workforce numbers since April 2020, while France made only fractional cuts.

In contrast, construction businesses in Italy expanded staffing numbers.

The sharp decline in subcontractor usage since May 2020 led to a rise in their supply at the quickest pace in nearly 11 years.

Germany saw the most significant reduction in demand for subcontractors, resulting in a steep increase in availability.

Subcontractor rates continued to rise but at the slowest rate since December 2020.

Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, commented that the euro area's construction sector remained challenging, with housing, commercial, and civil engineering projects feeling the impact.

"The high interest rate sensitivity of the construction sector is unmistakable," he said.

"Back in March 2022, when 10-year German Bund rates - the yield benchmark - began their serious climb, it took just two months for the eurozone's housing sector to start shrinking, according to the PMI data.

"We reckon rates will stay elevated, but the European Central Bank is probably done with its moves, and there are signs that long-term rates won't be able to climb much higher from here."

Dr de la Rubia said next year could finally see the construction sector hit rock bottom before starting its recovery.

"Among the three big Euro countries, Italy's construction sector seems to be dancing to its own beat.

"Instead of getting caught up in the downturn drama like Germany and France, Italy's builders have made a comeback into growth territory," he said, pointing to their total activity index reading of 51.8 being "a world apart" from Germany's 38.3 and France's 41.0.

"And it's not some random fluke, because this solid number is fueled by growth across the board, in housing, commercial building, and civil engineering."

Reporting by Josh White for Sharecast.com.