A new survey by the Ifo Institute for Economic Research in Munich has found that the “business climate” in Germany’s residential construction industry has hit an all-time low.

German residential construction industry hits new low

Falling from -56,9 points to -59,0 points, the “business climate” in Germany’s housing construction industry has reached the lowest value ever measured, according to the Ifo Institute.

The Ifo analyses business climates in Germany by asking manufacturers in a particular sector to give their assessment of the current business situation and their expectations for the near future. Expectations that the housing construction industry climate would improve fell from -64,7 to -68,9 points.

“The outlook in the coming months is bleak,” said Klaus Wohlrabe, head of surveys at Munich’s Ifo. “Residential construction is still facing the double whammy of a lack of new orders and ongoing project cancellations.”

However, according to the Ifo, 2024 has seen a slight drop in the number of residential construction companies in Germany that reported a lack of orders, from 56,9 percent in December 2023, to 52,5 percent in January. There was also a slight decline in the number of cancellations, from 22,1 percent to 17,4 percent, but Wohlrabe said that the outlook remained bleak since it was too early to tell if the differences amount to a ripple or a change in the tide.

Increased interest rates and rising costs remain a challenge

Back in July 2023, the Ifo had already predicted that the housing construction industry would see a sharp decline. Rising costs in the industry - which have partly been spurred on by the war in Ukraine - increased interest rates and an uncertain housing market were cited as reasons for the forecast. In the summer, the Ifo had already predicted that just 200.000 housing units would be built in 2025, just half of the Ampel coalition's target.

More than half a year later, following the institution’s latest report, Wohlrabe explained that “tough conditions have hardly changed at all. High-interest rates and construction costs aren’t making things any easier for builders.”

A glimmer of hope comes with Germany’s falling inflation rate, which dropped to +2,9 percent in January 2024, the lowest value since June 2021. This new consumer price index (CPI) rate and Germany’s current core inflation rate of +3,4 percent will now be considered by the European Central Bank (ECB) to reassess if interest rates should be cut.

A decision to cut interest rates from the ECB is not expected to come imminently, but once it does, the drop should make it easier for construction companies to finance projects.

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