German Construction Downturn Eases In February

germany feb14 06mar23 lt

Germany's construction activity continued to remain in contraction in February though the pace of decline has softened since the start of the year amid cooling cost pressures and supply-chain constraints, survey results from S&P Global showed Monday.

The construction Purchasing Managers' Index, or PMI, rose to an 11-month high of 48.6 in February from 43.3 in the previous month. Any score below 50 indicates contraction in the sector.

Among the three broad categories, the civil engineering activity rose for the first time in almost a year in February. The rate of contraction accelerated slightly in commercial activity.

The worst performing category was housing activity though it recorded a slower contraction with a comparatively faster decline than that of the commercial sector.

The drag down in construction activity was mainly attributed to a further fall in new orders on the influence of soaring prices for construction work, tightening financial conditions and general hesitancy among customers due to the uncertain economic outlook.

The rate of decline in new orders nonetheless was the slowest since March 2022.

German construction firms showed a negative outlook for the year ahead as the majority of companies expected a decrease in activity.

Building products and materials demand decreased in February. That was positive as it eased the pressure on supply chains. Firms reported their lowest delivery delay rate in nearly two-and-a-half years.

Easing supply-chain bottlenecks reduced the cost pressures in February. The rate of input price inflation softened to the lowest since November 2020. The charge inflation was the slowest for two years.

Workforce numbers associated with building companies fell for the eleventh consecutive month, but the pace of job shedding eased to a three-month low in February.

An analysis by the IfW Kiel Institute showed on Monday that lower real estate transfer taxes would lead to increased housing construction by the private sector in the backdrop of rising interest rates.

That would be cheaper for the federal states than financing new state buildings to the same extent through higher real estate transfer tax rates, the think tank said.

The IfW Kiel study was based on the two federal states of Bavaria and Saxony that have not increased their property taxes unlike other states. The number of new houses built in these two states from 2011 to 2020 were significantly more than in states with higher real estate transfer rates.

"A reduction in land transfer tax is apparently also an effective means of promoting new residential construction in particular and could help the construction industry out of the crisis in times of rising interest rates and prices," IfW Kiel Deputy Director of Research Jens Boysen-Hogrefe, who is also the author of the study, said.

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