Construction output decreased by 3.8% y/y wda in November, according to preliminary data published by the state statistical institute today (all prints in adjusted terms). The deterioration in the sector continued, but was again milder than the 10.3% y/y fall a month before. In fact, that was one of the weakest falls in the sector recorded last year. The construction works decrease remained fuelled by the non-residential construction and the civil engineering segments, whereas the only positive move was again reported by new residential construction.
In more details, the residential construction kept on recording strong performances, even if its growth started to moderate as of October. The residential construction segment was backed by a very good performance of the real-estate sector in 2016, which fuelled some optimism among investors in residential projects. Nevertheless, we think that the positive mood could have faded as the interest rates growth will probably have a negative impact on demand for housing. Civil engineering output, which heavily relies on public investments, generally decreased at double-digits last year. The worsening was milder in November, most probably because the EU funds absorption recovery in the last months of 2017 fuelled several new public administration projects in the field. The non-residential construction segment recorded the most severe deterioration in the month again, partially over a relatively high base. However, a major private investor announced important office building projects, which might explain the softer decrease compared to the previous months last year. In addition, the increasing interest in industrial park construction and expansion should also add some positive effects soon. Hence, we expect some rebound in the non-residential segment in the following periods.
In the other breakdown, the capital and current repair works fell milder in November compared to the previous month. The weak public investment is also a major factor behind the deterioration in these segments. In addition, the high uncertainties in the fiscal and legislative frameworks keep the private investments on hold. The softer falls were very likely the result of the same factor backing the non-residential and civil engineering works. At the same time, the new construction segment accelerated increase, after turning to a moderate annual rise in October, likely fuelled by the office building and industrial park projects, in our view.
Generally, construction works remained on the fall. The worsening has been partially cushioned by some recovery in the new construction works mostly in residential areas this year, but the trend is less likely to continue due to the interest rates increase. The demand for houses or other new residential buildings will most probably contract in the following periods. The works in no-residential areas might take over with some improvement of the performance in the following periods. Meanwhile, the state’s investments remain weak, as the government is trying to keep the deficit below 3% of GDP after the notable wage hikes and tax cuts implemented in the past years. EU funds might further provide a significant financing source for infrastructure, but the promised absorption boost might lag due to the political tensions which affect the government’s activity.