Construction Sector Faces Persistent Decline Amid Rising Costs and Economic Uncertainty
According to EUROFER’s Economic & Steel Market Outlook 2025 2026, since the third quarter of 2022, the European construction industry has been under increasing pressure, with output suffering from multiple challenges. The rising prices of construction materials, coupled with labor shortages across several EU nations, have contributed to the sector’s ongoing decline. However, the most significant factor driving the downturn has been the impact of rising interest rates.
In 2022 and 2023, monetary policy tightening by the European Central Bank raised interest rates sharply to curb inflation. While this policy aimed to stabilize the economy, its consequences for the construction sector have been severe, particularly for the residential housing market. Higher borrowing costs have resulted in declining housing demand, which has had a cascading effect on construction investment and industry confidence.
Q3 2024: A Continued Downward Trend in Construction Output
The third quarter of 2024 marked the third consecutive quarter of declining construction output, which fell by 2.2% following a 1.2% drop in the previous quarter. This downward trend is not a short-term anomaly but rather part of a larger, sustained decline in the sector, largely driven by the delayed impact of interest rate hikes and the unpredictable nature of economic policies.
Despite the European Central Bank’s recent rate cuts, the recovery in construction output is expected to be slow. The lagged impact of monetary easing will take time to filter through the market, meaning that significant improvement in demand and construction activity will not materialize until at least 2025. Additionally, many EU countries face their own economic challenges, including stagnant wages, low investment in infrastructure, and political uncertainty, all of which continue to impact the construction sector’s overall performance.
Investment Decline: Residential Construction Struggles to Rebound
One of the most critical indicators of the ongoing downturn in the construction sector is the decline in investment. According to the latest data, construction investment dropped by 2.7% year-on-year in Q3 2024, further emphasizing the negative trend that has characterized the industry since 2022. This marks the third consecutive quarter of investment decline, signaling a broader contraction across both residential and non-residential construction.
Residential construction has been particularly hard-hit. In Q3 2024, investment in this sub-sector fell by 3.7%, continuing a downward spiral that began in 2021. This decline is primarily attributed to higher mortgage rates, which have reduced the affordability of homes and dampened demand for new housing projects. Even with some monetary easing, the impact of previous rate hikes is expected to linger, further exacerbating the challenges facing the residential construction market.
Civil Engineering and Public Construction: Limited Growth Amid Fiscal Constraints
While the residential segment continues to struggle, some sub-sectors, particularly civil engineering, have shown more resilience. This sub-sector benefits from significant public investment, which remains a primary driver of construction activity. Programs like NextGenerationEU have provided funds for civil engineering projects, including infrastructure and public housing, and have helped sustain some demand for construction services.
However, the overall growth in public construction has slowed. While civil engineering remains relatively strong compared to residential construction, it still faces considerable challenges, including material shortages and inflationary pressures. Furthermore, the EU’s economic uncertainty and tightening fiscal policies mean that the public sector is unlikely to be able to maintain the same level of investment seen in previous years. With the Stability and Growth Pact back in effect as of 2024, governments face additional constraints on public spending, limiting the room for infrastructure investment.
Although public spending on construction remains a key support mechanism, the effectiveness of EU-funded projects is uncertain as the economic outlook deteriorates. The implementation of NextGenerationEU projects, for example, will face delays as the economic environment worsens, making it harder to meet the ambitious targets set for these programs.
Private Non-Residential Construction: Investment Woes Persist
The private non-residential construction subsector, which includes projects such as offices, commercial buildings, and industrial facilities, has also struggled in recent years. The outlook for this sub-sector remains subdued, as businesses continue to adopt a wait-and-see approach to investment, given the uncertainty surrounding both economic conditions and business profitability.
Since 2020, the private non-residential sector has been particularly vulnerable to the broader economic slowdown, with vacancy rates in office spaces and commercial buildings remaining high. Although there have been some signs of recovery in certain regions, the overall demand for new non-residential buildings has been sluggish. As a result, investment in this subsector is expected to remain subdued through 2024 and 2025, further dragging down the construction industry’s performance.
Long-Term Forecast: Recovery Hinges on Monetary Easing
Looking ahead, there are some hopeful signs that the construction sector may begin to recover in 2025 and 2026. The expected easing of monetary policy, alongside efforts by the European Union to support economic recovery, could lead to an uptick in demand for construction projects. The forecasted growth rate for construction output in 2025 is 1.1%, with 1.8% growth projected for 2026.
This recovery, however, will largely depend on the continued easing of interest rates, the success of EU recovery plans, and the global economic environment. Additionally, significant investment will be required to address the shortage of skilled labor and construction materials, both of which are critical to ensuring the viability of future projects. While public construction may remain a stable source of demand, the recovery of private sector construction will likely be much slower and will depend on the broader business investment climate.
Past Trends: From Rebound to Decline
The construction sector saw strong growth following the pandemic downturn in 2020, when it rebounded by 6.3% in 2021. This growth was primarily fueled by government support schemes, which boosted investment in residential and civil engineering projects. However, this growth trend was short-lived, with the sector seeing a contraction in Q3 2022 and continuing declines through subsequent quarters.
The private non-residential sector has been particularly affected by changes in the business investment climate, with high vacancy rates in office buildings and low demand for new commercial spaces. These factors contributed to the downturn in construction output in 2023 and 2024.
Challenges Ahead for European Construction
The construction industry in Europe remains under pressure as it faces challenges from economic uncertainty, material price inflation, and rising interest rates. While public sector investment in civil engineering projects will provide some support, the sector is expected to face further difficulties in the short term. For the industry to recover in the long term, a combination of monetary easing, government support, and supply chain improvements will be essential. Although growth is expected in 2025 and 2026, the construction sector will likely remain in a recessionary environment for the foreseeable future, with limited opportunities for significant recovery.
