Macro outlook
and the market
Uncertainty in the world around us has affected the macro economic circumstances in the Nordic region and contributed to a more challenging construction market. Housing construction dramatically declined while civil engineering, paving and public building construction developed well. All in all, prospects for the Nordic construction markets point downward in Sweden and Finland while remaining on the same level in Norway.
Inflation is beginning to deflate
Growth in the global economy is slowing down but developments differ significantly in the major economies. The global economy is estimated to have grown by about three percent in 2023 and is expected to be marginally lower in 2024. It looks like the USA will make a soft landing with around 2.5 percent growth in 2023 and slightly more than one percent in 2024. Negative growth in Germany has an adverse effect on the eurozone, which is expected to have an average annual growth in 2023 and 2024 of 0.5 percent. China’s growth is expected to land at just above 5.0 percent in 2023 and 4.5 percent in 2024. Inflation is the underlying factor in growth, interest rates and asset prices but geopolitical hazards in both Eastern Europe and the Middle East can hamper risk-taking. Volatile energy prices are another uncertainty that can have an effect on growth in the coming year. However, due to lower growth in OECD countries and supply chains functioning again, the trend is moving towards less pressure on prices. While the manufacturing industry anticipates lower prices, they continue to rise in the service sector. Most financial analysts appear to be in agreement that interest rates have reached their peak and central banks worldwide will begin to lower them in 2024. Most likely the American Fed and the European ECB will be the first start lowering interest rates some time during the first half-year. In Sweden the weak global economy combined with several domestic factors has weakened the Swedish currency, which has contributed to imported inflation. The shaky road to Nato membership, highly indebted households, interest rates driven to excessively low levels and concern for some of the commercial property sector’s ability to handle higher interest rates have contributed to a low value of the Swedish krona.
Climate transition drives the industry
The construction and real estate industries have a vital part to play in climate transition if Sweden is going to achieve the goal established by the Swedish Riksdag of net zero greenhouse gas emissions by 2045. Every sector of the construction industry will have to play a part in the extensive investments required to convert the base industry and in the work to increase access to sustainable and stable energy and distribute it. There are a lot of opportunities to streamline energy consumption in the real estate sector, which is a boon for the tech intensive installation sector as well as a large part of the material industry and construction contract sector. At the same time the construction and real estate industries have to reduce their own environmental impact in both the construction and operational phases. Calculations show that both the construction and civil engineering industries can almost halve their climate impact by 2030 with existing technology. However, to achieve net zero a shift in technology and commercialization of innovations is necessary. This requires reviewing the entire value chain from extraction to recycling. The traditional linear model for manufacturing that starts with extraction of virgin material and ends in landfill via usage needs to be updated, and infused with reuse in production as well as a life cycle perspective in management. This transition is driven by legal requirements and customer demand as well as market initiatives but further stimulus in the form of political instruments, long-term regulations and good access to capital may well be needed. In addition to instruments, customers must be willing to pay for the transition and public sector procurement can be the motor and forerunner here. A sub-goal for attaining a climate neutral value chain in the construction and civil engineering industries by 2045 is to achieve halving greenhouse gas emissions by 2030, compared to 2015. The 28th Climate Change Conference COP28 was held in November last year. This time discussions focused on how the world should adapt to climate changes in order to reduce vulnerability. One conclusion was the necessity of a major global investment in nuclear power if the world is going to achieve net zero emissions by 2050.
Dramatic downturn for Swedish housing construction
The construction industry was one of the sectors hit hardest by the high price level of 2023. Housing construction fell by more than half, thereby creating the most dramatic development during the year. The high price level, rising interest rates, a cautious market and restrictive banks affected other parts of the construction market as well. This led to a broad and intense decline in building construction where the only exceptions were industrial and warehouse units. The continued weak financial situation, with high interest rates and growing unemployment, will probably result in building construction investments continuing to diminish in 2024 but far less than last year. Civil engineering investments are expected to have increased in 2023 due to private investments increasing in areas like energy, fiber and water and wastewater. In 2024 the forecast indicates more or less zero growth.
The economy in Sweden
The Swedish economy struggled with the high level of both prices and the repo rate throughout 2023, which has diminished the purchasing power of households and led to dwindling consumption and investments. Nonetheless, unemployment only rose slightly during the year, although a sharp increase is expected in 2024. The Swedish Riksbank raised interest rates several times last year for a total of 1.5 percentage points. However, during the year inflation slowed significantly and therefore the repo rate was left unchanged at 4.0 percent at the November interest rate meeting. The market believes that interest rates have reached their peak and that the Swedish Riksbank will begin to lower them during the second half of 2024. After the Swedish economy contracted by nearly one percent in 2023, zero growth is expected in 2024.
The economy in Norway
The Norwegian economy’s development during 2023 was splintered and growth was driven primarily by oil-related business as well as the service sector. The construction industry was negatively affected by a drop in housing construction. Household consumption was dampened by rising interest rates, which had a negative effect on retail. However, the continued high rate of employment softened this situation. Going forward it appears Norges Bank will not continue to raise interest rates. A weaker labor market and less pressure from inflation is expected to lead to lower interest rates. On the whole Norway’s economy is expected to grow slightly in 2024 due to a recovery in consumption and growing investments.
Housing construction weighed down the Norwegian construction market
The total volume of started-up building construction investments in Norway was more or less the same as in 2023 compared to the previous year. However, development varied greatly and rising interest rates had a particularly negative effect on housing construction. While new production of single homes and apartment buildings declined industrial building construction volumes increased dramatically. There was also some growth in private premises while public sector investments went sideways. A broader drop in building construction investments is expected in 2024, with the exception of public sector building construction which might increase. Civil engineering construction is believed to have grown in 2023 and this positive development will most likely continue in 2024.
Housing and private premises negatively affected the Finnish construction market
The total volume of started-up building construction investments in Finland contracted in 2023 for the second year in a row. First and foremost housing construction developed negatively as a result of the difficult financial situation for households due to rising unemployment and interest rates. Investments in offices, retail and other private premises declined as well. However, industrial building construction investments and investments in public premises turned out to be strong and grew during the year. With interest rates rising in 2024 the total volume of building construction investments is expected to continue to contract in 2024 and this negative development will most likely affect most sectors in the market. Civil engineering is expected to have developed horizontally in 2023 but in 2024 will likely turn up again.
The economy in Finland
The Finnish economy contracted marginally in 2023. A contributing factor was lower household consumption caused by rising interest rates and higher prices. Another vital factor was diminishing gross investments where the drop in housing construction was key to the negative development. Inflation is believed to have peaked in 2023 and will begin to deflate in 2024 but it still looks like the Finnish economy will be constrained and unemployment will increase. On the whole Finland’s economy is expected to be slightly on the positive side in 2024 due to expected positive developments in consumption, investments and exports.
Investments 2019-2024F
Danish paving market will grow in 2024
The Danish paving market is expected to grow from the level in 2023, which turned out better than expected. The government will double paving maintenance compared to 2023 while the infrastructure plan IP 2035 has gotten off to a good start with the start-up of several civil engineering projects and new ones on the way in 2024. Municipalities are expected to maintain the same investment levels as in 2023. The private market is expected to slow down somewhat from a high rate, possibly a soft landing. Based on the above, the Danish paving market is expected to grow by 5 to 10 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.
Four examples of major actors in project development are JM, Bonava, YIT and Besqab.
Source of content and graphics: Navet Analytics AB