Gloomy Outlook for the Construction Sector


It wasn’t only industrial output that was down at the beginning of the year; the latest construction sector data also redrew the prospects for 2023. The arrival of EU funding is crucial for the sector.

The second reading of January’s industrial data confirmed the preliminary figures: in the first month of the year, the volume of industrial production declined by 0.2% year-on-year. Based on working-day adjusted data, production faired even worse and dropped by 3.2%. According to seasonally and working-day adjusted data, industrial output was 5.1% lower than in December 2022, the latest report by the Central Statistical Office (KSH) reveals.

The volume of industrial exports was 0.2% lower than a year earlier. Transport equipment exports, representing a 31% weight within export sales in manufacturing, grew by 19.5%, and exports in the manufacture of electronic equipment (accounting for a 14% weight) went up by 51%. Domestic sales of industry fell by 16.5% and those of manufacturing by 11.5% compared to the same month of the previous year.

A little more promising, though, was the fact that the volume of total new orders in the observed divisions of manufacturing was 1% higher compared to January 2022. New domestic orders dropped by 10.7%, and new export orders grew by 3.1%. The total stock of orders at the end of January was above the previous year’s level by 3.4%.

Like industry, the construction sector also started the year with rather disappointing data. According to the raw numbers, the volume of construction output in January 2023 lagged behind the previous year’s level by 3.6%. Construction of buildings declined by 4% and civil engineering by 2.1% on a year-on-year basis. Among the various construction divisions, production decreased by 7.8% in the construction of buildings, by 0.7% in civil engineering, and 1.9% in specialized construction.

The volume of new contracts concluded was below the January 2022 high base by 28%; within it, the volume of contracts for the construction of buildings was 23.2% lower, while the volume for civil engineering declined by 36.2% y.o.y. The stock of the end-of-January contracts at construction enterprises had lessened by 18.2% compared to the same period of the previous year.

Prices Still High

Price increases are still very high in the industry, mainly due to the rise in the price of construction materials, Gergely Suppan, head analyst at Magyar Bankholding, commented on the data. What is basically stagnation in the construction industry continued in January, and the macro factors also hint that the continuous growth levels seen in recent years will not characterize 2023, he says.

Based on the existing contract portfolios, there seem to be sufficient orders in the construction industry in the short- to medium term. But based on the declining level of new contracts, a further slowdown can be expected from the second half of this year, Suppan predicts.

According to him, the raw material prices, which have increased significantly and will continue to rise by another 10-15% at the beginning of this year, skyrocketing credit costs, and the falling private and restrained public demand all point in the direction of a slowdown.

“According to our estimate, there could be a decline of around 5% in the [construction] industry this year, and next year’s level is very uncertain in light of the order backlog. At the same time, in the next few quarters, the volume of residential construction, renovation, and government orders that are still in progress can provide sufficient volume,” Suppan wrote in a note.

On the demand side, a further notable slowdown in credit applications is inevitable at the current market interest rates. The financing and return on investments will also be questionable; however, the energy renovations segment will continue to represent a driving force in the construction market, Suppan says.

Less Attractive Alternatives

As for the investment market, demand is still lively, based on real estate market surveys. However, compared to the available returns at current price levels, inflation-tracking government bonds are becoming less attractive alternatives, so this segment may also slow down temporarily, according to the analyst.

Although previously the order stock was relatively high, and based on this, more favorable data was expected, the fall probably reflects the decline in demand, which is primarily explained by the significant backlog of government orders, although the decrease characterized all areas of the construction industry, Gábor Regős, head economist of Makronóm Intézet commented on the data.

“The latest data significantly redraws our picture of the [construction] industry’s prospects: while in December the order book was only 1.2% lower than a year earlier, at the end of January it was already close to 20%,” Regős explained.

“Even within this, a lag can be seen, especially in other construction, where government orders are significant, while in the case of company orders, the reduction is to a lesser extent,” Regős said.

The volume of new contracts also decreased significantly, by more than a quarter, and here the decline is also significant in the case of the construction of buildings. The question is how long-lasting or how temporary the decrease in order stock was, he noted.

The arrival of EU funds is crucial from the point of view of the development of the performance of the construction industry since a significant portion of the money finances some kind of construction or investment, Regős emphasized.

This article was first published in the Budapest Business Journal print issue of March 24, 2023.

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