The general economic outlook for the Eastern Europe region is improving, with growth momentum building. In terms of construction output, many countries in the region posted strong growth figures over the first five months of 2017, following sharp declines over 2016. These markets rely heavily on funds from the European Union (EU) to finance ongoing major infrastructure and other public projects.
In 2016, such funds stalled, and many projects in the region were put on hold. Indeed, there was a halt in investment spending across much of Europe, as the 2014-2020 funding period was delayed significantly, and, generally, the release of funds was delayed until early 2017. The stoppage in public funds had a much wider impact; private construction projects were also delayed, and it weighed on the broader economy over the year.
We expected these projects, in both the public and private sectors, to come back online at some point in 2017, once EU funding had started flowing into the region again. This core view is playing out, and we expect to see sustained growth in 2017 due to projects starting up again and the impact of low base effects creating large year-on-year changes.
Hungary
Due to the standstill in EU financing, combined with high base effects from the surge in spending in preceding years, construction output in Hungary dropped 17.2% over the course of 2016. This investment standstill altered the short-term outlook for Hungary’s economy more broadly, not just the construction industry, as a decline in manufacturers’ confidence weighed on industrial output and economic activity and a slowdown in consumer confidence impacted retail spending.
The sharp drop in spending in 2016 came partly on the back of sustained increases in construction activity over the preceding years. The end of 2015 marked the deadline for drawing-down funds from the 2007-2013 fiscal period, and there was an end to the surge in investment spending across much of Europe, particularly other Central and Eastern European countries. The recent upswing in investment flows has created high base effects and is partly the reason for the sharp decline witnessed over the course of 2016.
As EU financing returns to the region, there has been a resurgence in construction activity in Hungary, however we expect the pace of growth in the segment to moderate somewhat over the coming months.
Poland
Construction output volumes declined sharply in Poland in 2016 on the back of a standstill in investment from the EU combined with below expectation economic growth dampening industry sentiment over the year.
Poland is the largest recipient country of EU funding, and financial assistance to the country in 2014-2020 was scheduled to reach EUR82.5 billion. Reportedly, the rail sector had been allocated EUR5 billion, public transport and urban mobility were scheduled to receive EUR2.3billion, and EUR12.4 billion had been earmarked for roads and highways.
However, EU funding to Poland was stalled due to ongoing disagreements over the country’s institutions and state of democracy, combined with delays to the release of the latest trance of funding.
On the back of the previous round of EU funding (2007–2013) Poland witnessed strong economic growth. However, the latest tranche of funds was delayed due to prolonged negotiations before the 2015 parliamentary elections. As with other countries in the region, the end of 2015 marked the deadline for drawing-down funds from the 2007–2013 fiscal period. Due to the standstill in EU funding for projects, construction output in Poland fell sharply over the course of 2016.
This investment standstill altered our outlook for Poland’s economy more broadly, not just the construction industry, as a decline in manufacturers’ confidence weighed on industrial output and economic activity and a slowdown in consumer confidence impacted retail spending.
We believes the structural outlook for the construction industry in Poland remains strong, supported by sustained and ongoing foreign investment particularly across transport infrastructure and energy sectors, rising demand for residential construction, and the strong financial performance from domestic construction companies.
We believe that the total level of financial assistance given to Poland over the 2014–2020 period could be less than the EUR82.5 billion originally expected, and the domestic industries will not have the capacity to fully absorb the pent-up funds quickly, but we expect to see fairly strong growth rates over the forecast period.
Bulgaria
Construction activity declined sharply in Bulgaria in 2016 on the back of the standstill in investment from the EU. There has been improvement in 2017, but to a lesser extent than in other markets in the region. In the latest tranche of EU funding to 2020, a total of EUR5.6 billion is expected to be invested in constructing 597km of motorways and 914km of expressways.
We believe that construction industry growth in the country will be supported by the government’s focus on developing road and rail infrastructure under the Transport and Transport Infrastructure 2014–2020 program. Various road infrastructure projects, such as the Struma motorway connecting Sofia with the Greek border, the Hemus motorway connecting Sofia with coastal Varna, and the Cherno More motorway connecting Varna with Burgas, are expected to complete over the forecast period.
We believe that the total level of financial assistance given over the 2014–2020 period could be less than originally expected, and the domestic industries will not have the capacity to fully absorb the pent-up funds quickly, but we expect to see fairly strong growth rates over the forecast period.
