eco TV Week

France: When the construction sector goes well, so does the economy

6/24/2022

“When the construction sector goes well, so does the economy”. This motto was emblematic of  the French business cycle behaviour over the last decades. As a matter of fact, current order books are still at their record level, roughly at 9 months. Against this background, the sector is experiencing heightened pressures, such as cost pressures, which are increasingly reverberating on prices and margins. Moreover, in parallel, demand is already decreasing as reflected by new orders. As a result, sector’s activity may well ease in the future.

Stéphane Colliac

TRANSCRIPT // France: When the construction sector goes well, so does the economy : June 2022

Inflation has accelerated in France during the last months. Insee’s consumer price index has increased by 5.2% y/y in May and should accelerate further to 6.5% in September according to our scenario.

However, there is one sector where inflation is even higher: the construction sector. The phenomenon is broad based, as new home construction costs and housing development exhibit increasing price pressure. Construction costs have increased by 7.4% y/y in April for the construction of new buildings and even by 11.2% in the civil engineering segment.

Housing development prices were 8.4% higher during the 1st quarter of 2022 compared to a year ago. Housing development retailers are facing the highest percentage of price rises, even more than food or car retailers.

Higher commodity prices are the main driver, through stronger energy prices and other commodities such as metals and minerals widely used in the construction sector.

These increased costs weighed on corporate margins. Within the construction, these margins have decreased to 27.9% during the 1st quarter, the lower level since 1996 (excluding the Covid period).

In parallel, the construction is still running at full capacity, benefitting from a record backog of orders, roughly at 9 months according to Insee survey. The sector has benefitted from high demand on all type of works. E.g. 28% of households were willing to spend on housing development in October 2021, a record level, according to Insee.

Moreover, building permits have increased at the end of last year in order to be registered before the implementation of a new environmental regulation that entered into force from 2022. This has contributed to both a high backlog of orders and strong activity levels in 2022.

However, last surveys suggest a key deterioration of new orders since the beginning of 2022, according to e.g. real estate developers and the building craft sector. It increases the likelihood for a reversal that may weigh on overall GDP growth probably from 2023.

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