In focus Europe
General economic overview
Inflation in the Eurozone area surged to 8.1 percent in the year to May 2022 with energy prices 44.7 percent higher than a year ago. The Euro area unemployment rate was down to 6.8 percent in February 2022 with solid improvements in Spain (12.8 percent) and Italy (8.6 percent). German unemployment has decreased to pre-pandemic levels of 5 percent and job vacancies are rising, but the war in Ukraine is weighing on business confidence which has fallen to a 14-month low.
Construction sector performance
The construction sector is running hot across most countries in Europe as they strive to complete the backlog of projects put on hold during the pandemic. They face a perfect storm of inflated material prices, shortfalls for key manufacturing inputs and labour shortages. This backdrop is driving high rates of tender price inflation, in some cases of in excess of 10 percent per annum.
The German construction sectors have been strongly affected by price escalation, but all European markets are reporting higher construction cost increases than in previous surveys. Labour shortages are widely reported in all regions with plumbing and electrical trades especially undersupplied.
Efforts are increasing to work around the congestion in the supply chain, including early engagement with suppliers, seeking alternative materials, and more use of factory prefabrication. In February, the EU announced a €43bn plan to establish more semiconductor manufacturing in an effort to reduce dependence on Asian suppliers.
“With the building and construction industry contributing to almost 40% of the global carbon emissions, it will be a collective effort between Shell and its supply chain to stay committed to achieve the Net Zero by Thirty goal.”
Jia Wei Ho, Real Estate PMO, EMEA
Progress of the environmental agenda
In common with many industrialised nations, Germany increased its carbon emissions as the country emerged from the pandemic. As the largest European economy, it is significant that Germany is introducing legislation to require 100 percent renewable energy by 2035 in the production of electricity. This is a major goal in a country where 43 percent of electricity still comes from fossil fuels, and which is closing all its nuclear power plants. It is also remarkable, given Germany’s heavy reliance on Russian gas, but the war has increased the urgency of moving away from this to improve energy security and reduce emissions.
Meanwhile, the uptake of electric vehicles in Europe continues to grow, with Europe being the largest market internationally. The European Union is introducing “zero emissions” zones in several urban areas and financial incentives which have helped push the EV share of car sales to 11 percent of the total.
Future outlook
At a time when all the signs were positive for further recovery coming out of the pandemic, there are significant obstacles ahead for construction and growth. Labour skills shortages, supply chain disruptions and inflation are likely to continue as the energy crisis in most of Europe and Germany continues to escalate.
Additional LNG, or alternative energy sources, and more use of renewables take time to implement, so it is possible that some form of energy rationing may need to be undertaken. Even if the energy shortfall turns out to be manageable, rates of inflation are increasing well above target levels and higher interest rates are becoming more likely.
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