Construction Industry in Europe

Since the financial crisis in 2009, the construction industry has been shrinking. But the business environment is tipping. 2014 was the first year for the construction industry in Europe to grow again by 2.9%. This, however, does not cover the accumulated losses of over 10%. Especially Greece, that lost 80% of its construction industry output during the years 2010 to 2013, was hit very hard. Only the Scandinavian countries seem to have been able to withstand the aftermath of the financial crisis. Norway, for example, never lost a single digit of its productivity. Central European countries, with the exception of France, are by now back on a growth track and even better off than before 2009.

Regarding the growth rates over the last five years, one can observe a pattern of a two-class society in the European countries. The lower end contains the countries Cyprus, Greece, Portugal, Croatia, Italy, and, to a certain extent, even France. Those are the countries that were hit especially strong during the mortgage crisis. With regards to the construction industry, the sector’s growth rate lies below the growth rate of the general economy. In most of the other countries, the construction industry serves as a growth engine with revenues and growth rates exceeding the average. Let’s study the cases of Croatia and Slovenia. In Croatia, the growth rate of the construction industry was -7.3% in 2014 with a growth rate of the general national economy of 1.3%. Opposing, construction industry growth in Slovenia was 19.2% with an overall growth of 1.7% in 2014. Nonetheless, this is an extreme example and Slovenia lost even more than this outstanding growth during the years from 2009 till 2012.

Although going through severe disruptions, the inner structure of the construction industry in Europe merely changed at all. The big cash cow remains buildings and constructions, while civil engineering shows significantly less growth. An inhibitor to growth may also have been increasing import prices, especially for energy, that until 2015 lay 25% over the 2009 level. The fact that the import prices dropped to pre-crisis levels might be another indicator for the construction industry in Europe to recover.

Relative to other industries in the European countries, the construction industry holds a top position. Only pharmaceuticals, automotive, and rubber products outperform the growth of construction engineering. Its growth is comparable to those of the ICT and textiles industries but stronger than all other B2B focused industries.

Summary of growth: 2014 was the first year since the financial crisis in 2009 when the industry grew again as a whole. With the exception of some mostly southern European countries, the construction industry again serves as a growth engine. The growth rate for the EU-28 countries has been 1.1% in total in 2014, while the construction industry grew by 2.9% ibidem.

The greatest part of value-added* in Europe comes traditionally from the UK. As it is also the biggest national market for the construction industry, this is not at all surprising. Together with the other two biggest economies in the EU, Germany, and France, it contributes 50% of the total value added in the industry. The distribution slightly changes after discounting for the financial sector. Since this industry is very strong in the UK, Germany suddenly becomes the strongest construction industry regarding the non-financial business economy (contributing 22% of value added).

In 2012, the average value added ratio was 32% in the EU. The value-added ratio is the ratio of value added to turnover. A value-added ratio of 32% means that every Euro purchased by a construction company could be sold for 1,32€. Switzerland had the highest ratio with over 46% while Bulgaria archived only 17,32%. Interestingly enough, both those countries have the same number of construction companies but the Swiss ones on average have about twice as many employees. As we will see later, this is a consequence of macroeconomic factors as Switzerland is more specialized and less fragmented. Both are factors that contribute to a high value-added ratio. Also, the European powerhouses France, Germany, and the United Kingdom have an above average value added ratio.

Summary on value added: Construction is and remains an attractive industry from a value-added perspective. While a few countries seem to add the most value in the EU, almost every national economy has a great value added in the construction industry.

*What is value added? In simple, it is the difference between purchase and retail price. The value added is the value that one adds to a good that he/she wants to sell. For example, an artist adds value to the canvas and the colors by creating a painting.

The construction industry in Europe offered a total of 12.73 million jobs in the EU-28 in 2012. While it hit a long time low, the number of new job openings has been increasing steadily from year to year over the last years. The biggest employers are Germany (1.96 million), France (1.77 million) and Italy (1.55 million). France also has the highest personal cost in the construction industry (71.34 billion €). It is followed by Germany (58.45 billion €) and the United Kingdom (42.19 billion €).

With a total of 2.5 million people in labor in the construction industry and related functions, Germany is Europe’s largest employer of construction workers. Moreover, within the German economy, the construction industry is the single largest creator of jobs. It provides around 5.7% of all national jobs. It is only overcome by the United Kingdom and Spain with 6.2% and 6.5% respectively. Those two markets will remain to be among the most relevant construction markets in the world. In Spain, it goes as far as the country is almost dependent on the growth of its domestic construction industry. Germany and the UK even managed to create some 8% on average of new jobs in construction since 2012.

As industry reports show, the construction industry in Europe is highly fragmented and local. This can be argued on the basis of local legal restrictions, the high input of physical goods and personal interaction. The ratio of employment in the construction industry to the total employment thus remained relatively stable over the different EU states. It usually ranges between 4.5% of total employment and 6.5% of total employment.

There are, however, strong differences in compensation. While there is a group of countries where construction workers earn an above the average wage, there is also another with worse compensation. “Worse” in this sense means that workers in these countries only earn half of what their peers earn in high wage countries. In the high wage group are Denmark, Germany, France, Cyprus, Sweden, Finnland, and others. In the low wage group, there are, among others, Bulgaria, Latvia, Slovakia. Additionally, there is some middle ground that mashes otherwise very different countries like Slovenia and the United Kingdom.

Another way to look at employment is to observe the employer. The fragmentation mentioned earlier expresses itself, among other, things in the fact that the average construction enterprise has only 3.9 employees. Over 90% of all construction workers are employed in SMEs with 200 people or less. In fact, the average SME only has 3.4 employees. Half of those employees even work in Micro-enterprises with an average staff of 1.9. Only a fraction of 0.06% of all companies can be regarded as large companies. On average, those employ 752.3 people. This points to the entrepreneurial character of the construction industry.

Summary of employment: In several economies, the construction industry is the most important employer. Around 5% of European workers are employed in the construction sector and earn a country average wage. Due to fragmentation, the mobility of workers is limited and most companies are small. Those small companies serve as the backbone of the construction industry from employment as well as from a revenue basis.

The population density, as well as the shift from an industrial to a modern service society,  forces the United Kingdom to spend great amounts of money on construction. This and the outstandingly high price level on the island lead to its top position in spending. The second highest spendings are carried out in Germany, where the federal country of Bavaria is responsible for 20% of the country’s spending.
Total turnover in the EU in 2012 where 1,545.5 billion Euro with a value added of 492.9 billion Euro. This translates to a value-added ratio of 31.89%

With regards to regions with the strongest revenue, we see strong development in the Île de France and the Rhōne Alps in France but also in Italy’s Lombardy. Among the ten strongest regions there are neither German nor British counties. That is also reflected in the revenues of those four countries: France, UK, Germany, and Italy create the most revenues for the construction industry in Europe (in that order). However, discounted for national income, the highest relative spending occurs in the countries with booming towns. Specifically Spain, France, and Italy.

Summary of revenue: The revenues of the construction industry in Europe come back to levels from before the crisis. In the big economies, equilibrium has already been reached. The flywheel was set in motion and spending levels are up again.

With a share of 17.8% of all constructions in the EU-28, the UK boasts the highest value added. Cyprus, in contrast, is highly specialized in construction, with the industry being the largest contributor to its national economy.

Compared to other sectors, the share of people employed is similar while small businesses display stronger productivity. Small companies are overwhelmingly working on highly specialized activities, while the giants have a strong tendency towards civil engineering. That is not surprising given that civil construction projects are very labor intensive and require complicated project management.

Summary of market share: Small companies tend to focus on special tasks and on the construction itself. Large players, by contrast, are additionally more engaged in civil engineering and offer a wide variety of services.

Most enterprises operate in specialised construction activities. This means neither the construction of buildings nor civil engineering. On the other hand, the few big companies in the area manage to make great profits in all sectors, also and foremost in civil engineering.

In total, there were 3.2 million construction enterprises registered in Europe in 2012. Of large enterprises with more than 1,000 employees, there are only a few 2.1 thousand. The biggest concentration of the construction industry took place in the United Kingdom, where the trend of big corporates in the industrial sectors has a historical reason. Over the past years, also companies from the northern countries managed to become large companies. Germany and France are just average countries in this regard.

In favor of the construction industry in Europe are also the facts that the cost of labor went down since 2010 by on average 15% while at the same time the costs for building constructions rose by 6.5%. Outliers are Germany and Denmark, where the labor input increased over that period by 15% and 8%, respectively.
Still, on macroeconomic level productivity of the entire industry dropped by some 10%. With Denmark and Sweden showing strong increases and the UK showing a slight increase in productivity. This may lead to further concentration and the uprise of bigger companies. In Germany, it is also observable that small construction companies are currently created and default on a rate higher than pre-2009.

Although not in the EU, a quick look to Turkey reveals some interesting data. Here, productivity rose by 25.35% since 2010. While the number of SMEs stayed somewhat similar, the number of large enterprises has been increasing for a long time now. Those companies also drive growth in the country.

Summary of companies: Over 3 million companies employ over 12 million people in the construction industry in Europe. The industry is strongly fragmented due to specialization and volatility. Bigger companies manage to employ their people in a more productive manner than do smaller ones.