Further Weakening of Construction Activity in Western Europe

The prospects for 1996-97 for the construction sector in Western Europe are not encouraging: having briefly recovered from recession in 1994 – with real output expanding 3 percent – growth of 1.6 percent in 1995 clearly lagged behind that of overall GDP. Projections are for a further slowdown in 1996-97, to 1.1 and 0.9 percent, respectively. Major reasons for the modest growth outlook are the generally sluggish advance of GDP, cuts in government spending, and the slackening demand for residential buildings. A common feature among Western European countries has been strong investment in renovation and adaptation of old structures, and demand promises to stay lively in the near future. Renovation works claim a share of over 30 percent in total construction activity, and it is likely to rise in the future at the expense of new building. In East-Central Europe, the construction industry managed to overcome the transformation crisis in 1995 and may expect stable growth of 6 percent p.a. in 1996-97. Against the general trend in Europe, the Austrian construction sector experienced solid growth in the first half of the decade. In the course of 1995, however, public orders fell markedly – for budgetary reasons; and also residential building, the mainstay of construction activity and a major contributor to overall growth, lost considerable momentum towards end-1995. Total construction output in Austria remained constant in 1995 and is expected to decline by 1 percent in 1996 and maybe by another 3 percent in the following year. Marking the pace of the cyclical downturn, the sharp decline in new construction orders since mid-1995 is eye-catching. Results from the latest WIFO business survey are the worst since the early 1980s, the time of the last recession in the construction sector. Two-thirds of all firms report a massive decline in new orders. The consequences are becoming apparent on the labor market, where seasonal unemployment will hit a new peak. The recently announced infrastructure programme of the Federal government may provide fresh stimulus for construction investment. New incentives for renovation works which are highly labor-intensive should mitigate the adverse trend in the Austrian construction industry.