German construction downturn slightly deeper in May

The HCOB Germany Construction PMI slipped to 44.4 in May 2025 from 45.1 in April, indicating a modest acceleration in the sector's contraction and extending the industry's prolonged downturn.

German construction downturn slightly deeper in May

While still firmly in negative territory, the reading suggests that the pace of decline, although uneven, continues to reflect deep-rooted challenges facing the German construction sector—Europe’s largest by output. Persistent headwinds, including subdued demand, elevated input costs, and financing constraints, have hampered recovery efforts despite signs of resilience in certain sub-sectors. Housing activity remained a major drag, posting another sharp decline as high mortgage rates, regulatory burdens, and ongoing affordability concerns continued to deter both developers and homebuyers. The residential market has now seen over 20 consecutive months of contraction, and recent reports suggest a growing number of project cancellations and delays. Commercial building activity also weakened further, as rising construction costs and sluggish business sentiment weighed on new office, retail, and industrial projects. In contrast, civil engineering offered a glimmer of hope, stabilizing for the first time since mid-2023 and officially ending a 20-month streak of decline. This improvement is largely attributed to an uptick in public infrastructure investment and accelerated disbursement of EU funds under Germany's climate and digitalization agendas. Several firms cited a stronger pipeline of tenders and upcoming transportation and energy-related projects as contributing factors.

New orders fell again in May

New orders fell again in May, with the pace of decline picking up slightly compared to April. Survey respondents noted continued uncertainty surrounding economic policy, building regulations, and project financing, while volatile material prices further complicated procurement planning. The lack of visibility into future workloads has made clients hesitant to commit to new investments, particularly in the private sector. Employment in the sector came under further pressure, with job cuts accelerating to the fastest rate since February. Firms increasingly relied on attrition and reduced subcontractor usage to manage costs, pointing to a continued hesitancy to commit to long-term hiring. The fall in subcontractor demand also underscores the broader weakness in workload expectations and tight cost controls being implemented across the industry. Purchasing activity contracted once more, though the rate of decline slowed to its weakest in nearly three years. This suggests that while firms are still cautious, some are beginning to prepare for potential stabilization or recovery in the latter half of the year. Meanwhile, supplier delivery times improved for the fourth consecutive month, driven by both subdued demand and gradually easing logistics constraints. Better availability of materials and shorter lead times are helping firms manage project schedules more effectively, even as overall activity levels remain low. On the cost side, input price inflation continued its upward trend for the third month in a row, reaching a 27-month high. Rising prices for raw materials, particularly steel, concrete, and insulation products, as well as energy and fuel, were commonly cited. However, inflation remains below the record highs seen during the 2022–23 energy crisis and is still considered manageable by historical standards. Encouragingly, business confidence turned positive for the first time since early 2022, marking a notable psychological shift in the industry’s outlook. Firms expressed cautious optimism that the worst of the downturn may be behind them, buoyed by expectations of increased infrastructure spending, potential rate cuts from the European Central Bank, and broader economic stabilization. Still, sentiment remains fragile, and any meaningful recovery will likely depend on consistent policy support, improved financing conditions, and a rebound in both private and public sector investment.