EECFA countries in the European Commission’s 2022 Macro Forecast

Prepared by Tünde Tancsics and Dóra Barát – ELTINGA-EECFA Research

Prior to the publication of our 2022 Summer EECFA Construction Forecast Report, the European Commission released its forecast for the economic prospects for EECFA countries. Here are the main changes in the prospects between Autumn 2021 and Spring 2022. And as a comparison, at the end of the post you can check how we have revised our forecast.

Economic outlook has deteriorated in almost all EECFA countries compared to autumn but remains positive in most. The only exception is Russia where the economy is expected to shrink instead of the previously anticipated growth due to the war and the related sanctions. The prolongation of the war could also lead to a further decline in the economic growth of all countries.

Link to this viz >>

Apart from Russia, the rest of the EECFA countries (plus Hungary, which is a Euroconstruct member) were expected to see high growth rates of over 3.8% in Autumn 2021. The slowdown of economic growth in Slovenia and Serbia is projected to be moderate, respective -0.5 and -0.7 percentage points in the Spring 2022 forecast for the period of 2022-2023. However, all other EECFA countries have larger projected declines in economic growth (ranging from -1.2% to -6.9%) compared to both the EU and the Eurozone. The forecasted economic growth fell most in Russia, Romania and Turkey (-6.9, -2.1 and -1.5 percentage points respectively). Russia is the only country that not only represents an economic contraction (-4.45%) but is also the only EECFA country to remain below the estimated GDP growth rate of the EU and Eurozone for Spring 2022. Thus, apart from Russia, the others still have the same or higher economic growth than the EU average.

In terms of gross fixed capital formation (investment), predicted growth has decreased in both EECFA countries and the Euroconstruct member Hungary, as well as in the EU. However, the extent of this decrease varies significantly among countries. Whilst in the EU and the Eurozone, projected GFCF growth fell moderately (-1.1% and -0.9%, respectively), all other countries are expected to see a decline of over 2 percentage points, Bulgaria excepted. This implies, for instance, stagnating GFCF in Bulgaria and a remarkably large negative growth in Russia (-11%), similar to the GDP growth indicator. There is also a notable falloff in Hungary and Romania (-4.9 and -4.6 percentage points, respectively), although the former started from an expected growth of more than 10% in autumn, while the latter from only 6%. It suggests that the estimated growth of the GFCF for 2022-2023 in Spring 2022 is just above 1% in Hungary. In other EECFA countries, the decline in GFCF growth varies between 2.2 and 3.1 percentage points.

Construction growth has been revised downward everywhere except for Bulgaria (0.4 percentage points). While in the EU and Eurozone the indicator declined by approximately 1 percentage point, in Slovenia, Romania and Hungary, construction growth is to fall by more than 5 percentage points in 2022-2023. However, growth remains positive for every country where data is available, with Bulgaria leading the prospects (6.6%).

So this above is the European Commission’s opinion. And here you can check how we, EECFA see the upcoming years for Eastern European construction markets. Croatia and Slovenia are on the top, while Russia and Serbia are on the bottom.

Link to this viz >>

Our approach is different from that of the Commission, as we provide forecast for each segment of construction. That is, we have a bottom-up approach, where forecast is computed separately for residential, office, retail, industrial buildings, roads, railways, utility etc. segments. Mail us if you are interested.

Or check our sample report and order on eecfa.com

EECFA 2022 Summer Construction Forecast – Military conflict edition

EECFA’s 2022 Summer Construction Forecast Report was released on 27 June. Full reports can be purchased. Discounts and sample reports: info@eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Our earlier optimism over the Southeast European region of EECFA has gone. The current forecast is foreshadowing almost no growth until 2023 and contraction in 2024. The main reason behind is the worsening climate for construction due to the consequences of the Russian invasion of Ukraine. In the Eastern European region, we have turned pessimistic. The market of Russia and Turkey together is projected to stay below its 2021 level until 2024. We haven’t been able to provide our standard forecast for Ukraine in this summer round, but a status report has been compiled. We will resume providing forecast as soon as construction-related data collection of Ukrstat returns to normal.

Link to the viz >>

Forecast for Romania, the largest Southeast European construction market, has been revised downward. Instead of expansion, shrinkage is our current scenario. Serbia, which was the fastest growing market in the past 7 years, has an even more pessimistic outlook than in the previous forecast round. In Bulgaria, a whole different trajectory of spending EU funds is the reason behind the revision. We are negative on Russia all the way over the horizon and in Turkey the start of the recovery is expected to be postponed for yet another year.

Bulgaria. Owing to several external and domestic factors, outlook for Bulgaria’s economy to grow faster in 2022 has been reduced. And this year the construction market has entered a period of increasing unpredictability and heterogeneous performance. Residential construction has benefited from favourable financing conditions, and residential property has been used as a hedge against inflation. However, this will not last forever. EECFA is not optimistic in non-residential construction, while civil engineering could expand over the forecast horizon. Total construction output is prognosticated to be in the black with low, but positive growth rates in 2022-2024.

Croatia. The picture for Croatia’s construction sector is mixed, both from sector to sector and within sectors. Sector-to-sector, the output growth rates of Croatian construction sectors are decoupling, as some come close to completing the post-transition catch-up growth phase, while others are not nearly so far along. Within sectors, the strength of crucial output drivers, e.g., tourism season results, construction cost inflation, interest rate evolution, is uncertain and very dependent on events and policymakers’ reactions to them. Overall, the picture looks bright now, especially for residential construction, but the fight against inflation or a serious new COVID-19 outbreak could darken it rapidly and considerably.

Romania. As the short-term effects of the pandemic dissipate, the economy faces new challenges such as inflation and global trade disruptions. GDP is set to grow by 2.9% in 2022, in real terms, down from the previous prediction, but by 2023 (+4.4%) and 2024 (+4.8%) growth could accelerate (source: the National Forecasting Commission). Construction showed signs of recovery, so total construction output is to nominally grow, but slightly decrease in real terms this year. Material and energy prices have battered infrastructure projects hardest as seeking extra financing can be lengthy and difficult. Threats to construction growth in this forecast horizon are evidently increased costs of materials and energy, counter-inflationary policies, and the instability caused by the neighbouring war to regional and global trade networks. Countering these are the positive outlook for wages, employment, investment, and the overall economy. The availability of EU programs for co-financing, including the Recovery and Resilience Facility, could also help certain construction segments.

Serbia. In these challenging times, it will be a real endeavour to keep the pace and level of construction activity, even for a heated and growing Serbian economy. Unfortunately, economic and political developments in Europe are threatening to forcefully subdue the growing cycle in construction and the economy as a whole. So far, the economy is showing a relative resilience and construction activity has only slightly decreased compared to its expected performance in 2022, while permits are still keeping the good tempo. Nevertheless, the risks are still there, and a prolonged instability could produce a much deeper downturn and longer recovery. The strong performance of civil engineering and residential will assist this year’s output levels, but prospects for the rest of this forecast period are still quite conditioned by external factors. The ongoing economic crisis in the EU could easily escalate and produce further adjustments for 2023 and 2024 figures.    

Slovenia. Construction output increased fast in 2021 as the pandemic subsided. With rapid economic growth following in 2022, total construction output will likely exceed EUR 4 billion for the first time since 2008. Real growth will be slower, though, as construction cost index has also increased with the fastest pace in a decade, up by more than 10% in 2021 and 2022. Future growth is projected to be slower, especially if interest rates grow faster than expected due to high inflation rates. Still, several large civil engineering as well as residential construction projects are set to continue and prevent construction output from decreasing. 

Russia. Last year, the Russian economy showed strong recovery, partly on the back of construction whose growth turned out to be much better than expected (6,8% instead of 3,2% that EECFA had previously forecasted). The reasons behind were the active completion of non-residential projects that had been frozen in 2020, high demand in the housing market that supported construction activity in residential, and considerable state funding for various infrastructure projects that accelerated growth in civil engineering. However, the special military operation in Ukraine that began in February this year has neutralized all positive trends in construction and has led to a sharp worsening in the macroeconomic situation. Unprecedented economic sanctions imposed on Russia will inevitably affect the construction sector whose output is predicted to be negative throughout the forecast horizon: -2,7% in 2022 and from -1% to -1,4% in 2022-2024.

Türkiye. The Turkish economy is facing an unprecedented devaluation in Lira and soaring inflation, hammering wage earners. Manufacturing sectors relying on imported inputs, agriculture, and construction in particular, face difficulties in financing production and selling to customers with lower real incomes. But industrial production and exports are not much hit by the weakened Lira. Since the beginning of 2022, housing shortage, high dwelling prices and rents have been an issue. In the last 21 years fewer homes were built than the need, and the around 3,8 million Syrian refugees and illegal migrants appear to contribute to housing shortage. Due to the roughly 2,8 million dwelling units under construction, housing starts in Q1 2022 may continue to fall by the end of the year. The small decline in housing completion, however, because of declining demand under current macroeconomic conditions, may turn into a positive rate of change under the effects of interest rate subsidies for mortgage loans. Total construction output in Türkiye in 2022 is estimated to contract, so it would be the fourth consecutive year of decline. Mild recovery is expected to begin from next year on.

Ukraine. Since February 2022, Ukraine has been at war with Russia. As of June 2022, the Russians destroyed up to 30% of Ukraine’s infrastructure, damaged 2% of overpasses and more than 23,000 km of roads in Ukraine. About 20% of Ukraine’s territory is being occupied. Russia blocked the seaports through which imported goods were delivered to Ukraine. Building material factories and warehouses mostly remained in the occupied territory and most developers have frozen their projects for an indefinite period. Despite this, some positive signs are beginning to appear in the construction market, mainly in residential where the market is gradually reviving, adapting to the military situation (especially in the relatively safe western region). Little by little, critical infrastructure is being restored (destroyed bridges, roads, electricity and gas supply, communication lines). Under these conditions of major uncertainty, and before the end of the war, predicting future developments in the construction market of Ukraine is impossible. Therefore, Uvecon, EECFA’s Ukrainian member institute in Kiev, prepared a brief Status Report this time instead of the usual Forecast Report.

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Source of data: EECFA Construction Forecast Report, 2022 Summer

Contact information: www.eecfa.com, info@eecfa.com

Q1 2022 Permit-Completion in EECFA area

Latest update: 14 June (with Q1 data)

Optimism, growing requests for construction permits had characterized the smaller countries before the consequences of the war started to be felt. In the meantime, recovery has stopped in Türkiye and in Ukraine. (Of this latter the coverage and the reliability of the data is still unknown. We have asked Ukrstat about at, as soon as the answer arrive we will update this post.) Russia has recorded a peak in completion at the beginning of 2022.

The Permit-Completion visualization contains data on 8 EECFA (Bulgaria, Croatia, Romania, Russia, Serbia, Slovenia, Turkey, Ukraine) + 1 Euroconstruct countries (Hungary).

Open the full visualization with the link below and come back, and CONTINUE READING for hints:

EECFA Permit-Completion Quarterly – 14 June 2022

Continue reading Q1 2022 Permit-Completion in EECFA area

Q1 2022: new record in Hungarian construction

Press Release on EBI Construction Activity Report Q1 2022

The Hungarian construction industry started off this year with an exceptionally high Activity Start indicator: nearly HUF 1,300 billion worth construction works started in Q1 2022. The Activity Start of EBI Construction Activity Report in the first quarter is a new record (construction works have never started in such a high value in one quarter) and exceeded the level of Q2 2021 (the highest so far) by almost 37%. Yet, this spike is mainly thanks to the launch of two major projects: 1) the Soroksár-Kelebia section of the Budapest-Belgrade railway corridor and 2) the road section between Kecskemét and Szentkirály on M44.

EBI Construction Activity Report Hungary analyses the construction industry on a quarterly basis, including the volume of newly started construction works and the value of projects completed in each quarter in aggregate and by segment as well. It is prepared by Buildecon, Eltinga (creation of indicators and development of algorithms for aggregation) and iBuild (project research and project database). The EBI Construction Activity Report Q1 2022 has been released and can be purchased at ebi@ibuild.info.

Stagnant building construction

The value of started building construction projects was slightly more than HUF 430 billion in the first 3 months of 2022; a good start to the year. The Activity Start of EBI Construction Activity Report was a bit below the value of the same period of the previous year but compared to the last two quarters of 2021, there has been no major change in the Activity Start of building construction. And the first 3 months of 2022 were considerably better than the period between April and December 2020.

Within building construction, the Activity Start of residential construction was modest: the value of started construction works stayed below HUF 90 billion. The Activity Start indicator of non-residential buildings was almost HUF 350 billion in Q1 2022, lower than the very strong first 2 quarters of 2021, but almost the same as the values of Q3 and Q4 2021.

The biggest started building projects in Q1 2022 included Kovács Katalin National Kayak-Canoe Sports Academy in Sukoró, eMAG logistics centre in Dunaharaszti, and ActiCity Event Center in Veszprém. In Budapest, the construction of BEM Center office building and Kimpton Hotel (District 2), as well as Phase 2 of Corvin 7 office building (District 8) entered construction phase.

Big numbers in civil engineering

Construction start on the Budapest-Belgrade railway line between Kelebia and Soroksár, and the section of M44 between Kecskemét and Szentkirály brought an outstanding Activity Start indicator for civil engineering. The total value of launched projects went up to an unprecedented HUF 850 billion between January and March 2022; twice the previous record value of Q1 2018. The Activity Start of civil engineering in the first 3 months of 2022 exceeded the full annual value of both 2020 and 2021.

The total value of road and railway construction works within civil engineering was almost HUF 800 billion thanks to these two large-scale projects. It is indeed the highest value of the last decade. But non-road and non-railway civil engineering projects, similarly to the last two quarters of 2021, started in a low value again.

In addition to these two big-volume projects, key civil engineering projects include the Phase 2 of main road 33 (Debrecen).

Continue reading Q1 2022: new record in Hungarian construction

Potential impact of the war in Ukraine on the Bulgarian construction market

Written by Yasen Georgiev, EPI, EECFA Bulgaria

Like elsewhere in the EECFA countries that are not directly impacted by the war in Ukraine, construction market in Bulgaria entered a period of an increasing unpredictability. What stands behind is an interplay between domestic and external factors.

The Bulgarian construction market entered 2022 with a mixed performance: booming residential construction, stagnating non-residential one and a rather heterogeneous civil engineering. Residential construction benefited from favourable financing conditions and fears for inflation that turned property investments into a safe haven. At the same time, non-residential construction was struggling to recover from the Covid-19 shock. Civil engineering was heavily impacted by the lack of clear future prospects and direction because of the political turmoil in 2021 with three rounds of parliamentary elections, and the absence of new EU funding (Bulgaria’s Recovery and Resilience Plan was approved by the European Commission in April 2022, while the EU’s Operational Programmes are still not finalized).

Sofia, Bulgaria. Source: pixabay.com

The war in Ukraine, however, increased the level of uncertainty throughout the entire construction market. Building material costs and shortage and/or equipment shortage were the fastest growing factors limiting the activity of construction enterprises in February-April 2022. Despite the slow pace, the number of clients with payment delays over the last months was also on the rise. As a result, the overall business climate in the construction sector started to deteriorate rapidly in April (Source: NSI, Business survey in construction).

Simultaneously, the headwind from the pre-war period in the residential segment continues. Compared to Q1 2021, permitted residential buildings increased by 20%, dwellings in them by 8%, and their total built-up area by 14%. However, signs of cooling are in sight: compared to the previous quarter, permitted residential buildings decreased by 3.1%, the number of dwellings in them by 23.4%, as well as their total built-up area by 17.1%. On quarterly basis, started residential buildings in Q1 2022 dropped by 4%, their total built-up area contracted by 10%, although dwellings in them went up by 5% (NSI, building permits issued for construction of new buildings).

Similar trends are to be seen elsewhere. In Q1 2022 permitted administrative buildings decreased both in number (by 45%), and in total built-up area (by 54%) compared to the previous quarter. Issued permits for construction of other types of buildings are less by 8%, and their total built-up area down by 28%. On an annual basis, there is a reduction of issued permits for construction of administrative buildings and their total area, respectively by 35% and 82%. Permits issued for construction of other buildings sank by 4%, as well as their total built-up area by 1.3%. Against the previous quarter, started administrative buildings and their total built-up area shrank by 21% and 51%, respectively. Started other types of buildings also decreased by 6%, as well as their total built-up area by 15%.

What becomes evident from the data above is that the construction market is most likely to keep a high level of volatility triggered by two opposing market forces:

  1. the need for investors to search for shelter from inflation and
  2. the necessity for developers to adjust to market conditions they are not used to (material shortages, constant upward changes in prices of materials and fuels, and labour costs).

In that puzzle, the situation in Ukraine will further affect the sector, surely not in a predictable way and most probably neither in a positive one. However, the government is yet to finally start investments within the Recovery and Resilience Facility in 2022, which, accompanied by unleashing the EU funding from other sources in the years to come, might secure a soft landing for the sector before its potential new take-off when the market regains momentum again.

EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Bulgaria. The current reports were issued in December 2021 and the next reports will be issued on 27 June 2022. For orders and sample report: eecfa.com

Destruction of the built environment and consequences of the war in Ukraine

Written by Sergii Zapototskyi – UVECON, EECFA Ukraine

On 24 February, 2022, Russia, with the support of Belarus, started an open military attack on Ukraine. Since the first days of the full-scale invasion of Ukraine, civilians, ambulances, orphanages, hospitals and residential areas have come under shelling and airstrikes; a deliberate massive violation of international humanitarian law. As per the UN Human Rights Office (OHCHR), between the outbreak of hostilities and 2 May, 6469 civilian casualties were recorded (3153 killed and 3316 injured) in Ukraine and the territories controlled by the partially recognized republics of Donbass. Deceased civilians included 226 children, while the wounded comprised 319 children. In Donetsk and Luhansk regions there were 3241 casualties (1,638 killed and 1,603 injured), including 484 casualties (99 killed and 385 injured) on the territory controlled by the self-proclaimed republics. OHCHR believes that civilian casualties are likely to be ‘considerably higher’, though, especially in Mariupol, Popasnaya, Izium and Borodianka where intense fighting has taken place and is continuing.

All photos were made by Sergii Zapototskyi

Refugee crisis

The invasion has caused a major migration crisis: according to the UN, as of 26 April, 5.32 million refugees left Ukraine, mostly to Poland (2.848 million), Romania (0.764 million), Russia 0.563 million), Hungary (0.476 million), Moldova (0.429 million), Slovakia (0.346 million), and Belarus (0.024 million). As of 21 March, roughly 6.5 million people became internally displaced, mostly women with children and elderly people. According to UNICEF, more than half of the children in Ukraine have become refugees. At present, according to opinion polls, 73% of refugees seek to return home, but if the war drags on, and the scale of destruction caused by the shelling of peaceful cities by Russian troops increases, the vast majority of migrants will simply have nowhere to return.

Economic damage

The 9 most affected regions account for 30% of Ukraine’s GDP. GDP contraction in 2022 is forecasted to range from 10% to 35%-40% (provided that the occupied territories do not increase, and the active phase will last for several months). These figures correspond to a reduction in electricity consumption of around 35% (published by DTEK, the largest private investor in the energy industry in Ukraine). The sources of at least 70% of Ukrainian GDP remain more or less intact. Total losses of the Ukrainian economy (direct and indirect) due to the war range from USD 564 billion to USD 600 billion. Direct documented damage to infrastructure is estimated at USD 88 billion. In the last week of April, direct losses to the Ukrainian economy due to destruction and damage to civilian and military infrastructure grew by USD 3.1 billion.


Destruction to infrastructure, industry, residential buildings

The destruction of the Russian invasion is wide-scale, hammering infrastructure, industry and residential areas. As of today, at least 23000km of roads and 32000sqm of housing stock have been destroyed or seized. The housing stock was especially badly damaged where there were active battles and shelling by aircraft and artillery continued:
i) In Mariupol (Donetsk region): according to local authorities, 90% of buildings were torn down.
ii) In Irpen (Kyiv region): 50% of buildings were destroyed.
iii) In the administrative divisions of Kyiv oblast: 1875 objects were damaged (546 completely destroyed, 1329 partially ruined).
iv) In Kyiv region: 28 multi-storey buildings, 441 private houses, 8 educational institutions, 4 healthcare institutions, 8 cultural institutions and 2 sports institutions were wrecked.
v) In Kharkiv: heavily shelled by Russian artillery, more than 1300 residential multi-storey buildings, 70 schools, 54 kindergartens, 16 hospitals were badly damaged.
vi) In Kyiv city: more than 100 buildings were damaged, including 6 schools and 14 kindergartens. The load-bearing structures were damaged in 6 residential buildings, which cannot be restored, so they will need to be dismantled. All other buildings have to be restored.

Within the total direct documented damage, the biggest losses to infrastructure are the costs of housing stock and the assets of companies. 40% of the total number of damaged, destroyed or seized residential buildings and enterprises are in Donetsk region, 23% in Kharkiv region, 12% in Chernihiv region and 8% in Kyiv region.

In total, 535 kindergartens, 866 institutions of secondary and higher education, 231 medical institutions, 173 factories and enterprises, at least 75 administrative buildings, 277 bridges and bridge crossings, 11 military airfields, 11 airports and 2 ports are damaged or destroyed in Ukraine. There is not a single hospital in Luhansk region with no damage and in places of active hostilities there are military doctors and the wounded and seriously ill are evacuated to safe places. Also, as of the end of April, at least 95 religious and 130 other cultural buildings were damaged, destroyed or seized: 47 religious buildings, 9 museums, 28 historical buildings, 3 theaters, 12 monuments, 3 libraries and more.

Right now, there is a necessity to find resources for specific projects for the restoration of housing stock. And the post-war restoration of Ukraine’s infrastructure and economy will depend, among other things, on the return of Ukrainians from abroad (workers, business development, industry, etc). One area is the planning and expansion of the housing stock in the western regions of Ukraine where there are at least 5 million internally displaced people as during the war people might integrate into a new place and some might not return to their regions of origin. After the end of hostilities, it is also necessary to rethink and restart life. The experience of war confirms that new houses will have to be built with a fortified underground parking (like they do in Israel), using energy-saving technologies, for example.
 
In the framework of the program to relocate enterprises, up to 1500 industries can be transferred to 9 western regions (currently about 121 enterprises have moved). Losses of industrial assets amount to USD 6.7 billion (about 100 industrial enterprises were damaged or destroyed). Metallurgy lost at least 30% of assets with the biggest losses registered by Azovstal and MMK Ilyich respectively (the second and third largest plants).

Damage to export and agriculture

Export of goods from Ukraine is limited as Russian troops blocked Ukrainian ports in the Azov and Black Seas. Road and rail infrastructure can also transport limited volumes of goods due to the mass evacuation of Ukrainians by railway and roadblocks. By sea, Ukraine transported 62% of the total dollar value of goods, while by rail 12% and by road 23%.
 
Agriculture is a direct victim of the Russian aggression with the fighting often taking place on Ukrainian fields/farms. About 13% of the territory of Ukraine is covered with landmines plotted by Russians. There is a risk of a protracted war in Kharkiv, Luhansk, Donetsk, Zaporozhye and Kherson regions whose share of wheat production is 23%, corn is 3%, barley is 21% and sunflower seeds is 20%.

Post-war recovery

The main prerequisite for the post-war economic recovery is for Ukraine to receive reliable security guarantees that hostilities will not resume on her territory. In the absence of this, private investment will be reduced to zero, economic activity will be stifled, and security costs will have to be relied on business, raising the cost of economic activity and undermining competitiveness.

Key goals of the post-war economic recovery should be: i) real estates and infrastructure destroyed or damaged in the war should be restored; ii) economic activity should resume swiftly; iii) refugees and internally displaced persons should return and be involved in economic processes; and iv) foundations for a sustainable economic growth should be established.

In the long run, rebuilding and restoring Ukraine will cost at least USD 600 billion, including not only the restoration of infrastructure, but also the development of a new economy and new European institutions. Options for funding might comprise the frozen assets of the Russian Federation and the European and American funds for the restoration of Ukrainian infrastructure. The EU plans to create a solidarity trust fund to finance the post-war reconstruction of Ukraine (similarly to the Covid-19 recovery fund) and finance investments and reforms in agreement with the government of Ukraine. It is not yet clear how much will be provided through grants or loans as the war in Ukraine still rages on, but the EU told ambassadors that the figure would reach hundreds of billions of euros within decades. The Ukrainian diplomacy should focus on obtaining the EU candidate status and then obtaining full membership; so the program of post-war reconstruction should be harmonized with the tasks of EU membership and ensure the inclusion of Ukraine in the European pre-accession training programs.

Potential impact of the war in Ukraine on the Serbian construction market

Written by Dejan Krajinović, Beobuild Core d.o.o., EECFA Serbia

Serbia’s construction market was booming when the economic and geopolitical situation changed, so the complicating circumstances in the world are stifling the potential growth and slowing down the ongoing recovery. Inflationary pressures have exploded with the start of the war in Ukraine and the effects of the current crisis are still unforeseeable.

Ada Bridge over the Sava River, Belgrade, Serbia. Photo by Beobuild, EECFA Serbia

Although Serbia is not directly involved in the economic war between the EU and Russia, spillover inflation in construction materials and energy will inevitably shake the construction market and its outlooks. At the moment, it is very hard to predict the developments as many political and economic decisions in the coming months will actually decide the exact scenario. Inflation has deep roots in EU monetary policies, and it started long before the war in Ukraine, so there is no simple and easy solution. What tools monetary and fiscal authorities will choose to combat inflation will be a crucial factor, but without trade normalization with Russia, any recovery is hard to imagine.

Worse than a high price is an unstable price, and the continuous increase in building material costs are already causing problems in contracting new projects. Construction companies are updating their contracts to allow flexibility in costs, particularly on projects with long deadlines. In 2021, construction costs rose 8.8% against 2020, with double-digit contribution of construction materials during the second half. This strong negative trend extended with even more steam in 2022, as global commodities reached record prices in decades. The rise in construction material prices reached 17% in Q1 2022, but this is hardly the end. Luckily, until now there has been no shortage of materials on the market, but the disruption in flow of oil and natural gas could halt production and create serious supply problems across Europe. In order to avoid any shocks, the Serbian government has put a cap on oil prices in retail and revises its levels weekly. Furthermore, state tax on gasoline has been lowered to mitigate the pressures.

So far, this crisis hasn’t had a significant impact on construction volumes, but this could be just too early to assess. Uncertainty has exploded, but it appears everyone is still waiting for the conclusion. There have been no project halts or cancellations, on contrary, both permits and volumes are still growing in most segments. The second half of the year will be painting a much clearer picture when all current developments take full effect.

EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Serbia. The current reports were issued on 6 December 2021 and the next reports will be issued on 27 June 2022. For orders and sample report: eecfa.com

Residential construction seems unrelenting as it entered its 8th year of consecutive growth in 2022. The segment is leading the construction of buildings and the outlook is generally positive. Prices were growing faster than costs, interest rates were at historic lows and demand seemed endless. This environment will certainly change, so residential construction will have to adjust as well. The fact that Serbia has a heated and growing economy is excluding any sharp decline in short term, but mid- and long-term prospects became much dimmer. Following the move of the US Federal Reserve, the Serbian National Bank also started tightening its loose monetary policy by increasing interest rates from 1% to 1.5% in Q1 2022. This is just the first step and further increases are inevitable, so financial conditions will largely change in the coming period, especially the mortgage market and the availability of home loans.

Non-residential construction in Serbia is also standing strong, with some segments cooling off after strong growth cycles. There were some delays during the pandemic, but the realization of planned and ongoing projects continued unabated in 2021. All major segments have been rising in volume, supported by both private and public investments. Still, the latest cycle was already peaking, so some consolidation was expected even without external shocks.

Civil engineering saw record levels in 2021, and we believe another record year is on the horizon in 2022. Key large-scale energy, road and railroad projects in Serbia are already contracted and well underway, so we expect this construction segment to remain a strong contributor in this or next year’s output. On the other hand, prices could affect future contracts and volumes if inflation and stagnation pair up.

Potential impact of the war in Ukraine on the Croatian construction market

Written by Michael Glazer, SEE Regional Advisors – EECFA Croatia

For Croatia, as for other EECFA countries, the Russian invasion of Ukraine has been both a supply shock and a demand shock. And many of the elements of these shocks are the same for Croatia as for other EECFA countries. On the supply side, energy costs are rising as are the costs of construction materials and of construction finance. Supply chains and labor markets have also been disrupted. On the demand side, inflation has cut into consumers’ real disposable income, consumer confidence has been shaken as a result and finance for real estate purchases has become more expensive.

EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Croatia. The current reports were issued in December 2021 and the next reports will be issued in June 2022. For orders and sample report: eecfa.com

Admittedly, these disruptions are to a significant extent a prolongation and exacerbation of existing trends. For a considerable time before the invasion, consumer and producer price levels were rising broadly, construction costs were going up faster than overall inflation and central banks were considering tightening monetary policy to get inflation under control. Bank lending criteria were also getting stricter and consumer confidence was declining. All of this had a negative effect on Croatia’s construction output, but the sector was booming, nonetheless.

That said, the invasion’s impact has by no means been just more of the same for Croatia, and indeed its specific effects may weaken certain of the country’s construction sectors, at least in the short term. One cause for concern is the sharp, invasion-caused rise in Croatian food and energy prices. These threaten to both significantly reduce consumer resources available for home purchases and to exacerbate potential homebuyers’ concerns for the future. They may also, by forcing large price rises that in turn diminish demand, reduce industrial output, at least to an extent.

Mrtvi kanal, Rijeka, Croatia. Photo by Danijel Durkovic on unsplash.com

Also, Croatia’s tourism industry, which contributes as much as 20% of its GDP and is a major driver of its hotel, residential and commercial construction, is extremely sensitive to geopolitical developments, especially those in Europe. For example, in late 2021 and very early 2022, Croatia benefited greatly from Russian vaccine tourism, as Russians sought vaccines other their domestic Sputnik, both because Sputnik wasn’t very good and because, for that reason, European Union countries wouldn’t accept it. Now, though, the invasion has shut off even the normal flow of Russian and Ukrainian tourists and will continue to do so for this summer and fall at the least.

The uncertainty that the invasion has created in the minds of potential EU visitors as to future energy costs, and so as to their disposable income, may also damage Croatia’s tourism season this year. Or benefit it if as a result of these uncertainties EU tourists opt for cheaper, closer to home, holidays. Either way, Croatian construction output will likely be significantly affected as hotels change their capital spending plans to adapt, builders of coastal dwellings respond to alterations in demand and Zagreb construction residential and office developers adjust their products and their output levels to reflect buyer interest.

One sector that the invasion has not had a significant effect on is civil engineering. Work on, for example, Croatia’s large rail projects continues as before. The same holds true for industrial construction and to a large extent warehousing and storage, the former because the invasion has not changed the medium-term supply/demand calculus for those building such projects, the latter because even if one of the main drivers for such projects, consumer Internet purchasing, is uncertain in the short term, it will clearly rise substantially in the near future.

In the medium term, Croatian civil engineering may actually benefit from an invasion-induced turn to sources other than Russia to satisfy the EU’s need for gas. Such a shift would likely mean that the storage capacity of Croatia’s Krk Island LNG terminal would be increased, and pipelines built to enable the terminal to furnish more gas to more countries.

Potential impact of the war in Ukraine on the Turkish construction market

Written by Prof. Ali Turel, Cankaya University, EECFA Turkey

Compared to neighbouring countries to Ukraine, Turkey has been relatively less affected by the human consequences of this war. The number of refugees coming from Ukraine, disclosed by the Minister of Interior of Turkey on 21 March, accounts for 58 thousand, a much smaller figure than the at least 5 million refugees from Syria, Iraq and Afghanistan who escaped from armed conflicts or wars in their countries and are still in Turkey.

The direct effects of the war in Ukraine on the construction output of Turkey may not be determined yet, because construction statistics are made available by the Turkish Institute of Statistics in 2-3 months from the end of the coverage period of statistics. Indirect effects, however, are mixed with macroeconomic problems that have been in place since November 2021; the most notable one being the falling exchange rate of the Turkish Lira against foreign currencies, leading to high inflation. The annual rate of inflation according to the Consumer Price Index was 19,89% at end October 2021 and grew to 48,69% by the end of January 2022 and further rose to 61,14% two months later. The yearly rate of change in Domestic Producer Price Index was already 46,31% at end October 2021, and with steeper rises, it went up to 93,53% and to 114,97% by the end of January and March 2022, respectively. Rises in petrol and natural gas prices in international markets connected to the war in Ukraine should be an important contributing factor to further increases in inflation.  

Cappadoccia, Turkey. Photo by Afdhallul Ziqri on unsplash.com

Construction cost is primarily affected by the rates of change in Domestic Producer Price Index in Turkey. The annual rate of change in the Construction Cost Index was 41,93% in October 2021 and rose sharply to 79,91% at the end of January 2022, which is the latest available statistic in construction cost. Housing Price Index had a similar trend to Construction Cost Index as the annual housing price growth was 77,4% in nominal, 21,2% in real prices by the end of January 2022. Since wage increases are indexed with the Consumer Price Index in Turkey, the 21,2% real rise in housing prices should be an indication of the lower affordability of housing.

Russia and Ukraine are important trade partners to Turkey. The value of trade with Russia increased by 25,3% and the one with Ukraine by 63,8% in February 2022 from the same month of 2021. The war could cause disruption in the movement of goods, particularly between Turkey and Ukraine. We will be able to know its effects when statistics on international trade are published for March and the following months of 2022.

EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Turkey. The current reports were issued in December 2021 and the next reports will be issued in June 2022. For orders and sample report: eecfa.com

Potential impact of the war in Ukraine on the Romanian construction market

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

Construction in Romania is not directly impacted by the conflict in Ukraine, however, there are several issues that would be indirectly made worse by it: construction costs, interest rates and inflation.

Construction costs already grew at a fast rate in 2021 (+25% yearly average over 2020), and even more so in early 2022, with January seeing a 41% increase in costs compared to January 2021. In these circumstances, an increase in energy costs and base materials due to both import difficulties and increases in global prices would lead to even higher costs and discourage investment in new construction. The Romanian economy is not strongly connected to that of Russia, Ukraine or Belarus, with imports from all three countries totaling at less than 5% of all imports into Romania in 2019 and exports to them totaling less than 2.5% of all exports in 2019 (last year unaffected by the pandemic, source: NSI). However, there are some segments where trade intensity is much higher: energy and ores. In 2019, 37% of all mineral fuels and oils and 40% of ores came from one of the three countries. Thus, trade difficulties would negatively impact the availability of fuel and materials and, thus, the price of construction.

Brasov, Romania, 3 March, 2022. Photo by Traian Titilincu on unsplash.com

While construction costs impact supply, the other two issues (interest rates and inflation) work together to negatively impact demand. The National Bank of Romania increased the reference rates to 3%: the 5th raise since September 2021. This will have a knock-on effect on the costs of consumer and new mortgage loans, making them more expensive, at a time when the residential real estate prices are highest since 2008 with asking prices for apartments up 20% in March 2022, compared to the same month of 2021 (source: imobiliare.ro). Coupled with record levels of inflation, especially related to fuel, heating and food, this would make financing new home purchases exceedingly difficult, and will push demand down.

Although the non-residential construction market, thanks to the easing of restrictions, was on recovery track, all the previously mentioned factors would hinder recovery. Additionally, the subsector would also have some specific challenges such as global supply chain disruptions due to sanctions, rising energy and transport costs at a time when there is a moderate worker shortage and increased pressure from employees for more remote work options.

When it comes to civil engineering, demand for construction remains high, but the ability of the government to deliver on that demand will be hindered by reductions in the available budget for investment. Increased construction costs make public investment more difficult. The increasing current account deficit, the need for subsidies to counter the effects of inflation and energy costs on the most vulnerable citizens and increased defense spending (to 2.5% of GDP in 2023, from 2% in 2022) are all eroding the public funding available for construction of civil engineering projects. The saving grace of the segment will be the availability of EU funding, however even that will be made less effective by the increases in costs.