Insight

Knauf Insulation’s economic expert: ‘tough times call for tough companies’

By Knauf Insulation
December 21, 2023

The construction industry may be navigating troubled economic waters, but in the words of Knauf Insulation’s Head of Market & Business Intelligence Davide Maiello: “Tough times don’t last, but tough companies do.”

New research by Euroconstruct, which surveys more than 90% of Europe’s construction market, reveals that total construction output across 19 European countries in 2023 is expected to fall by 1.7% year-on-year and then drop again by 2.1 in 2024.

According to the research, the industry is expected to stabilise with an increase of 1.5% in 2025 before returning to growth in 2026 with a rise of 1.6%.

“Of course, the industry is suffering, but there is light at the end of the tunnel,” says Davide Maiello, Knauf Insulation’s Head of Market & Business Intelligence. “We must look at this time with positivity. This is a call to action for the construction industry. This is a moment to reflect and an opportunity to improve

“We may not be able to tackle the cyclic issues driving the downturn such as interest rates, economic uncertainty and the impact of inflation.

“However, as an industry we must find new solutions to those areas we can change such as upskilling our workforces to meet modern demands and innovating to do more with less, for example, through prefab and off-site construction.

“We must innovate now to maximise the opportunities of the next positive cycle.”

Davide Maiello

Dramatic drop of new residential

The downward trend for construction in Europe is mainly due to a lack of demand, says Davide, with negative trends in 2024 compared to 2023 in 10 out of 19 of the countries analysed by Euroconstruct.

The most significant impact is being seen in the slowdown of new residential buildings which accounts for a fifth of the construction market, says Davide.

Eurostat’s survey puts 2023 to 2024 losses in residential construction at a staggering €105 billion with the 2025 to 2026 upturn only recovering 20% of this loss.

In 2023 new residential activity fell by minus 8.4% and this is expected to fall by minus 7.4% in 2024 adding up to almost 16% in lost activity in just two years.

“In 2022 we had 3.9 completed dwellings for every thousand people and in 2026 we will have 3.2 per thousand. This figure is similar to 2009 when we saw one of the lowest dips of the past 20 years.”

High cost of inflation and interest

So, what is causing the slowdown?

In the past 12 to 18 months, we have seen the fastest increase in interest rates in 20 years which has impacted construction investment and the cost of home ownership, particularly for those on variable mortgages.

“Housing prices also increased at a rate that was higher than inflation from 2017 to 2022, which means that while salaries were growing with inflation, at the best, house prices were growing higher which is problematic.”

Furthermore, the cost of living crisis has cut household incomes significantly fuelling greater economy uncertainty, says Davide.

From the demand side, the construction industry has also been navigating a shortage of skilled labour as the number of retired workers continues to outnumber those joining the industry.

This challenge has been magnified by demanding building regulations which require specialised skills.

“The good news is that the rate of inflation is slowing down,” says Davide. “We are also seeing demographic changes. For example, in the EU27 countries, 30% of people aged between 25 and 34 are still living at home. If these people start to move out and create a need for new homes, it could help the rebound of new residential.”

Impact of Italy’s renovation U-turn

Residential renovation in 2024 is expected to fall by minus 4% across the 19 countries surveyed by Euroconstruct. However, if Italy is excluded from the figures the anticipated figure is zero.

Italy has seen 417,000 homes benefit from a total of €81 billion in energy-saving renovations between 2021 and 2023 following the success of a national financial initiative supporting renovation known as the Superbonus.

In 2023, this scheme’s tax incentives were downsized from 110% to 90% undermining its appeal.  “In 2024 Italy is going to lose at least 21% of its renovation activity. So, it is a clear outlier,” says Davide.

“The ‘Renovation Wave’ commits European Union Member States to renovate 35 million buildings by 2030 so if we want to attain this level we must accelerate our pace.”

Stable trend of non-residential buildings

In terms of non-residential buildings, the trend is more stable in 2024. Despite a slightly trend of minus 1.2% for non-residential new buildings, there is a plus 1.2% growth in non-residential renovation.

The reinvestment of profits, a focus on energy efficiency in public buildings and tax advantages are driving growth in non-residential but these factors are counter-balanced by increased costs of capital and credit, political factors and economic uncertainty, says Davide.

“We are coming out of a difficult year in 2023 that was worse than expected and 2024 will not be any better,” says Davide. “After stabilizing in 2025 we will see growth in 2026. It is essential that every construction company takes a long hard look at how they will accelerate this growth after navigating the challenges of 2024.”