Policymakers shaping the construction sector recovery; COP16 matters, nuclear energy reloaded & the big stay in Europe’s job markets

Global growth finds itself at a crucial turning point, particularly with the US elections just around the corner (check out the perspective I recently gave - CNBC interview). This moment is also vital for the construction sector as policymakers struggle with fiscal tightening and the appeal of lower interest rates. As we move toward 2025, a key question looms: will policymakers create a solid foundation for sustainable recovery, or will lingering challenges derail progress? Aspects we explore in this week’s construction industry special. In our What-to-watch publication this week we explore several topics, including the impact of UN’s ongoing biodiversity conference in Cali, Colombia, highlighting the opportunity for decisive biodiversity action, the resurgence of nuclear energy as a low-carbon option, and the evolving dynamics of Europe’s labor markets, driven by generative AI.

Together, these trends pave a hopeful way forward toward a sustainable and economically vibrant future (fingers crossed).

And a fresh episode of our Tomorrow podcast, this time round on our recent global wealth report and how global financial assets of private households have fared in 2023.

Breaking or laying bricks? How policymakers will shape the construction recovery

Our in-depth analysis for you here.

Construction sector in Europe, US and China: As interest rates are decreasing but fiscal spending is also going down, the construction sector is going to be significantly impacted by policy making in key markets. We take a look across segments in the construction industry as well as the impact on corporates operating in the sector:

Despite major headwinds, the residential construction segment has remained resilient and lower interest rates could revive prices and activity in 2025. Housing starts and residential building permits have been going down in most countries over 2024. However, real estate prices have probably bottomed-out after the significant correction in most markets. We expect prices to increase by +1% in France, Italy and Spain in 2025, while they should grow by +2% in Germany and the Netherlands. In line with this trend, affordability has improved in most countries as wages have increased. In Europe, Germany remains the weakest market, with building permits down by -22% y/y as of Q2 2024 and the sharpest correction in prices. In the US, new house builds declined by -8% y/y in the first half of the year but prices were slightly up. The renovation market managed to grow as energy-efficiency improvements demand was solid. However, going forward, the segment should slow down as it was supported by subsidies and government schemes that will be downsized in 2025. Decreasing interest rates could provide a tailwind in 2025: We estimate that a 1pp drop in mortgage rates increases residential building permits by +3pps over the next quarter in Italy, +5pps in France, +6pps in Spain, +8pps in Germany and as much as +19pps in the US. Furthermore, the transmission of lower policy rates to mortgages is rather fast – a matter of months in most countries. But some have even seen rates start to decrease even before the central bank rate cuts as banks attempt to attract and lock in clients early. Over the full loosening cycle which would leave rates 2pps lower by fall 2025, this would mean a significant boost to residential construction.

But the non-residential segment is navigating structural changes. In the first half of 2024, office construction saw double-digit decreases in the US, France and Germany while transportation, logistics and data centers experienced sharp increases and hotels recovered, especially in Southern Europe. Overall, non-residential construction was sluggish. These developments reflected the continued preference for hybrid work models, the restructuring of supply chains amid geopolitical tensions and the boom in travel. In this context, Commercial Real Estate (CRE) investments are still decelerating but we see sign of stabilizations going forward, especially as demand for CRE loans is picking up and should continue to do so as rates decrease. Overall, the non-residential segment has been following trends such as the rise of remote work, e-commerce and artificial intelligence but there are signs of reversals that could prove costly over the longer term.

Infrastructure should recover but is facing fiscal squeezes. The US has been leading the way in terms of infrastructure projects and investments, with the Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act (IRA) boosting the segment massively. In Europe, the civil engineering and infrastructure output has been resilient mostly thanks to Next Generation EU funds. However, recent figures show a dip in output and the incoming fiscal austerity in many countries will only reinforce this trend, though a more favorable rate environment should help the sector recover. Fundraising in Q3 2024 was 28% higher than in 2023 and (non-renewable) energy projects represented over a third of fundraising up to Q3 2024, highlighting the rush-for-power narrative. Returns of infrastructure assets are also improving progressively, which should bolster demand and support the sector further.

China’s construction sector is still facing a significant slowdown due to the persistent real estate crisis, with no strong rebound in sight. Construction project initiations and total investments declined by around -40% y/y so far in 2024. The real estate downturn that started in 2021, provoked by fast debt accumulation, excessive investments and regulatory tightening, has caused sharp declines in housing starts, sales and prices. We estimate that government support in 2024 adds up to nearly 4% of GDP as authorities aim to break the doom loop between the real estate sector and local government finances. Even if they are successful, we doubt that the real estate sector will return to its former glory in the long run, given deteriorating demographics, smaller room for further urbanization and debt deleveraging. In contrast, infrastructure investment, particularly in renewable energy and electricity, provided some stability to construction overall, growing by +7.9% in August 2024. Electricity investment reached a record RMB1.6trn in 2023 as part of China’s strategy to shift toward sustainable, high-quality development.

Ultimately, lower interest rates are a relief but not a booster for companies in the global construction sector. The slowdown in input prices, from cement to lumber, is benefiting companies that had been squeezed by inflation in the last couple of years. Nevertheless, ongoing labor shortages are pressuring profitability and increasing opportunity costs. In the US, construction wages increased by +3% y/y in Q2 2024; in Germany and Italy, which report the most labor shortages in Europe, wages grew by +5% and +3% respectively. Lower interest rates will improve interest coverage and access to credit but are unlikely to offset the trend of higher insolvencies in the sector that accounts for 20-25% of corporate failures. Insolvencies have risen by +20% y/y in Germany, +31% y/y in France, +35% in Italy and Sweden and +21% in Belgium – with a prolonged high number of major cases globally, particularly in Western Europe and Asia.

Our in-depth analysis for you here.

What to Watch this week

The complete set of stories for you here.

COP16 in Cali: From agreement to actions. Top of the agenda at the UN’s ongoing biodiversity conference in Cali, Colombia, is implementing the landmark Kunming-Montreal Global Biodiversity Framework, adopted in December 2022 to protect critical global ecosystems. However, 85% of countries have missed the deadline to submit their National Biodiversity Strategies and Action Plans. Our analysis highlights the significant value of ecosystem services to economic sectors. Inland wetlands provide services valued at USD71,275 per hectare annually, while coastal systems generate USD37,170 per hectare each year. In this context, Cali’s COP can play a major role in valuing natural capital and creating a market for nature to incorporate ecosystem value into financial decisions. This will be key to align economic growth, the climate transition and environmental sustainability.

Power struggles: Nuclear energy and the race to net zero. Nuclear power has made a comeback in discussions surrounding the green transition this year, yet it remains a divisive topic. While traditional nuclear powerhouses like France and China continue to expand their capacity, newcomers like Kazakhstan and the Philippines are planning to develop nuclear energy for the first time. As a low-carbon energy source, nuclear offers a reliable option for decarbonizing industries that are reliant on continuous power, such as big tech, where companies recently started to explore nuclear energy to power AI. However, there are many challenges: long construction times, costs over 40% higher than wind or solar, supply-chain risks, safety concerns and waste disposal. Nevertheless, nuclear generation will play a role in the net zero transition and is expected to double by 2050.

Eurozone labor markets: the “Big Stay” conundrum. The era of the “Great Resignation” seems to be over. Despite the bloc’s underwhelming economic performance since end-2022, labor markets seem to be in great shape – at least at first glance. Unemployment has reached historic lows, stabilizing around 6.4%, while employment continues to grow – 4.5% above pre-Covid levels. But this is also because firms are still hoarding labor after the pandemic, mainly in tech, machinery & equipment, automotive and construction. There are early signs of a trend reversal – vacancy rates have started to decline and lower labor productivity has decreased workers’ bargaining power – and we do expect labor retention to soften in the Eurozone as profits normalize and wages increase. Ultimately, increasing labor market churn could improve job matching and reallocation, as well as reduce overqualification. Investing in generative AI systems could also revitalize both workers and labor markets: Proper adoption could bridge gaps between low- and high-skilled workers, lowering re-employment and training costs, and streamlining onboarding.? ??

The complete set of stories for you here.

Tomorrow podcast – a new episode out now

A new episode of our Tomorrow podcast aired recently: Despite monetary tightening, the global financial assets of private households recorded strong growth in 2023. But there is an Atlantic divide, and a generation gap. Find out more in this episode with @Holzhausen, Arne (Allianz SE), Head of Wealth, Insurance and ESG Research, and Economist @Stoffel, Kathrin (Allianz SE). Missed the full report? Here you go again: "Allianz Global Wealth Report 2024".