Market outlook affected by inflation, interest rates and climate transition
In 2022 the global economy was dominated by the financial effects of the war in Ukraine in the form of rising energy and food prices, and general cautiousness.
However, the global economy has been relatively resilient due to the fact that industry’s order books were well-filled at the beginning of the year and this is a period of ramping up and climate transition. Nonetheless, escalating prices for material, components and energy cut into profitability and with external demand down there is less appetite for investments right now.
Primarily households have been negatively affected this time as a result of the escalating cost of heating, interest rates and broad inflation. It is mostly due to the diminishing demand from households that Europe and the USA in particular are entering a two-year period with weak or negative growth. A relatively large part of Swedish households have mortgages, which makes the Swedish economy particularly susceptible to interest rate hikes. This has negative consequences for both housing construction and price development for existing homes.
Even the commercial real estate market suffers from rising interest rates in combination with weaker demand for services and goods, since farther down the line this can lead to more vacancies and lower construction investments.
In total, the global economy is estimated to have grown by about 3.2 percent in 2022. The forecast for growth in 2023 indicates an increase by about 2.3 percent. Europe’s GNP growth in 2022 was aligned with the rest of the world but it is not expected to keep up with other areas’ growth in 2023. Instead it is believed that Europe’s GNP will contract by around half a percentage point.
Important sustainability issues
The Nordic countries still have a long way to go to achieve carbon neutrality despite targets and plans for net zero emissions of greenhouse gases. The construction and real estate industries have a vital part to play in climate transition and are therefore driving various initiatives to reduce carbon emissions in line with the Paris Agreement, particularly through the Road map for fossil free competitiveness that Peab has also signed onto. The construction and civil engineering industry, together with seven other trade organizations, work within the road map to achieve a climate neutral construction sector. This work comprises the entire value chain from planning and implementation to demolition and reuse.
Creating sustainable cities includes energy efficient buildings and a construction process that uses material and processes in a climate-adapted manner. Looking at it from a broader perspective, cities’ sustainability relies on energy-smart community planning with, for example, circular flows that lower climate impact. Development is driven by government agencies and customers as well as the construction industry itself. For the contractors it’s a matter of transitioning to being fossil free, electrification, input goods with lower climate impact and environmental waste management and reuse. For the authorities, requirements like climate declarations when erecting buildings from the Swedish National Board of Housing, Building and Planning as of 2022, have led to competence development and new experiences. The 27th Climate Change Conference COP27, which was held in November last year, focused on how the world should adapt to climate changes in order to reduce vulnerability and held negotiations regarding a draft of the work program for the reduction of emissions that was adopted at the previous meeting.
The concept sustainable cities includes financial and social aspects, in addition to climate and environmental ones. Planning for cities based on financial sustainability entails making wise and well thought out investments that withstand the test of time and are flexible enough for future changes. It might also include, for instance, facilitating the ability of residents to make sustainably financial decisions in their everyday life. Regarding the social aspect, the construction industry can remove barriers and isolation, in and between city boroughs, to increase safety and create a city for everyone. At the same time the escalating prices for homes in recent years and the risk of diminishing housing construction could very well strengthen exclusion and social inequality.
The economy in Sweden
Already before Russia’s attack against Ukraine in February 2022, the Swedish economy was struggling with raw material shortages and rising material prices. The war has driven up costs and broadened inflation through price hikes for energy, fuel and food. The Swedish Riksbank has therefore raised interest rates substantially several times to curb these developments and bring down inflation expectations. However, towards the end of the year inflation rose dramatically to record levels. Demand weakened in the second half of 2022 as a result of the declining global economy and less spending money in households. The forecast for 2023 indicates that the Swedish economy is contracting. The conditions for investments and consumption alike are worsening due to higher interest rates, weakening demand, rising unemployment and the high cost of living for both companies and households.
The economy in Norge
The Norwegian economy’s recovery after the pandemic continued into the first half of 2022, but the impact of the war in Ukraine led to a slowdown in the latter part of the year. Private consumption of both services and goods declined due to rising prices for energy, food and other products. In addition, Norges Bank has raised the policy rate several times, which has led to higher interest rates for both households and companies. However, the situation in industry has been somewhat more positive. The outlook for 2023 indicates that the economy may grow slightly, primarily due to growing investments and increasing public consumption.
The economy in Finland
Finnish financial growth developed surprisingly well during the first half-year of 2022, despite the breakdown in trade with important commercial partners like Germany and Russia. Escalating inflation pressed down household consumption, while at the same time lower unemployment stimulated household consumption. Rising gross investments and public spending has also contributed to growth in the Finnish economy. However, in late autumn conditions worsened and forecasts for 2023 indicate that growth will likely stagnate due to less activity and demand from both business and private persons. Unemployment, on the other hand, is not expected to grow and the relatively limited inflation in the country will probably keep large interest increases at bay.
Investments 2018-2023F
Building private premises softened downturn in Sweden
The total volume of started-up building construction investments diminished in 2022 as a result of the quickly declining economy, rising interest rates and high prices for material. The downturn, which affected several sectors including housing and premises was, however, softened by public sector building and to a certain extent investments in office buildings, commercial property and hotels. The decrease in housing was particularly noticeable regarding new apartment building production. After several years of positive development, building construction investments in industry, storage and logistics also declined, which was an effect of the slowdown in the economy and negative development in e-commerce. The drop in investments in 2022 will most likely be followed by an even greater decline in 2023, which will probably hit the entire construction industry. Civil engineering investments are expected to have increased in 2022 but will probably contract in 2023 as a result of lower public investments.
Splintered development on the Norwegian construction market
The total volume of started-up building construction investments in Norway all in all developed positively in 2022 but varied among the different sectors. New production of single homes and renovating apartment buildings declined while the other sectors grew, particularly in industrial building which flourished. Growth in private and public premises was on the other hand more modest. Development for total building construction in 2023 is expected to be negative but office building construction and apartment building renovations will probably lift, which will soften the total downturn. Civil engineering investments are expected to have dramatically increased in 2022 but will probably level out in 2023.
Housing and industry weighed down the Finnish construction market
The total volume of started-up building construction investments in Finland contracted in 2022, after an upturn the year before. However, the decline did not hit every sector as both apartment building renovations and investments in offices, commercial space and hotels stood firm and increased. In the housing sector new production of single homes and, in particular, apartment buildings were hit hard by weakening demand on the market. The negative trend is expected to continue during 2023 but will probably not be as apparent as in 2022, although the drop in industrial construction is expected to be significant. By all accounts there was zero growth in civil engineering in 2022 and this trend is expected to continue in 2023.
Danish paving market will contract in 2023
The Danish paving market is expected to contract more than previously predicted. Current assessments are that government maintenance will contract by 25 percent. Municipalities are being squeezed by the need to save and the municipal market is expected to decline by around ten percent. The infrastructure plan IP35 already affects the construction industry but the asphalt market will not really feel it until 2024-25. The private construction market is slowing down as a result of the economic crisis and is expected to drop by 10-15 percent. All in all, the Danish paving market is expected to contract by 10-15 percent.
Other major players
Although the Nordic construction market consists mainly of a large number of small companies operating under intense competition on local markets there are a few very large, national players in addition to Peab. Several of them also operate more or less on the entire Nordic market. Noteworthy companies in building construction are Skanska, NCC, Veidekke, AF Gruppen and Obos as well as Finnish Kesko, SRV and YIT.
Some of the major actors in road and railroad construction are Skanska, Veidekke, AF Gruppen, NCC, Svevia and Infranord.
Some examples of major Nordic companies in industrial construction are NCC, Skanska, Veidekke, Colas, Rudus, BetongIndustri and Nor-Betong.
Some examples of major actors in project development are JM, Bonava and Besqab.
Source of content and graphics: Navet AB