EECFA 2017 Summer Construction Forecast and Revision

We have released our summer construction forecast on 16 June 2017 on Bulgaria, Croatia, Romania, Russia, Serbia, Slovenia, Turkey and Ukraine. This post intends to summarize the most important projections for these construction markets for the years 2017-2019. These are our main findings; for a deeper understanding, please consult our reports. You can contact us on eecfa.com.

Outlook for the EECFA regions

The highly optimistic outlook for South East Europe is maintained by EECFA. Leaving behind the transitory 2016, when the absorption of funds available in the new EU programming period (2014-2020) was still at a low level, the upcoming years are characterized by a bigger expansion of the construction market than that of GDP. Building construction is predicted to well outperform the total market, with a yearly average rate of 9% over the horizon. The small growth in the region’s total civil engineering market is attributed to the negative expectations in Romania.

Sideway moves, no further market expansion on the horizon are what we consider the most probable scenario for the 3 East European markets together. Turkey and Russia, being far the two biggest markets we cover in EECFA, is expected to show some similarities. In both countries our forecasts are moderately optimistic in the civil engineering market. While in the building construction market the outlook is clearly negative for Russia and neutral for Turkey. In Ukraine, the recovery experienced in 2016 is predicted to be sustained until 2019. Both building construction and civil engineering could expand further with a relatively good pace.

South East Europe: country-level outlook and forecast revision

Looking at Serbia, predictions for the construction market over the forecast horizon have slightly been revised upward against the 2016 winter forecast, confirming the already set trends in construction volumes. The permit reform having started in 2015 has particularly been driving a new boom in building construction. This, combined with historic-low interest rates, rising earnings and the improved financial conditions in the country, is making Serbia one of the main engines of economic growth in the West Balkans. Thus, the outlook is the second most optimistic in the SEE region with an 11% annual average growth for the 2017-2019 period.

Expectations for the construction market in Croatia are even better than awaited in winter 2016 with a projected 11.2% growth this year, 7.1% rise next year and a smaller, 2.8% increase in the year after. The bright spots are that the country’s economic indicators are promising and Croatia is getting better at applying for EU funds both on central and local governmental levels. Further, Croatia’s tourism sector will likely keep expanding. A negative factor hindering development might be the ongoing Agrokor crisis, though, (Croatia’s, and one of Southeast Europe’s, largest conglomerates facing bankruptcy) as if it is mishandled, it can considerably damage both the economy and the construction sector.

The Slovenian construction industry – after hit by bankruptcies of major construction firms and the following deceleration of large-scale construction projects due to diminishing EU funds at the end of the EU financial perspective in 2014 – is expected to have registered a contraction of 9% in 2016. However, EU funds of the current financial perspective of 2014-2020 started to flow in by the end of 2016 and high-volume projects having been at a standstill are now gaining momentum by ownership restructuring. As these restructured projects will be initiated in 2017-2018, construction in Slovenia will likely see a hike of 9.6% this year and even bigger ones in 2018 and in 2019: 10.1% and 16.1%, respectively.

The Romanian construction sector is set to have posted a lower-than-anticipated expansion in 2016: in comparison with the 3.7% growth hoped for the whole year in the EECFA Winter 2016 Report, now only a 0.5% growth is estimated for last year because of the more extensive underperformance of the civil engineering subsector due to the sluggish uptake of EU funds. Nevertheless, more expansion might return to the Romanian construction market this year with 4.3%, considering the better-performing housing permits and state subsidies supporting the housing sector. In 2018, a 7.6% increase should take place, while in 2019 growth should decelerate to 1.8% given that the residential market expansion is expected to slow down.

Ultimately, Bulgaria seems to have registered a bigger slump in construction output in 2016 than the one predicted last winter. Currently, a major decrease of 31.1% is estimated to have occurred in the sector in 2016, compared to the shrinkage of 18.5% awaited at the end of the year. The reason for the downward revision is the considerably greater drop in the civil engineering segment owing to the slower-than-expected absorption of EU funds and with virtually no big-league projects contracted last year. In 2017, however, a rapid recovery is set to come with the return of EU funds in the civil segment, with the growth in the residential subsector backed by the low interest rate environment for mortgages and by decreasing jobless rates. Therefore, for 2017, a growth of 8% is forecasted for the whole construction sector, while the expansion for 2018 and 2019 is estimated at 6.4% and 4.5%, respectively.

Country-by-country forecast and revision of East European construction markets

After 8 years of almost uninterrupted downtrend, 2016 was the first year for the construction sector of Ukraine to witness a revival: output is expected to have recorded a 12% growth last year, higher than the 7.3% predicted in the winter 2016 EECFA report. Non-residential construction and civil engineering fuelled the market last year, coming from extremely low levels between 2013 and 2015. This spring the Ukrainian parliament has passed a series of acts in order to improve the country’s position in The World Bank’s Doing Business ranking, which is thought to have a stimulating effect on the construction industry as well. The forecast period looks promising with a probable increase of 7.7% this year, 8% next year and 7% in the year after.

In Turkey, the mixed picture is caused by the historical revision of GDP figures (GDP calculation method was changed at the end of 2016). As part of it, construction investment numbers have massively changed backwards after the revision, and consequently, the current market size is more than two times bigger (!) than previously recorded. As for the outlook, Turkey’s construction is projected to register a 1.4% growth in 2017, while for 2018 and 2019 a respective 0.8% and 1.0% increase is forecasted. The further expansion of the civil engineering market is foreseen to be dragged down by the near-zero growth of building construction.

The ballpark figure for the decrease in Russia’s construction output in 2016 has been revised upward (from -1.1% expected in winter 2016 to -0.4% estimated in summer 2017) as Russia’s economy looks to have come out of recession by the end of last year with a decelerating inflation and the strengthening of the rouble. Looking ahead, there are clouds on the canvas of the forecast horizon, though, with -2.5% output foreseen for 2017, -0.8% in 2018 and -0.2% in 2019. That said, in 2017 building construction is likely to be greatly negative, but in the years after, the drop will be mitigated by an awaited gradual improvement in the economic climate of the country and governmental programs affecting residential construction.

Compiled by: EECFA Research Center – Source of data: 2017 Summer EECFA Forecast Reports

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