German building sector pulls out of recession (FT)

Germany’s construction sector has emerged from a decade-long slump and no longer acts as a brake on economic growth in Europe’s largest economy, according to economists and companies in the sector.

Although hardly a boom, the bottom of the market has been reached, says Hans-Peter Keitel, chief executive of Hochtief, the country’s largest builder. “After almost 10 years of continual recession in the construction sector it is a highly important development: the market is moving upwards, even if it is in small steps . . .  If this development can continue, then construction can resume its traditional role as the motor of the German economy.”

The upturn in construction investment this year was cited by the federal statistics office earlier this week as a main reason behind a 0.9 per cent jump in German gross domestic product in the second quarter – the country’s fastest quarterly growth rate for five years. Domestic construction has been in the doldrums since the mid-1990s after a post-reunification boom that significantly overestimated demand for buildings.

Since then, the sector has lost 40 per cent of its revenues and half of its workforce but there are still broadly the same number of construction companies – 75,000 with only 6,000 employing more than 20 workers – meaning profitability is often elusive.

The biggest and most successful builders such as Hochtief and Bilfinger Berger generate most of their growth abroad.

“There is a huge atomisation in the sector and this leads to ruinous competition,” says Heiko Stiepelmann, deputy director of the HDB construction industry association. “But we are very positive because finally revenues have stabilised and we are thinking of lifting our forecast of 1 per cent growth this year.”

Construction order figures for June out later this month are expected to confirm a turnround since the middle of last year; May’s showed a jump of almost 12 per cent compared with the same month a year before.

Even if construction activity remained at the current level, that would be “good news” for Germany, says Dirk Schumacher, economist at Goldman Sachs in Frankfurt. “It would no longer be acting as a drag on growth.” The recession in German construction slashed GDP by more than 1 per cent in the five years to 2005, he calculates. In contrast, Spain’s booming construction sector increased GDP by 5.4 per cent over the same period.

The recent strength partly reflects a rebound after a bitter winter, which halted building work. Other exceptional factors may have been at work.

In stark contrast with the rest of the world, German house prices have hardly moved for a decade, though large-scale investments by private equity firms in housing have boosted hopes of a revival. Instead, the imminent abolition of private housebuilding subsidies for construction could have boosted orders last year; a planned three-percentage point rise in value added tax next year might have brought forward construction activity into 2006.

Public sector spending on construction appears to have recovered – but perhaps only because the pressures on finances are not as severe as in recent years. Infrastructure projects will remain vulnerable to the fiscal squeeze. However, the pick-up in business spending on construction almost certainly reflects the revived underlying strength of the German economy.
“The pick-up in housing and to a certain extent in public sector construction may reflect special, one-off factors. But businesses have invested in new premises to house the machinery they need for additional production – and that is a real sign of an economic upturn,” says Jörg Krämer, economist at Commerzbank.

“Construction will be one of the main drivers of Germany for the next few quarters,” says Mr Schumacher at Goldman Sachs. “But how sustainable is it? There are quite a lot of questions about 2007 and 2008.”

Mr Stiepelmann says a previous upturn in 2000 burned out almost as soon as it was noticed: “It was like a straw fire.” He is more optimistic this time but adds: “When you have lived through 10 years of ever- decreasing numbers, you are just thankful when the trend ends.”
Copyright The Financial Times Limited 2006