EECFA 2023 Summer Construction Forecast

Posted on by efalucskai

In Southeast Europe the forecast is mixed across the board. For this year, EECFA expects expansion in all but one of its five small countries’ construction markets (Romania). For next year, Serbia will also likely join by turning into negative territory, while in 2025 Croatia is forecasted to be the only country to register a drop, albeit a modest one.

In the Eastern European region of EECFA, construction forecast up to 2025 is positive for Türkiye and Ukraine, while in Russia it seems gloomy all the way. In Türkiye, the reconstruction after the February quakes is the key driver, while in Ukraine, a lot will depend on how fast and how soon the reconstruction of the damaged stock can be carried out. EECFA has attempted to make its first forecast for Ukrainian construction since the war began.

Construction up to 2025 in Southeast Europe

In Bulgaria, the new coalition government can mitigate the expected economic slowdown in 2023 by speeding the absorption of EU programs and the implementation of Bulgaria’s Recovery and Resilience Plan. Total construction output is estimated to achieve real growth in 2023. Factors in favor of this forecast are the strong tailwind in residential construction, a slight growth in non-residential and expectation for an improved performance in civil engineering.

Neither inflation nor population decline could stop Croatian construction output’s growth in 2022, and 2023 looks likely to follow suit. Figures for some Buildings sectors, e.g., Retail and wholesale and Residential, contain surprises. Performance of certain Civil engineering sectors was unexpectedly strong due to events that may be one-off or instead portend a trend.

High construction cost is a major factor behind the expected downturn in Romanian construction this year and next, but the market should recover by 2025. EU funding from the 2013-2020 programs has a spending deadline of 31 December 2023, and with the new 2021-2027 programs still in early phases of implementation, a gap is expected in output while the switch takes place. Also, 2024 is a quadruple election year for Romania (local, parliamentary, presidential, European parliament), bringing new challenges for construction as power transition can bring new priorities and strategies.  

Serbia is feeling the consequences of the economic slowdown in the European Union, but so far it seems it will avoid recession in the short term. Construction outputs are also showing a mixed picture with building construction suffering contraction in volumes, while civil engineering will likely break new record highs in 2023. And even though there is a lot of uncertainty, the high level of investments is still maintaining positive economic growth and strong employment figures. 

The Slovenian construction industry continues to exhibit resilience amidst a thriving economy. While challenges such as inflation and higher interest rates pose hurdles for the residential construction subsector, non-residential and civil engineering are benefiting from increased public investment. By capitalizing on these opportunities, the industry is well-positioned to contribute to the country’s ongoing economic growth and development.

Outlook in the Eastern European construction markets of EECFA

Last year the Russian economy showed relatively high resilience to the negative effects of sanctions. One growth point was construction that showed much better-than-expected dynamics. Russia’s ‘Turn to the East’ notion in the new external political-economic conditions requires intensive construction of infrastructure objects, which fueled growth in construction in 2022. Going forward, the market will likely show decline driven by negative trends in residential and some downturn in civil engineering on the back of a high base in 2022.

After the elections held on 14 and 28 May 2023 in Türkiye, the value of Lira has been falling, creating financing difficulties for contracted construction projects using imported materials. In Q1, the economy accelerated annually owing to strong domestic demand and low interest rates, while construction continued to regain senses. The two earthquakes in February in 11 provinces caused massive human casualties and damages to over 300 000 buildings and infrastructural facilities. As the Government must restore buildings and infrastructure, growth in construction will speed up in the years to come.

If hostilities end in 2023 and Ukraine’s territorial integrity is preserved, post-war reconstruction will cost several hundreds of billions of US dollars according to various recovery plans. About 3 million Ukrainians saw their homes destroyed and about a third of the infrastructure is damaged. The war caused widespread damage to the construction sector and full recovery is only expected after the war ends. Now there is a partial construction of destroyed or damaged residential, non-residential, and critical infrastructure facilities in relatively safe areas with the help of compensation programs at state and local levels and mortgage programs. A key challenge though is the acute shortage of building materials (glass, cement, asbestos, and gypsum, among others). Resumption in construction will improve the country’s post-war economy, provide jobs, increase the production of materials and open new enterprises.

The EECFA 2023 Summer Construction Forecast Reports up to 2025 have been released and can be purchased on eecfa.com where a sample report can also be viewed.

Croatian construction output makeup changes: more hospitals, fewer flats?

Posted on by efalucskai

Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt), EECFA’s Croatia members

The composition of Croatia’s construction output is changing. While the residential segment may soon experience a slowdown, health-related construction – public and private renovations and new builds alike – is seeing a considerable boom.

Photo by Hajnalka Hurta

Construction continues strong in Croatia. The country’s State Bureau of Statistics announced earlier this month that construction permits issued in January 2023 were up 19.1% in number and 40.5% in value compared to January 2022. While permitting in Croatia can vary significantly from month to month, these data certainly suggest that the sector remains vibrant. So do the Bureau’s statistics for 2022 construction volume versus that for 2021. According to the Bureau, the value of completed construction work carried out by business entities in Croatia with 20 or more employees increased by 12.9% in 2022 compared to 2021, while the value of new orders increased by 27.1%.

But while construction as a whole remains robust, a number of sectors are weakening as changes in the composition of construction volume continue. Where once the tide of construction activity raised all sector’s boats, airport and highway construction has now given way to rail on the civil engineering side. On the buildings side, construction of residences may at last be cooling down from its white-hot heat of the last few years. The Statistics Bureau’s recent announcement of a 9.8% decline between January 2022 and January 2023 in the number of apartments for which permit applications were submitted suggests this.

Current forecast for Croatia is available in the EECFA Construction Forecast Report. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries. For orders and sample report: eecfa.com

So, paradoxically, does the 20.2% rise in the average price of new apartments between 2021 and 2022. Inflation clearly accounts for a substantial part of this increase. And supply may have shifted to higher priced units. But it nonetheless appears that a significant increase in real prices for equivalent apartments has likely occurred. In this regard, the Governor of the Croatian National Bank recently pointed out that the volume of residential property sales is decreasing, something that he notes usually precedes a fall in prices. Tighter mortgage conditions and higher interest rates also likely played a role.

On the other hand, a type of construction is that is booming but not getting the attention that it deserves is construction of healthcare facilities. Both public and private facilities have been and are being built in unprecedented numbers. The subsector’s strength has come from both public and private projects and from both renovations and new builds. This despite a push, so far not highly successful, on the part of the Croatian government to, in the name of efficiency, consolidate a number of healthcare facilities that now exist in low population localities.

On the public side, significant construction has been ongoing for some time now. Among the larger projects have been the consolidation and expansion of the Rijeka Clinical Hospital Center, a multi-year, more-than-hundred-fifty-million euro project that is now in its third phase. This project includes the Hospital for Mother and Child, a new facility to consolidate gynecology, obstetrics and pediatric facilities previously housed in outdated facilities in two different towns. In Zagreb, projects completed or already underway include the total reconstruction of the city’s Clinic for Infectious Diseases and the renovation of the Zagreb Clinical Hospital Center’s Jordanovac, Rebro and Petrova facilities, the Sisters of Mercy Clinical Hospital Center, the Merkur Clinical Hospital and the Children’s Hospital. Elsewhere, a new, 100-million-euro General Hospital was built in Pula, and various smaller, regional facilities were upgraded, including in Bjelovar and Varazdin.

While a good deal of Croatia’s public medical facility construction has been completed, much still remains to be undertaken. In addition to further upgrades to current facilities nationwide and the possible construction of a National Children’s Hospital in Zagreb, considerable work remains to be done to repair the damage caused by the two earthquakes that struck Croatia in 2020, including significant reconstruction at Zagreb’s Faculty of Medicine. The government is also pushing health tourism, with a minimum of EUR 61 million to be invested in public and private projects in this field.

Private healthcare construction projects are also proliferating. Among those recently built are Akromion’s 10,000 m2 hospital for orthopedics and trauma and Sveta Katarina’s 4,000 m2 facility, both in Zagreb. A variety of other facilities are in the planning stages, although their exact characteristics, e.g., as to size and in some cases even nature, remain either confidential or as yet undecided. The government’s increased focus on and funding of healthcare tourism is likely to significantly increase activity in the healthcare subsector.

As the Croatian economy evolves, particularly as it responds to Croatia’s entry into the Schengen Area and the Eurozone, more changes in the composition of construction volume must be expected. As an example, it is claimed that already one in three Croatian residences is bought by a foreigner. And the country seems to at last be being discovered as a manufacturing location, with Jabil, a major US-based manufacturer, building a large facility in Osijek. The consequences of these changes for total volume are hard to predict, but are certain to occur.

EECFA 2022 Winter Construction Forecast

Posted on by janosgaspar

EECFA’s 2022 Winter Construction Forecast Report was released on 5 December. 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.

Yet another downward revision characterizes the forecast for both regions. Southeast Europe could see shrinkage on the horizon. This, however, comes after a great period of construction in between 2016 and 2021, so the market is foreseen to come down from a peak level. In this respect, the 3% decline until 2024 is no drama, in EECFA’s view. The drama is in East Europe where the peak was reached in 2018 and the market was around 10% below that peak level even before the Ukraine war began. Since then, EECFA has paused issuing forecasts in Ukraine and a status report has been prepared. Without Ukraine, the region is expected to reach its bottom in 2023.

In Southeast Europe, almost all countries have been revised downward. Three out of them, however, could see expansion until 2024. The foreseen contraction in Romania and Serbia pulls down the region to negative. Romania is quite pessimistic; the market could shrink by almost 10% by 2024. Serbia is expected to witness a sizeable drop, too, before growth returns in 2024. As the region saw much construction in 2016-2021, the market will likely decline from the peak, making the 3% drop on the forecast horizon not-so-drastic.

Bulgaria:

  • Under the projected economic slowdown, construction will increasingly be affected by the ongoing political instability that is likely to undermine reforms within the Recovery and Resilience Plan, and delay implementation of the EU’s operational programmes.
  • Тotal construction output is estimated to have grown in 2022.
  • For 2023-2024 civil engineering is forecasted to increase at a more accelerated pace.

Croatia:

  • Residential construction output held up in 2022, impervious to war and disease. But it’s likely residential’s rapid growth will over time succumb to rising prices and a falling population.
  • Rail construction output will rise as more rail projects come online. Some new high-cost road projects may yet be undertaken for political reasons.
  • Energy prices will fuel building of oil/gas port facilities, pipelines and storage in 2022-2023, construction that the EU’s green-energy push may quench in favor of renewable energy and power grid projects.

Romania:

  • The Romanian construction market is set to shrink slightly in 2023 and 2024 as internal and external factors conspire to make building materials more costly. 
  • Inflation-induced lower purchasing power and growing mortgage interest rates are making loans more expensive, and few people can afford to buy a home in cash. 
  • On the one hand, Romania could benefit from the current global instability and attract more foreign investment to grow its economy. On the other, increased energy costs translate to higher operating and construction costs and discourage investment. 

Serbia:

  • The challenging economic situation will undoubtedly have negative effects on construction outputs. But how negative is the question of external factors and the coming events.
  • The domestic market is strong, with high public and foreign investments, as well as record employment. The highest economic risk comes from inflation and the expected recession in the EU.
  • The current economic slowdown could deepen the contraction in case of a prolonged crisis.

Slovenia:

  • Slovenia has experienced expansion in construction output on the back of the strong overall economic growth.
  • However, risks for the future include high inflation, large construction cost increases, and overheating economic growth. And increased interest rates will depress residential output in the future.
  • Supply chain constraints might jeopardize the completion of large civil engineering projects.

In East Europe, 2022 could be the 4th consecutive year of drop in Türkiye, and no quick recovery is foreseen on the horizon. We have turned somewhat optimistic in Russia, but only from 2024 on. Without Ukraine, the region will likely hit bottom in 2023. The region reached its peak in 2018 and just before the war in Ukraine started, the market was around 10% below this 2018 level. Owing to the war, Uvecon, the Ukrainian member institute of EECFA, has prepared a status report for the second time instead of the forecast report.

Russia:

  • Direct and indirect effects of sanctions hammered the construction market that declined faster in 2022 than previously expected.
  • Forced acceleration of projects in transport and energy, in response to export and import structure changes due to sanctions, will spur growth in civil engineering.
  • Many targeted programs and national projects will support the construction sector throughout the forecast horizon.

Türkiye:

  • The construction industry has been trying to deal with high inflation that has led to 120% yearly rise in construction cost and 189% increase in housing prices.
  • There has been some deficit between produced and needed home numbers since 2000, augmented by the influx of refugees from Syria and neighbouring countries (3,920 million registered; unknown unregistered).
  • The low-cost housing project of the government as of September is expected to stop the current slump in the construction sector.

Ukraine:

  • Prospects for construction depend on the existing situation on the market as a result of the destruction of residential, non-residential and engineering infrastructure, and the end of hostilities with the possible economic recovery.
  • Total area of damaged or destroyed housing is 74.1 million sqm (7.3% of the total area of Ukraine’s housing stock), a number which, unfortunately, grows every day. Restoring the housing stock will become a key issue for Ukraine after the war ends.
  • Energy infrastructure remains the top priority for recovery, as nearly 40% of the energy system has been destroyed.

EECFA 2022 Summer Construction Forecast – Military conflict edition

Posted on by efalucskai

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

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

Posted on by efalucskai

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.

EECFA 2021 Winter Construction Forecast – 4th pandemic edition

Posted on by janosgaspar

EECFA’s 2021 Winter Construction Forecast Report was released on 6 December. Full reports can be purchased, and a sample report can be viewed here: www.eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

We are more optimistic for 2022 in the Southeast European region of EECFA than in the previous forecast round. The drop in 2023 is caused by Bulgaria; the awaited shrinkage is so sizeable there that expansion elsewhere in the region might not counterbalance it. Expansion in the East European region of EECFA is foreseen to be smaller both in 2022 and in 2023 than in the previous forecast round. Growth in Turkey was revised downward.

Link to this viz ->

The largest Southeast European construction market of EECFA, Romania, is expected to see only moderate growth on the horizon. Serbia, having recorded the biggest expansion of almost 100% in the 2014-2020 period, is foreseen to plateau in the upcoming years. In Eastern Europe, in Turkey we maintain to believe that the recovery could start, but we lowered our growth expectation compared to our previous forecast. After 2 years of no-growth, Russia’s construction market is foreseen to expand gradually until 2023.

Bulgaria. The Bulgarian economy is recovering more slowly than expected, and the likely growth rate is 3.8% in 2021. However, residential construction looks strong thanks to low interest rates on housing loans, making home purchase more affordable. Real estate is also the safest and easiest way for those wanting to invest to avoid negative deposit rates. The pandemic and its lasting follow-up effects played an additionally strong cooling effect on non-residential construction because of a surge in office and industrial construction earlier and with an emptying pipeline. Zero progress on big-league infrastructure projects will take its toll on growth in civil engineering construction in 2021, but it is set to catch up in 2022. Total construction output in Bulgaria is anticipated to grow by 6.5% in 2021 and 16.5% in 2022. The lack of preparation for the new programming period 2021-2027 and the National Recovery and Resilience Plan are to negatively affect total construction output which is expected to drop by 24.9% in 2023.

Croatia. Croatia’s tourism season surpassed all expectations, driving a 16.2 percentage point swing in the country’s GDP growth, from -8.1% in 2020 to +8.1% this year, and a one-notch jump in its Fitch rating, to BBB. The near-term future of Croatia’s construction sector now depends greatly on the evolution of the COVID-19 pandemic, particularly its effect on tourism. EU and international financial institution crisis-relief funding will, though, soften any blow that the disease delivers. The City of Zagreb’s budget crisis, bureaucratic delays in spending crisis-relief money and much higher construction costs are other negative factors that will affect the growth of construction output, which must be assessed not for the sector as a whole, but segment by segment (e.g., hotels vs. residential).

Romania. The economy is expected to return to pre-pandemic levels, in terms of GDP, by the end of 2021, after growing 7% in real terms. The European Commission forecasts Romania’s GDP growth rate to stay above the EU average in both 2022 (5.1%) and 2023 (5.2%), and, with the help of the Recovery and Resilience Facility (RRF), construction would have a positive ground to grow upon. Total construction output in 2021 is predicted to slightly decline (-0.3%), but to recover and grow in 2022 and 2023. Low interest rates and excess liquidity coalesce into an expanding residential subsector, while non-residential construction continues to be impeded by pandemic-related changes to work habits and various restrictions. On the back of the RRF and the 2014-2020 EU cohesion funds, and despite ongoing difficulties and delays in implementing projects, civil engineering construction continues to have a high potential for growth.

Serbia. After the restrictions in 2020, economic recovery came faster than expected and GDP growth is estimated to reach at least 7.3% in 2021. This strong rebound is supported by accelerated construction activity and increased capital investments, where a high single-digit expansion is projected in 2021 outputs. Construction output is fuelled by civil engineering projects, but also the robust residential and industrial related constructions. Furthermore, budgetary expenditures for investments are planned to reach record levels, with 7.5% of GDP dedicated for this purpose in 2022. All indicators are pointing towards more extensive growth and sustained construction activity at record levels in this forecast horizon.

Slovenia. The Slovenian economy has rebounded stronger than expected after the pandemic. One of the strongest economic growth accelerators was gross fixed capital investment, causing construction output to get back on feet. Total construction output is projected to exceed EUR 4bln sooner than previously predicted – already in 2022 – and reach EUR 4,3bln in 2023. Construction cost growth will probably slow down from a hike in 2021, resulting in a more stable construction environment without supply shocks. This will enable several big civil engineering projects to continue apace, but the main contributor to construction output will be new residential projects. Of course, our forecasts remain contingent on the condition that no further lockdowns hinder the overall economic activity.

Russia. The construction industry in Russia is going through the second year of the pandemic relatively successfully, and the previously expected stagnation in 2021 is likely to turn into a 3.2% growth by the end of the year. This unexpectedly good result was enabled by segments with traditionally active government participation: residential and civil engineering which were supported by large funds. The non-residential subsector also contributed to the growth of the construction market in 2021, mainly due to the massive completion of objects whose construction was previously postponed from 2020. But because all these factors are temporary, construction market growth in 2022 and 2023 will lessen and is prognosticated to post +1.9% and +1.2% per year, respectively, as a part of the potential for the positive dynamics was already exhausted in 2021.

Turkey. The Turkish economy started to regain senses from the pandemic blow in Q3 2020, which continued with high GDP growth in Q2 2021. Although Turkey removed most COVID-19 related restrictions on 1 June 2020 with the elevated number of vaccinations, now, like across Europe, the fourth wave of the pandemic has started (yet with relatively fewer new cases). The estimated economic growth rate by end 2021 is about 10%, but the primary concern in recent months has been high inflation caused by the national currency’s devaluation. Building starts expanded greatly, but completions registered a small drop in the first 9 months of 2021. The government requires interest rates (also for mortgages) to be kept at less than half of the rate of rise in building construction cost. Keeping real incomes positive during high inflation times is important for demand for commodities like housing and other real estates. Turkey’s total construction output is prognosticated to be positive in the forecast horizon with an average growth of 2.6% up to 2023.

Ukraine. For the construction sector in Ukraine, 2021 marks the year of completion of the construction regulation reform launched back in 2019. In mid-September, the newly created State Inspectorate for Architecture and Urban Planning began to work as a full-fledged new body with its own structure, powers, and new work principles. Ukraine’s construction market in H2 2021 has showed a good recovery in investment activity and the resumption of construction. The residential subsector remains the driver of the construction sector due to stable demand from the population. The main constraint in the development of the construction market in 2021 has been increased construction costs despite the active implementation of residential projects against the backdrop of the revival of mortgage lending, increased demand from the manufacturing sector, as well as high volumes of financing.

Croatia’s economic recovery and construction boom: real or smoke and mirrors?

Posted on by efalucskai

Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt), EECFA’s Croatia members

Croatia’s remarkable recovery from the brutal impact that the COVID-19 epidemic had on the country in 2020 is, like its construction boom, both real and smoke and mirrors, both temporary and long-term.

Photo by Tatjana Halapija

The country’s tourism sector, brought low by COVID-19 in 2020 (with commercial accommodation facilities recording a 64.2% reduction in arrivals and a 55.3% fall in overnights compared to 2019), has rebounded a mere year later to levels as strong as or even stronger than the 2019 banner year for the sector. August 2021 overnights, for example, achieved 93% of 2019 levels and fiscalized receipts (a proxy for revenues) were 21% higher than those of August 2019. This rebound is crucially important to Croatia, since, depending on how you measure it, the tourism sector accounts for 18% or more of the country’s economy.

Dubrovnik – Photo by Zoran Jelaca

First, though, the smoke and mirrors part: a large, but hard to determine, portion of the apparent tourism recovery is due to the government’s requiring that guests staying in Croatia be registered with governmental authorities. In fact, a registration requirement has existed for many years, but Croatian lessors of rooms for short-term occupancy, which constitute the majority of the country’s tourism beds, have long ignored it in order to evade taxes. The difference is that for COVID-19-related reasons the government is finally enforcing the requirement. The upshot has been that many more guests have been registered in the COVID-19 era than would have been previously.

The reality, though, is also encouraging. It is clear that significantly more tourists have visited Croatia this year than might have been expected given the fierceness of the epidemic both in Croatia and in the countries that are the typical sources of its guests, although the exact size of this increase is hard to discern through the distorting glass of official statistics. What is certain, though, is that the surprisingly large number of tourists who actually visited Croatia and the increase in the portion of them who were registered has both leveled the playing field for large hotel chains (which have always registered their guests more or less accurately) and provided badly needed windfall revenues for the government. Regarding the latter, the budget deficit for 2021 is anticipated by the Minister of Finance to be less than 3.8% of GDP despite extensive spending on COVID-19 and earthquake relief. He expects the deficit for 2022 to fall to 3.0% of GDP.

The upshot for the Croatian construction sector is likely to be quite positive. Hotel firms are likely to loosen the reins at least somewhat on their construction activities. While this will be to an extent offset by lower construction spending by small renters of vacation homes and rooms, they, too, will have earned more this year than they expected, even taking into account that unlike prior years they will have to pay taxes on their income. And the windfall tax revenues generated by their tax payments are an unalloyed benefit for the government which will use at least some of them to pay for the new construction required to compensate for the recent earthquakes.

Zagreb – Vlaska street – Source: licegrada.hr

Other factors are less positive, making the overall construction picture in Croatia hard to read. GDP growth for 2021 is now forecast by the Croatian Minister of Finance to be greater than 8%, also unexpectedly high as the continuing increase in the forecast number over the course of the year shows (e.g., the European Commission’s July 2021 forecast was for 5.4% GDP growth in 2021, itself an increase in the EC’s prior forecasts). So, immensely positive for the construction sector.

Construction forecast for Croatia is available in the EECFA Forecast Report that can be purchased on eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

That said, inflation is high (and possibly accelerating). The annualized change in the Harmonized Index of Consumer Prices was 3.5% in September (compared to 3.1% in August and 2.7% in July).

Construction costs (both supplies and labor) are nearing stratospheric levels. Regarding labor, Croatian construction firms are no longer importing workers only from Croatia’s neighbors in Southeast Europe or even from Central and Eastern Europe as a whole but are instead turning more and more to India, Nepal, the Philippines and other distant sources. This is not an option for many building supplies, of course, shortages of which are no longer just driving prices up but are now also slowing projects down. Demand and available resources differ greatly from construction sector to construction sector, so a wide variation in sectoral output is to be expected.

A number of other factors contribute to this variation, which we will analyze in detail in our upcoming Winter 2021 forecast report.

Zagreb – Photo by Ivana Nobilo

EECFA 2021 Summer Construction Forecast – 3rd Pandemic edition

Posted on by efalucskai

EECFA’s 2021 Summer Construction Forecast Report up to 2023 was released on 28 June. Full reports can be ordered here. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Southeast Europe

In the first year of the pandemic the construction market of the SEE region as a whole remained in the positive, and further expansion is expected until 2023. The only exception is Bulgaria where a harsh transition is foreseen for 2023 when the 2014-2020 EU programming period ends financially. The massive growth experienced in the years before 2020 is not anticipated to return; around 3% growth is projected for 2021 and 2022, and a 3% drop for 2023. The countries with the largest cumulated growth on the forecast horizon are Croatia and Serbia.

Bulgaria. After a drop of 4.2% in 2020, the European Commission (EC) forecasts the economy to rebound by the end of 2021 and to grow by 3.5%. Positive economic outlook, combined with low interest rates on home loans, will result in more affordable homes. But increased savings and zero deposit rates raise speculative investments in residential, pushing home prices up. Non-residential construction was expected to decelerate even before the pandemic, but the Covid-19 crisis has accelerated this process. Civil engineering is backed by advancing EU fund absorption and by 2027 will be given new opportunities. After an estimated drop in total construction in 2020 by 1.3% in Bulgaria, 2021 and 2022 are expected to see a growth of 9.2% and 12%, respectively. But a considerable drop of 24% is prognosticated in construction output in 2023 due to the slow preparation for the next programming period and the National Recovery and Resilience Plan.

Croatia. We are significantly more optimistic about output growth in a number of Croatian construction sectors than in our last report. Assistance from the EU and international financial institutions blunted the edge of the three catastrophes that struck Croatia in 2020, the COVID-19 pandemic and the Zagreb and Sisak-Maslovina earthquakes. For most (but not all) sectors, it appears that the catastrophes will not greatly change the drivers of output growth over the medium to long term, although they will have some short-term consequences. The three-year hiatus until the next elections in Croatia and the recent election of a reformist mayor in Zagreb, Croatia’s economic powerhouse, provide openings for spurring Croatia’s economic growth and so construction output, but it is not clear that they will be utilized.

Romania. The economic impact of Covid-19 has been less than initially feared. Investment into construction grew strongly in 2020, preventing GDP from a larger drop, and we expect investment to continue in the following years thanks to the RRF. Recovery is also to be quicker than previously forecasted: the EC forecasts a GDP growth of 5.1% for 2022 and 4.9% for 2023. EECFA’s forecast for 2021 and 2022 in construction output is a small contraction (-0.7% and -0.2%) with growth returning in 2023 with 2.6%. Last year residential developers focused on finishing as many projects as possible as there were concerns of a potential market downturn. It didn’t happen, but the new supply to be delivered in the next years could push prices down under normal market conditions.

Serbia. In 2021 things are getting back to normal with the economy standing strong and having already surpassed pre-pandemic levels. Serbia’s economy was one of the least affected in Europe with GDP contracting just 1% last year, and an expected real growth of around 6.5% this year. Recovery is visible in almost all economic segments except for some service sectors still struggling to reach 2019 levels. Serbia’s weaker exposure to tourism and related services moderated losses during the pandemic, and investment stayed strong in both 2020 and 2021. In addition, the government increased public investments in infrastructure and civil engineering projects. Demand in Europe is also recovering, orders are growing again, and with tourism on the rise as well, there is a lot of reason for optimism in the coming period.

Slovenia. Construction industry and the economy in general was less disrupted by the pandemic than originally expected. While GDP decreased by 5.5% in 2020, it is expected to rebound strongly in 2021. Total construction output stayed at almost exactly the same level in 2020 as in 2019: EUR 3.4bln; and it is prognosticated to increase strongly in 2021 and 2022, and exceed EUR 4.1bln in 2023, for the first time since 2008. An interesting recent development though has been the rise in construction costs in 2021 resulting from high demand and supply disruptions owing to the pandemic and its economic aftermath. However, we estimate that this increase in construction cost will be temporary and will decelerate after 2022.

East Europe

The worst performer in 2020 in the Eastern region of EECFA was Turkey, but the downtrend here started well before the pandemic struck. As recovery is awaited to start this year in Turkey, the region as a whole could turn to positive in 2021. Expansion is our current scenario for the region with 9% cumulated real growth until 2023. The largest cumulated market growth on the horizon, thanks to the relatively low starting point, could happen in Turkey.

Russia. The economy is coping with the effects of the pandemic relatively well. GDP contraction last year turned out to be less serious than anticipated with one reason being the stability of the construction sector that showed high resilience to the crisis on the back of active government support for the entire industry, the implementation of many transport and energy projects, and measures to support demand for homes. Construction output shrank by 0.9% in 2020 (against the previously expected drop of about 5%-6%). In the short term, the decline is most likely to slow down to 0.3% in 2021 with a transition to active growth in 2022-2023 within 3.9%-3.4% per year, respectively. Optimism for the next two years stems from the expected recovery in housing construction and the continued infrastructure projects in civil engineering.

Turkey. The economy is showing a rebound after the pandemic. The recent months have seen positive rates of change in GDP, industrial production, value added of construction sector, building starts, and completions. However, a weak Turkish Lira against foreign currencies continues to cause inflationary problems to the economy. Producer prices, construction costs and mortgage interest rates have been increasing at rates close to the rise in exchange rates. The government may again adopt the policy of requiring the three state-owned banks to offer preferential mortgage loans. Total construction output in Turkey is estimated to have slumped by 6.9% last year, but this year growth might return averaging roughly +4% all the way through the forecast horizon.

Ukraine. Last year the construction market was marked by the impact of Covid-19 along with internal problems such as the reform of the State Architectural and Construction Inspection, primarily affecting housing construction. On a positive note, the president launched the Big Construction scheme in March 2020 to support construction industry, so we estimate the overall decline to be 2.2%. And although the recession has reduced the investment flow in construction this year, it has increased demand for some commercial segments such as logistics and co-working offices. As the Big Construction scheme will have sufficient funds for this year as well, it gives cause for optimism for now, and Ukraine’s construction market is forecasted to register growth across the board. 

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Source of data: EECFA Construction Forecast Report, 2021 Summer

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

EECFA 2020 Winter Construction Forecast – 2nd Pandemic edition

Posted on by efalucskai

The 2020 Winter EECFA Construction Forecast Report was released on 8 December. Full reports can be purchased, and a sample report can be viewed at www.eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Southeast Europe

Building construction markets of the Balkan EECFA countries as a whole have shown resistance during the pandemic so far. Nonetheless the region is foreseen to have yet another negative year in 2021, before expansion can return in 2022. As the current EU programming period is nearing its end, civil engineering is expected to be the driving force in the upcoming period, well outperforming building construction. The total construction market is projected to side move in 2021, and 2022 could bring a growth of around 4%. Based on its priorities, the NextGenerationEU recovery fund is also supportive for both building construction and the civil engineering sub-markets. Its specifics (for what and when) on country level are yet unknown, though.

Bulgaria. The expected economic recovery should bring the Bulgarian economy back to pre-crisis levels by end 2022 with both exports and consumption contributing positively. Having it in mind, the future of residential construction remains positive despite the economic uncertainty. In short term, purchasing power should be affected, but in general, demand for new housing projects in big cities should remain. Non-residential construction will also be held back by dropping demand for commercial and hotel projects, and the projected slow and uneven economic recovery. Civil engineering in the future should be driven by EU funding as well as by the national budget. After major growth in total construction output in 2019 (+19%), 2020 will likely see a drop of 4.9%. Approaching the end of the programming period in 2021 and 2022, total construction will likely increase by 4.4% and 5.2%, respectably, in real terms.

Croatia. The effects of COVID-19 and the Zagreb earthquake on the Croatian construction industry will vary greatly from sector to sector. Thanks to swift, massive EU financial assistance, some sectors will even benefit from the disasters. These sectors include civil engineering generally and especially those CE sectors in which projects can be implemented rapidly. For buildings sectors, results are mixed. Some were harshly battered and will take years to recover. Others barely felt the catastrophes’ consequences. With few exceptions, the trends that underlay buildings sectors’ growth before these events will remain the primary drivers of buildings output in the medium and long run. In the short term, disaster-relief spending will benefit some.

Romania. Pandemic impact on construction was felt less strongly in 2020 since ongoing projects were not halted and thus the market slightly grew (3.8%). With the entire economy taking a few years to recover after the 2020 crisis, total construction output in Romania should drop in 2021 (-2%) and start recovering in 2022 (+2.8%). The pandemic will water down the housing subsector next year as fewer-than-expected new projects began this year and the recession should also continue to reduce purchasing power. In non-residential, retail and hotel were battered most. Office construction is in hiatus due to lower demand for new construction with the expansion of work-at-home scheme and with businesses rethinking the use of traditional offices. The drop in international trade set back industrial construction, but as borders open and exports start picking up, recovery may come too. Civil engineering is the brightest spot with an estimated growth in government investment as 60% of the EU funding for infrastructure is still unspent from the 2014-2020 budget.

Serbia. The developments in 2020 are marked by the reoccurring pandemic and during the year, movement restrictions were introduced twice, having a very negative effect on all service sectors. Furthermore, it is now certain that pandemic effects are to extend into 2021 and the best-case scenario means the economy will take the entire 2021 to recover. With still large uncertainty looming for next year, the forecast still carries a lot “ifs” and the government spent over 10% of GDP for various stimulus measures aiming to mitigate the effects of the interruptions. While the recovery in the second half of 2020 was strong, the new restrictions in October and December again impacted developments and stopped the normalization. Luckily, the realization of big public infrastructure projects has been steady and growing, which has helped growth in construction outputs, and private investments are still not subsiding. Strong credit activity and market fundamentals are also supporting recovery, but lingering foreign demand and slow recovery in the service sectors continue to dim the prospects.

Slovenia. Construction industry was less disrupted by COVID-19 that some were fearing. Even though construction output is estimated to have dropped by 4.8% this year, it will likely rebound next year close to the 2019 level and should expand further in 2022 on the back of civil engineering where big projects are continuing apace. The Second Railway Track to Port Koper, the Third Axis Road construction and the Karavanke Tunnel expansion all continued in 2020 and were less disrupted by the lockdown than expected. Non-residential construction, on the other hand, will suffer from the lingering effects of the economic slowdown caused by the pandemic and the consequent lower investment in industrial and commercial segments. Similarly, residential construction is subdued for the time being due to the pandemic but may return to growth path towards the end of the forecast horizon based on historically low interest rates and good availability of credit financing.

East Europe

Dragged down by Turkey, the decline in buildings construction started in the Eastern region of EECFA as a whole well before the pandemic struck. And 2020 is also expected to see a negative year. From 2021 on recovery could start, but the level of 2018 is not projected to be reached on the forecast horizon. The civil engineering submarket of the region also contracted massively already in 2019 and further decline is our scenario for this year. From 2021 on this submarket could turn to positive and we are optimistic for 2022 as well. Total construction market of the Eastern region is forecast to grow by around 3% in each of the upcoming 2 years.

Russia. This year has seen several negative factors blasting construction industry in Russia, and the economy, such as falling oil prices, the devaluation of the rouble at the beginning of the year, and the pandemic with its related lockdown and restrictions. This caused a massive decline in real incomes, a deterioration in investment climate and a downturn in business activity. One way or the other almost all construction segments felt the pain and decline in total construction by end 2020 is to be 5.8%. It is better than our summer 2020 predictions, though; the government’s economic recovery plan turned out to be quite effective and allowed us to slightly improve our forecast. Return to growth in construction is possible already in 2021 (+0.3%), and by end 2022 a much more confident positive dynamics (+4.1%) is expected based on the likely recovery trends in all segments on the back of state support and the launch of big infrastructure projects.

Turkey. The economy was marred during the 3 months after COVID-19 appeared on 11 March in Turkey. Anti-COVID measures put in place caused massive declines in industrial production, including construction, and in GDP. Lifting most measures and introducing a subsidy offering soft loans by the three state-owned banks on 1 June 2020 served as an important stimulus for the economy and the construction sector. Together with a historical peak in housing transactions in July 2020, building starts began to grow, although there is a big backlog of construction in almost every sector. Rising inflation and construction costs owing to the depreciation of the Turkish Lira against foreign currencies would be the primary concern for the construction sector in 2021.

Ukraine. Construction this year showed a negative trend compared to last year. After a relative growth in Q1 2020, there was a significant dip in Q2, followed by a gradual recovery in Q3-Q4. Nominally, at end Q3 construction reached last year’s indicators in the volume of works performed, but with inflation considered, the drop is still 2%. In the same period last year, construction showed a rise of 23.5%. Key negative factors this year are the COVID-19 crisis and the reform of the State Architectural and Construction Inspectorate that started almost simultaneously with the lockdown in early spring. As a result of falling population incomes and complications in obtaining construction permit, the volume of housing construction slumped. Civil engineering fared well thanks to a state program and the redirection of part of the money from the Covid Fund into the subsector.

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Source of data: EECFA Construction Forecast Report, 2020 Winter

Croatia’s new government: Turning point or business as usual?

Posted on by efalucskai

Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt), EECFA’s Croatian members

Near Senj, Croatia – Photo by Tatjana Halapija

It’s at last becoming possible to assess the consequences for Croatia’s construction sector of the country’s July 2020 elections. Jockeying for governmental positions, COVID-19- and tourism-season-related priorities and other pressing matters prevented the new Croatian Democratic Union (HDZ) led government from moving on its larger agenda until recently. Now, though, the political picture, and the impact of the elections on Croatia’s construction sector, is getting clearer.

The July elections were particularly important to the Croatian construction sector for a number of reasons. They occurred mid-COVID-19-pandemic, when a change in government or even just a change in government policy would have had large consequences for Croatia’s fight against the disease and so for public- and private-sector finances and accordingly for the resources that would be available in the next few years for construction projects. This was especially true as the elections were called in the midst of Croatia’s tourism season, a critically sensitive time, as the survival of the country’s hospitality sector, which is responsible for much of Croatia’s building construction, was at stake, and relatively soon after the Zagreb earthquake, which caused on the order of EUR 12bln in damage to the city’s buildings and infrastructure that must be repaired.

Making the elections still more consequential, they seemed likely to decide the fates of several political parties and movements, some with significant influence on Croatia’s construction sector, as well as those of a few individually powerful politicians important to that sector. Finally, they also seemed likely to affect Croatia’s relationship with the new EU Commission and EU Parliament, relations determinative of the amount and nature of EU COVID-19- and earthquake-related aid that Croatia could secure.

So, how have things turned out? Regarding winners and loser, the center-right HDZ was by far the biggest winner (increasing by five the number of seats held by its coalition in the one hundred fifty-one seat parliament) and the center-left Social Democratic Party (SDP) the biggest loser (with its coalition’s seat count falling by ten). Far-right defectors from the HDZ did well as a new party (securing sixteen seats), but paradoxically lost power, since the HDZ’s strong performance made them irrelevant to the formation of an HDZ-led government.

The consequences of the HDZ victory are mostly positive for the construction sector. Importantly, there will be substantial continuity in the government’s construction policy. While by no means certain, it’s possible that a victory by the SDP and its coalition could have led to months of fractious conflict within the coalition, and indeed within the SDP itself, and put in power a party that after many years out of government might no longer have been familiar with how to rule.

As to the policies that the new government will adopt, further simplification of bureaucratic procedures relating to construction is likely, as is a continued emphasis on large infrastructure projects and COVID-19- and earthquake-damage amelioration measures. Crucially as to the latter, Andrej Plenković, Croatia’s prime minister both before and now again after the elections, has great pull with the European Commission, since he played a major role in brokering the selection of Ursula von der Leyen as the Commission’s president. (In fact, von der Leyen, while EC president, made a controversial video supporting Plenković’s candidacy, for which she later apologized.) For the same reason, he has similar influence with the European People’s Party, of which the HDZ is a member. These relationships have very likely already been reflected in the large sums that the EU proposes to allocate to Croatia for earthquake and COVID-19 relief. They probably also mean that the EU will be more flexible in how Croatia spends the money that it receives for these purposes. All good news for construction in Croatia and in particular for civil engineering projects.

Construction forecast for Croatia is available in the EECFA Forecast Report Croatia that can be purchased on eecfa.com

Also important to the construction sector is the dramatic decline of the Croatian People’s Party (HNS) as a national political force and the eclipse of its leaders. The HNS kept only one parliamentary seat and no ministries. The party’s formerly extensive influence on energy matters is now very much past tense, and its members are being gradually removed from positions of power in Croatian state-owned enterprises, a process likely to be accelerated by the arrest of the CEO of JANAF, Croatia’s gas pipeline company, who was formerly a HNS member is said to still be close to that party. The result is likely to be a better alignment of Croatia’s energy policy with its policies in other spheres. In particular, it will likely lead to a construction program for electrical-power facilities more in keeping with Croatia’s energy needs than with its government’s political makeup.

Other developments have been less positive. The HDZ has not followed through on some of its electioneering promises. One important one is that the number of Croatian sub-sovereign administrative divisions would be reduced from the present 428 municipalities (the smallest of which has 137 inhabitants), 128 cities and twenty counties to a more sensible number. The cost of maintaining so many governmental organizations is quite high, with, for example, a mayor, municipal secretary, administrator/bookkeeper, etc. required for each municipality and city not to mention the offices, office cleaners, doorkeepers, official automobiles and the like. that lead to even more expense. It appears, though, that the internal political cost of rationalizing Croatia’s local governments, which would be a painful task for a government of any political stripe, is too high for the current one, and so significant reductions in numbers and payrolls are unlikely. The rub here is not just that Croatia’s surfeit of local governments is expensive and leads to corruption. It’s also that reduction in their number and related reforms are high on the priority list of the EU. So a failure to follow through on the promised reforms could lead to friction in the release of EU funds, including construction-related money.

The new government has also scored some own goals with its post-earthquake and anti-COVID-19 policies. As to its response to the devastation that the earthquake wrought in and near Zagreb, promised relief has been slow in coming, and the legislation governing it was not well drafted. While matters are now being clarified, funding delays have caused real suffering for those whose residences and offices the earthquake rendered unsafe.

Zagreb upper town, Croatia, after the March 22 earthquake – Source: Cropix

As to the COVID-19 pandemic, the prior HDZ government’s success in the spring in tamping down COVID-19 infections eroded dramatically in the summer and fall. Daily infections are now at record levels, likely a result of lax enforcement of preventive measures in the summer (to accommodate tourists and electioneering) and continued lack of enforcement into the fall (reflecting public resistance to inconvenience and a loss in confidence in the government figures leading Croatia’s COVID-19 response). The upshot may be a weaker tourism season in 2021 as travelers no longer see Croatia as safe. This would in turn hurt the hotel construction sector directly and, because tourism is such a large part of the Croatian economy, many others indirectly. A failure to get COVID-19 back under control could also have other, nearer-term economic consequences through mounting health-care costs (including those relating to the disease’s long-term consequences) and worker absences due to self-isolation and disease symptoms. The latter absences could be quite prolonged given COVID-19’s effects.

Split, Croatia – Photo by Tatjana Halapija

Budgetary problems, including those alluded to above, are another problem facing the new government, and only a few of them are of its own making. Income and value-added tax receipts are down dramatically. Combined with the pandemic support payments needed to prevent massive unemployment and company failures, these shortfalls have blown a large hole in Croatia’s budget that the government has covered by borrowing. Earthquake relief and further COVID-19 measures will exacerbate the budgetary problem, and borrowing more is not a viable solution. While Croatia has been promised substantial EU aid, indeed more on a per capita basis than most EU members, it’s still not clear when that aid will arrive or how fast the government can disburse it once received. Progress at the EU level in this matter has so far been slow, and the consequences could be severe for all Croatian construction sectors, including civil engineering, if it does not speed up soon.

All in all, the outcome of Croatia’s July elections is likely the best that the country’s construction sector could have hoped for. Policy continuity, experience in governing and good relations with the EU are essential to Croatia at the present time. By triggering reform and renewal in the SDP, the elections may even have laid the groundwork for a more competitive, and hence more responsive, political environment in Croatia, which would also likely be a positive not just for the country, but for the sector.