Construction: An end to German Recession

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ConstructionAn end to German Recession?
David Thomas Oxford Economic Forecasting

• 26 May 2004
• Tel [phone]
• Email dthomas_at_oef.co.uk

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Residential

• Residential construction work has been the
  strongest growing sector
• This is very noticeable in the US, but also
  evident elsewhere in the Triad
• Driven by buoyant housing markets, but with
  different responses/elasticities
• Some evidence of backward bending supply curve
  at high house price inflation

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Housing market features
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Western European construction

• Excluding Germany, construction output has
  expanded by over 2 in each of the last years,
  with similar performance expected moving forward.
• This has been motivated by residential work
  recently, while non-residential construction is
  set to take over in the medium term.
• Led by the UK particularly in residential
  construction, with a large contribution from
  repair and maintenance. Public sector work has
  been offsetting weak commercial demand, but
  orders have jumped in recent months.
• Residential construction output has also been
  strong in France and Spain, driving further
  growth for construction as a whole.
• Italian output is falling, led by non-residential
  weakness.

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Germany end of the decline?

• After improvement in late 2003, construction
  output declined in 2004Q1.
• This will be a drag on output for the year as a
  whole.
• But confidence has improved again and is above
  its high point for 2003.
• Order books have also improved for both
  residential and non-residential work.
• Residential work is expected to peak first.
• Non-residential work will come later, following
  the production recovery

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Investment in structures
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Emerging market construction output
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Risks

• Risks are balanced around the cautious recovery
  expected for non-residential work. Excess
  capacity may be even greater than expected
  following the large expansions to mid-2001. But
  the expected upturn in production may cause
  stronger recovery.
• Continued strength in the housing market could
  drive further short-term gains in residential
  construction, only to be offset once interest
  rates rise. There is also the danger that
  builders are overzealous in responding to demand,
  leaving excess capacity and undermining future
  expansion.
• After years of decline, the weak recovery
  expected in Germany and Japan may not
  materialise, although the modest recovery could
  easily be exceeded if pent-up demand is
  unleashed.

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Continued low real interest rates

• Continued low interest rates have continued to
  drive housing demand, with double-digit price
  inflation.
• But responses to housing market strength differ.
• While, property remains an attractive investment
  option with low returns elsewhere.

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Investment in structuresresidential
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Investment in structures other
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Investment in structures total