European industry has been supported by the better availability of components amid supply chain improvement in recent months as well as reduced concern about possible gas shortages due to favourable weather conditions at the beginning of the heating season in Europe. The impact of favourable weather can be seen in categories traditionally associated with infrastructure investment, i.e. civil engineering (6.9% YoY) and specialised construction works (8.6% YoY). However, the weather in December was not as favourable, and the risk of annual growth falling to negative levels is high. A lack of funds from the Recovery Fund and the high cost of contractors make it difficult to launch tenders. Even when the funds appear, it will take time to launch tenders.
PPI slowed to 20.8% YoY in November from 23.1% YoY in October. On a monthly basis, the PPI index declined for the first time since August 2020. Prices in the energy supply section increased on an MoM basis after two months of marked declines. Energy prices are now about 60% higher than a year ago. In manufacturing, the deepest year-on-year price decline was in the production of coke and refined petroleum products (-7.6% YoY). Prices also fell in the production of metals and electronics.
In this scenario, the end of the year looks relatively favourable for domestic manufacturing, which is entering the slowdown quite gently, accompanied by a decline in inflationary pressures, although PPI inflation remains high. Domestic manufacturing once again confirms solid resilience to external shocks.
In contrast, building construction deteriorated markedly (-4.2% YoY, following an 8.9% increase a month earlier). In this case, the increasing effects of the sharp decline in residential real estate construction will continue. Even at the beginning of the year, the number of apartments under construction was at record levels, and now it is likely that developers are trying to reduce the supply of new apartments seeing weaker demand. The government’s plans to launch preferential mortgages will supposedly improve the situation. But still, developers are likely to experience an excess of completed apartments vs. weak demand in early 2023.
That’s why, therefore, the picture from ING Bank for construction is quite negative, and construction may turn out to be one of the weakest spots of the domestic economy in 2023. A significant opportunity is the government’s mortgage subsidy programme. But this might not have any meaningful impact before the second half of next year.