Construction boom supports the German economy

The fact that the German economy did not slide even deeper into recession because of the Corona pandemic is due not only to government consumption, but above all – in contrast to other countries such as the UK – to the pleasing development of the construction industry. It is true that construction investments also declined this spring. However, this was not due to the corona crisis, but to the extremely positive performance in the first quarter.

In the first half of 2020, construction investments increased by 3.2 percent in real terms and by as much as 6.3 percent in nominal terms compared with the same period in the previous year. By way of comparison, investment in machinery and equipment slumped by 18 percent in nominal terms and by over 19 percent in real terms in the same period. The importance of construction investments for the German economy thus continued to grow. While the share of construction investments in the nominal gross domestic product (GDP) was only 8.7 percent in the first half of 2005, it was 12.1 percent in the first half of this year.

Although incoming orders in July were down on the record level of July 2019 and on the previous month, the success story of the German construction industry is continuing for the time being: In June, sales in the main construction industry exceeded the previous year’s result by 11 percent. For the first half of the year as a whole, sales grew by 6.5 percent. This also had a positive impact on the labor market. In the first half of the year, there were 1.6 percent more people employed in the construction industry than a year ago. Sales also rose in the first six months of this year in the SME-oriented finishing trade (+ 5.4 percent). The number of employees increased by one percent.

Both major construction segments thus defied the corona crisis. However, they are reaching the limits of their capacity, not least due to the shortage of skilled workers. This is also reflected in prices. Producer prices in building construction and civil engineering rose by over 3 percent in the first half of this year, while they fell slightly in the manufacturing sector.

In the long term, the upturn in the construction industry can be attributed in particular to residential construction. Since 2017, however, public-sector construction has also seen above-average growth. This is mainly due to the fact that the investment backlog in infrastructure has finally begun to be reduced. In the longer term, however, this trend is unlikely to simply continue. Public-sector construction investments will be put to the test again at the latest when government budgets are again subject to pressure to cut costs. This is likely to be the case for municipalities first.

Investment in commercial construction has developed noticeably more slowly in the past 20 years than in public sector construction and residential construction. Moreover, commercial construction cannot entirely escape the effects of the Corona crisis. However, demand for logistics real estate should be an exception due to the triumphant advance of online trading.

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