Surge in Construction Fuels German Economy
In downtown Frankfurt, Germany, a construction site the size of a football field sits amid the city’s busiest shopping area. Four skyscrapers and a mall are being erected.
It’s a common scene in Germany these days. “In some regions, it’s difficult to hire a crane or a truck and in some cases even skilled workers,” said Erich Gluch, a construction analyst at the Ifo economic institute in Munich. “There has been an explosion of construction activity.”
The industry’s emergence from a decade-long recession propelled Europe’s largest economy to its fastest expansion in five years in the second quarter.
Even as real estate booms are at or near their end in the U.S. and Britain, Germany is gaining momentum, promising a spur to growth for the foreseeable future.
The economy’s 0.9% second-quarter growth was driven by a 4.6% jump in construction activity, the biggest increase in a decade, the Federal Statistics Office said this week.
“I wouldn’t talk about a construction boom yet,” said Peter Keitel, chief executive of Essen-based Hochtief, Germany’s biggest builder. The company is a commercial lead manager on downtown Frankfurt’s Hochvier project, which will cost the equivalent of $1 billion.
“But after 10 years of decline, the market is improving,” Keitel said. “If this continues, construction can reclaim its traditional role as the motor of the German economy.”
Economic growth may exceed 2% this year, the most since 2000 and up from 1% in 2005, Bundesbank President Axel Weber said this week.
“Even a stabilization in the German construction sector will have a substantial impact on growth,” said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. “Between 2000 and 2005, the recession in construction cut 0.6 percentage points off GDP growth on average each year.”
The recovery has been a long time coming. Spending on construction slumped about 22% in the last decade, according to data compiled by Ifo, declining 2% on average a year.
Contraction in the industry caused hundreds of thousands of job losses and bankrupted contractors such as Philipp Holzmann and Walter Bau.
The roots of the slump go back to the country’s reunification in 1990. After the collapse of communist East Germany, the government pumped more than $600 billion into the five eastern states and Berlin, leading to overbuilding that left hundreds of derelict high-rise apartment and office blocks scattered around the east and more than 1 million homes standing empty.
German house prices fell 6.8% from 1994 to 2004, the Organization for Economic Cooperation and Development said.
This year, construction investment may increase 2.5% to 3%, Ifo’s Gluch estimates, the most since the peak of the reunification boom in 1994.
At the same time, “German construction companies have done their homework and halved their workforce in the past 10 years to 700,000 from 1.4 million,” said Michael Knipper, president of German builders association HDB, which is poised to raise its 1% sales growth forecast for this year.
“The German construction industry is competitive” again, Knipper said.
The recovery is being led by commercial construction as export-driven growth spills into the domestic economy. The need for additional warehousing and infrastructure has risen as companies expand production to meet export demand. Others are investing in shopping malls such as the Hochvier project in Frankfurt to take advantage of a revival in consumer spending.
Hamburg-based Deutsche Euroshop, which invests in shopping centers, said Aug. 11 that profit more than doubled in the first half as it added malls in its home market.
Increased company profits are boosting tax revenue, fueling public-sector spending on construction. Hochtief’s Keitel predicts a surge in public-private partnership work, in which companies finance, build and run state infrastructure such as roads, schools and hospitals. The value of Hochtief’s public-private projects increased 8.3% in the first half of 2006.
