Germany’s construction industry is still in a recession, though the decline slowed down at the end of the second quarter. Growth in civil engineering and commercial projects helped somewhat, but residential construction remains a significant concern, hurting business confidence. Civil engineering is seeing growth, with its index rising for the third straight month due to an infrastructure package, although funds from the €500 billion plan have not yet been released. Private companies are finishing current projects quickly, anticipating future ones. However, input prices rose sharply in June, reaching a peak not seen in 28 months, due to higher material and labor costs. Suppliers are passing these increased costs onto construction firms. Despite more subcontractors being available, they raised their rates. Construction companies are worried about the new government’s plan to increase the minimum wage by over 8% to €13.90 in 2026. Confidence that existed in May turned into pessimism in June, largely driven by the ongoing downturn in the housing sector. The Housing Activity Index declined for two months, even though the ECB has lowered interest rates. Rising long-term rates, partly due to increased public debt, are influencing this decline.

Industry Sentiment Shifts

The article describes the ongoing recession in Germany’s construction sector, where residential construction continues to weaken despite some growth in civil engineering and commercial works. Although these sectors are making progress, the steep decline in the housing market is the main issue affecting business sentiment, particularly in residential construction, which is facing rising costs and uncertainty from policies. The civil engineering sector is showing positive results, largely due to hopes of future infrastructure spending. However, this optimism is based on plans yet to be financed from the €500 billion fund. Companies are focused on completing current orders before new projects become competitive. This suggests a drive to finish old work rather than an increase in new demand. Additionally, prices for materials like concrete and copper are rising, with June marking the highest material inflation in over two years due to increased labor costs and supply delays. While subcontractors are now easier to find, they are also raising their rates, likely in anticipation of wage increases and future costs. The planned minimum wage increase to €13.90 by 2026 could shrink profits for labor-intensive firms. Larger companies might again raise rates to maintain profit margins, while smaller firms may struggle more.

Monetary Policy Challenges

A notable shift occurred from May to June. Confidence briefly improved following changes in interest rates but quickly turned to unease. Despite the European Central Bank lowering its policy rate, long-term borrowing costs remain high, reflecting increasing sovereign debt, which drives up yields and mortgage rates. This shift is particularly impactful for those in residential development, where future investment interest is waning. Buyers are cautious due to high project costs, wage uncertainty, and difficult lending terms. The current situation suggests slimmer margins in the short term, especially since housing bookings are low. With a growing gap between input costs and consumer demand, further declines in volume are likely. Consequently, holding onto long-term projects seems unattractive unless protected against fluctuations in material or wage costs. In these conditions, we typically reduce bets on overall building activity and focus on where volatility may occur, particularly in subcontractor pricing and civil engineering assumptions. Optimism around infrastructure has begun to wane, and activity contracting does not align with funding timelines, warranting close evaluation. Additionally, wage increases are directly affecting cash flow as they are being anticipated sooner than planned. Companies may adjust build timelines to safeguard against unexpected price changes. Long-term interest trends have not clearly translated into confidence. The continuing decline in the Housing Activity Index, despite central easing, suggests a deeper issue that monetary policy alone won’t solve. Businesses should prepare for further changes in profitability expectations for residential-focused firms. Create your live VT Markets account and start trading now.

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