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Euroconstruct, the association of European forecasting bodies, predicts that construction output across Europe will grow by about 3% this year, compared with an average growth rate last year of 0.8%. This is an exceptional result. If true, it will mean that construction is outperforming the general economy for only the second time this decade.

The factors behind the current surge in activity are both economic and political. With most countries on course to meet the financial criteria for joining the single currency, there has been a slight easing of financial discipline among Europe’s treasuries and central banks. This has meant that there is more public money available to clear the backlog of major civil engineering projects that has built up over recent years. A second factor has been low and stable interest rates, which are stimulating private investment.

Countries and industry sectors

Euroconstruct covers the 15 countries of the?European Union (with the exceptions of Greece and Luxembourg), plus Norway and Switzerland. Most countries’ industries have done well in the recent past – last year, for example, only four of the member states recorded construction growth below the 0.8% average. However, average performance has been disappointing throughout the 1990s.

The overwhelming reason for this has been the sharp decline in the output of the German industry. The importance of Germany can hardly be overemphasised – it accounts for one-quarter of Europe’s total construction market. And much of the current good news is because its construction industry’s expected rate of growth is predicted to increase for the first time in five years (which is also good news for its largest contractor Hochtief). After a 4.1% fall in output growth in 1998, German construction is expected to fall only 0.2% in 1999 before rising 1% in 2000. However, the troubles of Germany’s second-biggest contractor, Philipp Holzmann, could throw this forecast into doubt.

There was good news on the figures front for UK builders. The output growth of the British industry is expected to be 2% this year, rising to 2.7% in 2000. France, Italy and Spain are all expecting growth to slow.

In the mature economies of western Europe, the focus is increasingly shifting from new build to the maintenance and renewal of existing facilities. This involves less capital spending, and so dampens the rampant growth seen as economies develop.

In 1998, the repair and maintenance sectors were more buoyant than new work, with civil engineering repair and maintenance leading the way with 3.2% growth. The only sector to decline was residential new build, with output falling 1.7%.

By the end of 1999, the best performing sectors are likely to have been residential repair and maintenance and new non-residential building, both predicted to grow by more than 3%. Growth is also expected to return to the new residential building sector.

In 2000, residential and non-residential new build are expected to underperform, compared with construction’s predicted total growth of about 2.5%. Residential repair and maintenance is forecast to match it, but the stars of the show are likely to be non-residential R&M and civil engineering. However, over the past few years, it has been the new non-residential building sector that has performed best.

Construction output and GDP

Construction output as a proportion of gross domestic product has fallen throughout the 1990s, and construction is no longer the locomotive of growth it once was in many European countries.

Real GDP grew 2.9% in 1998 in the European Union and 2.5% across the Euroconstruct# zone, both figures well above the trend for the 1990s. This reasonably moderate rate of growth has been driven as much by the smaller EU countries as by the larger ones.

However, much of the GDP growth in 1998 took place in the first half of the year. The economic climate in the EU worsened in the second half as financial crises hit South-east Asia, Russia and Latin America. Most analysts downgraded their forecasts for 1999, with Euroconstruct predicting GDP growth of only 1.8%.

The effects of the economic crises around the world have, on the whole, proved transitory, signalling that the structural reforms implemented in the European economy over recent years have begun to bear fruit in terms of long-term competitiveness. European exporters have also benefited from the effective 6.6% devaluation of the euro in the first half of the year, and HSBC Economics and Investment Strategy is predicting an annual rate of growth in eurozone exports of 8% to 10% by the end of 1999.

Eurostat has reported quarter-on-quarter GDP growth of 0.5% for the first two quarters of 1999, and most analysts believe this is likely to be maintained in the second half. Euroconstruct has upgraded its GDP forecast for France, Spain and the UK, and downgraded it slightly for Germany.

The European economy

Consumer price inflation is expected to stay below 2% at least to the end of 2000, and although some analysts predict a eurozone interest rate rise some time at the end of this year or the beginning of next, rates are unlikely to rise above 3% by the end of 2000. The eurozone’s budget deficit is forecast to decline from 2.1% in 1998 to 1.7% in 2000, and the unemployment rate may fall to about 10% by the end of the year (9.2% in the Euroconstruct zone).

All this presents a fairly bright picture of the European economy in the short term, with growth in GDP of about 3% forecast for 2000. Of the big five, only Spain is likely to exceed this average, with France equalling it and the rest below.