Germany’s construction sector saw its Purchasing Managers’ Index (PMI) drop to 44.4 in May, down from 45.1 in April. This decrease is sharper than in previous months, even though civil engineering is beginning to show signs of recovery. Homebuilding and commercial construction are still struggling, but for the first time since 2022, companies are feeling positive about the year ahead. Civil engineering makes up about 14% of the sector’s value and has shown some improvement. A recent government infrastructure package could help boost ongoing projects. However, residential and commercial construction are facing difficulties. Rising long-term government bond yields and input prices are hurting profits. Even though the European Central Bank (ECB) has cut interest rates in the short term, it hasn’t had a significant impact on the sector.

Cautious Outlook for Construction Sector

The outlook remains cautious as new orders continue to decline, indicating that a recovery is not on the horizon. The improved sentiment is influenced by political changes and upcoming infrastructure plans. Confidence levels have returned to those seen in early 2022, but real growth might not happen until 2026. This slow progress could extend beyond civil engineering to other areas of construction. The drop in Germany’s PMI to 44.4 in May signifies a further decline in overall construction activity. This index measures monthly changes and remains below the neutral mark of 50, showing that the industry is contracting. Civil engineering, which had been stagnant, is now starting to recover. This segment, which accounts for roughly one-seventh of the sector’s value, has gained support from recent government fiscal programs. Yet, other areas continue to face challenges. Residential and commercial construction face ongoing pressure. Higher government bond yields have increased financing costs, affecting profit margins and discouraging new investments. Rising input prices have added to the financial strain. Even with the ECB lowering rates, relief has been limited. Output in weaker areas, like homebuilding, continues to decline. New business is declining, meaning that workload pipelines aren’t being refilled. This limits short-term hiring and impacts the broader supply chain. Although sentiment has improved, tangible growth may take time. Optimism has returned for the first time in nearly two years, driven by changes in political tone and clearer commitments from Berlin toward infrastructure improvements.

Bridging The Gap Between Optimism and Output

What matters now is not just the positive expectations but whether construction orders start to reflect this optimism. For those concerned about future price changes, fixed asset investment data will be critical. If indicators for civil engineering activity keep improving, it could lead to more predictable contract pricing. However, the rest of the sector remains cautious. While confidence has bounced back close to pre-downturn levels, significant projects may not resume until 2026. Any shifts in government priorities or ECB policies could change this trajectory. The key is to see if expectations turn into actual orders and cash flow, especially in areas beyond civil engineering. We are closely monitoring the gap between sentiment and actual output. It’s not enough for survey-based optimism to rise. Unless this is matched by new tenders or construction starts, the sector will remain subdued, particularly in medium-sized commercial projects. Market pricing for long-term construction contracts will likely continue to be sensitive to ECB communication and shifts in the fiscal landscape. The focus now is not on confirming a recovery but on closing the gap between hope and execution. Until tender pipelines become more substantial and capital spending resumes, risks will remain skewed to the downside. The near-term trend will be influenced by input costs, forward orders, and interest rate signals—not sentiment alone. Create your live VT Markets account and start trading now.

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