Construction: Slovenia

Written by Dr. Ales Pustovrh – Bogatin, EECFA Slovenia

The impact assessment of the 2022 Russian invasion of Ukraine on the Slovenian construction market must take into account the current volatile situation associated with the pandemic. Even before the war in Ukraine started, building material manufacturers reduced their capacity, either due to logistics problems resulting from the global closure of countries, or due to declining demand. As the last wave of the pandemic ended, supply failed to keep up with increased demand and construction material prices began to rise. According to statistics, building material prices in Q3 2021 compared to Q3 2020 rose by a fifth. The implicit deflator of the value of construction put in place (which measures prices in construction) exceeded 14%, the highest in 20 years. Additionally, rising energy prices – electricity, gas and other fuels – contributed most to the overall construction cost increase. At end February 2022, annual inflation rate in Slovenia was 7%.

Despite high inflation, construction output in Slovenia has increased. Following a gradual decline in construction activity in 2021, the value of construction works rose again in the beginning of 2022. Construction companies performed 5,8% less construction work in 2021, mainly due to a decrease in the number of projects in non-residential buildings. Yet, non-residential grew most among all construction subsectors in January 2022. High activity was also recorded in housing construction at the end of 2021 and in early 2022. Residential construction output remains high, but is still lagging behind demand for housing, resulting in a fast increase in prices for residential real estate. In nominal terms, prices at end 2021 were 26% higher than the 2008 average. In the housing market, the growth of residential real estate prices in the last quarter of 2021 accelerated further. Construction output has also increased in the civil engineering sector, backed by public investment. The state is investing in the construction of the second track to Port Koper, the third development axis in road connection, the modernization of railways, the renovation of state roads and cycle paths, the construction and renovation of the electricity network; and there are large investments in water supply infrastructure. The state is also planning to invest in healthcare. As 2022 is an election year, an increase in public expenditure was expected, but its growth has exceeded even the most optimistic expectations.

Construction activity in 2022 and beyond will be highly dependent on the development of events related to the war in Ukraine. The direct dependence of the Slovenian economy on the Russian and Ukrainian markets is relatively small, but this conflict can have a strong impact on inflation in Slovenia, the global financial markets, trust, and supply chain operations. The Russo-Ukrainian war will continue to raise commodity prices, too. Not only iron will rise in price, but also nickel and aluminium whose price has jumped to a new record. The prices of oil and natural gas are also rising, which will also raise the price of cement. Ukraine was a major exporter of clay to produce ceramic tiles, so we can expect that the price of tiles will hike due to the lack of clay and rising energy prices. Construction companies want to pass on such increases to public contracting authorities (built-in inflation), but they have only been partially successful so far. In the coming months, the measures taken by the Slovenian government will reduce energy prices, so it is projected that prices will no longer exceed the February level, but they will not decrease either. The rise in prices in construction is also affected by the lack of workers. There is still a large surplus of demand in the labour market over the supply of skilled workers in the industry.

Written by Dr. Ales Pustovrh – Bogatin, EECFA Slovenia

Construction output in Slovenia decreased by two-thirds between 2008 and 2015 as the effects of the global financial crisis lingered and the Slovenian banking system needed restructuring. Early signs are showing that the pandemic will have much less impact and might even prove to be beneficial to the construction sector in 2021 and beyond.

In 2008, the Slovenian construction reached levels it had never reached before since the country became independent. According to EECFA’s research, its total construction output exceeded EUR 4,6 billion in that year, which as we know now, was unsustainable. Construction output decreased for the next 8 years and embarked on a low of EUR 2,2 billion in 2016 before rebounding to an estimated EUR 3,4 billion in 2020.

Then Covid-19 struck and the whole economy entered another crisis. With lockdown measures and restrictions to the physical movement of people, including workers, it was possible that construction would once again feel the burden of a general economic crisis that might force it into a full depression. In practical terms – how can construction workers construct new projects if they are not even allowed to work in groups on site?

After some initial confusion, it quickly emerged that Covid-19 will not have the same effect on the industry. Construction was able to continue its operations unhindered. Unlike in the Great Recession, banks have kept crediting new construction projects and at very low interest rates. Disposable income of the population has not decreased due to generous anti-crisis measures supplementing the lost income. And the government was willing to run large budget deficits as it was able to borrow at virtually zero cost on international bond markets. A part of these financing was invested in different construction projects, including in health building constructions.

Additionally, a fragile coalition of centre-left parties under Prime Minister Sarec fell apart in Spring 2020 and was replaced by centre-right coalition under the new Prime Minister Jansa. His agenda is also based on implementing some long-stalled construction projects, including the new high-voltage electricity distribution network connection with Hungary and the start of the construction of the new hydroelectric power plant near Mokrice. Some previous large construction projects have been continued or even accelerated, including the start of the construction of the so-called 3rd national road axis, as well as the planned expansion of the Slovenian railroad network that would capitalize on the ongoing construction of the new railroad connection toward Port Koper.

With these big-league construction projects and numerous smaller, privately funded ones, initial data on construction output in 2020 show that instead of decreasing, it might have actually slightly increased even during the health emergency and the accompanying economic recession. Additionally, with strong economic rebound predicted for the time after the emergency, potentially as soon as in the second half of 2021, construction output might grow further.

EECFA’s Winter 2020 forecast is envisioning for Slovenian construction a 0,3% real growth in 2021 and 1,7% in 2022, but with an upside potential.

Segment-level construction forecast is available in the EECFA Winter 2020 Construction Forecast Report Slovenia that can be purchased on eecfa.com

The new government has presented an ambitious long-term plan for civil-engineering, health and nursing home construction for the next few years (although it implementation will greatly depend on the results of the next election in 2022).

It will also have plenty of financing available from the comprehensive EU Recovery Plan. In Slovenia’s national recovery and resilience plan, the European Commission has confirmed access to EUR 5.2 billion for the 2021-2027 period. All in all, it is becoming clear that unlike in the previous crisis, access to funding for construction will not be a problem this time.

Written by Dr. Ales Pustovrh – Bogatin, EECFA Slovenia

The COVID-19 pandemic has reached the Slovenian construction industry in a good shape. New construction contracts strengthened in H2 2019, resulting in some of the fastest growth of construction in early 2020 in the whole EU. The activity continued into March 2020 even though the lockdown measures were already implemented.

However, a decline is expected as halting construction works are affecting the entire sector:

• There are some disruptions in the supply of materials as some manufacturers have stopped production and others have reduced production.
• Construction work is being done less intensively mainly because of measures to protect workers.
• Some foreign contractors have problems mainly with the logistics of their workers on projects in Slovenia.

Yet, the construction industry has been relatively less affected than some other industries (like tourism) as most large projects continue even during the lockdown measures. The concern is the absence of real estate contracts as the risk of making long-term investment decisions has also increased.

We are planning to issue the new EECFA Slovenia Construction Forecast Report on 29 June 2020. Sample report and order

Economic damage to construction segments will crucially depend on the duration of the crisis and the uncertainty it brings. According to some estimates, the short-term crisis is expected to result in a 5% drop in GDP. First indications that the return to normal operation of the Slovenian economy is near were the announcements that several lockdown measures were to be relaxed by the end of April 2020. Nevertheless, the actual fall of the economic activity will depend on the effectiveness of the state’s actions, where Slovenian politicians have promised one of the largest stimulus packages in the EU (estimated at more than 6% of its GDP) but they will have to be implemented in an effective way.