Economic Outlook: Europe's improving prospects

The latest data for the Eurozone economy has been encouraging. Sentiment is heading up, consumer confidence is strengthening – consumer willingness to make major purchases reached an eight year high in January – unemployment is edging down and growth in output is accelerating.

Yet the Eurozone still has growth constraints including a somewhat restrictive fiscal policy, high public and private debt levels, as well as the geopolitical tensions of the Russia/Ukraine conflict. In a bid to boost the region, the European Central Bank (ECB) announced a quantitative easing (QE) programme that will help to ease credit conditions, by buying € 60 billion (US$ 68 billion) of public and private assets per month from March 2015 to September 2016.

Greece remains a further hindrance to growth. Results of the Greek election will make negotiations with international creditors extremely difficult. Should Greece default, the ECB could stop providing liquidity support to Greek banks, increasing the probability of a Greek exit from the Eurozone. However, the European Stability Mechanism, progress on banking union, fiscal consolidation and ECB action suggest that a Greek exit is less of a threat to the Eurozone than was the case a few years ago.

Overall, the outlook for the region is better than previous years and previous forecasts. Lower oil prices, a weaker Euro, and the QE programme mean IHS Global Insight’s forecast for Eurozone growth has improved from a +0.8% increase in real GDP in 2014, to +1.5% in 2015 and +1.8% in 2016.

The outlook for Western Europe construction is similar to that for its economy – continuing improvement, but with anaemic growth. Real construction spending expanded +1.4% in 2014, after years of contraction, and IHS Global Insight expects +2.2% growth this year with improvement to +2.5% in 2016.

Non-residential structures is the strongest growth segment, with office and commercial construction the leading components, as job gains and rising consumer confidence create demand for office, retail and meals/lodging space. A significant share of this spending will be on renovation activity. There will be new construction activity as well, but the larger share of that will come in the later years of the forecast.

Industrial construction spending will lag other structure types, but will still offer the best potential seen for a decade. The economic recovery will benefit manufacturing in general, and automotive in particular, because the halving of oil prices has lowered vehicle operating costs and increased purchasing power.

In the post-crisis years, the issue with investment in this type of construction has been uncertainty, but IHS Global Insight is cautiously optimistic that capital spending will increase from the second half of 2015. Indeed, the strongest segment of industrial construction will be facilities producing transportation equipment.

The weak Euro also benefits Eurozone manufacturers, as other countries increase imports. The primary beneficiary will be Germany, but the industrial construction outlook is also strong for the UK, Ireland, Turkey and northern Europe, especially Finland.

Infrastructure spending is also providing impetus, as the need for fiscal austerity diminishes and countries catch up on deferred projects. Turkey and Norway lead growth in this segment, followed by Germany and the UK. Spain, Portugal and Greece offer meagre growth, but this represents progress from double digit declines.

The strongest turnaround belongs to Ireland, whose infrastructure construction contracted nearly -10% over the past five years, but which will see growth at about the regional average over the next five.

Over the next year, residential growth will be led by the UK and Sweden (+5.6% each) and Turkey (+5.5%). Ireland (+4.2%) and Germany (+4.0%) round out the leaders.

Ireland’s recovery is something of a base effect, having had one of the hardest hit housing markets, while the UK and Germany will benefit from strong consumer confidence and income gains.

Turkey has the most attractive demographic profile of the regional economies, with solid population growth and improving incomes.

Residential overhang remains in Spain, and fiscal policy and a lack of consumer confidence remain drags on residential construction in Greece and Italy. All three will continue to contract in the near term, and Norway’s residential spending is also set to shrink for the second consecutive year.

North-South divide

The differential between a moderately strong Northern Europe and a weaker Southern Europe market persists with this forecast. Scandinavia will enjoy moderate growth in the +1.5% to +2.5% range, with Sweden at the high end and Denmark at the lower. Austria is poised for +1.5% growth, while Switzerland and the Netherlands realise total construction increases near +2.0%.

Switzerland may have some struggles on the non-residential structures side as its current monetary policy hurts manufacturing competitiveness relative to Germany. France holds the middle ground at just +1% average growth.

Spain and Portugal are likely to return to growth in 2015, but construction spending will expand at less than +1%. Greece and Italy will see further declines in construction spending in 2015, and when growth returns, it will be so tepid that 2019 construction spending will be below 2014 levels in real terms.

Non-residential structures is the weakest link for Greece, as the uncertainty around its debt position makes investment unattractive, while a general malaise affects all segments of the Italian market.

Apart from Greece, the region has made progress with its fiscal and financial difficulties, and the construction outlook is mildly better today than even six months ago.

Some economies, notably Germany and the UK, have essentially thrown off the yoke of recession.

While a lower Euro will help, many countries remain constrained by a lack of international competitiveness, excessive regulation and uncertainty – none of which is conducive to structural investment. Combined with weak to stagnant population growth, there is no impetus to significantly revive the European construction market as a whole, although a couple of countries have decent prospects.