Germany’s construction sector showed a decrease in the PMI to 44.4 in May, down from 45.1 the previous month. The decline was sharper than in April, with civil engineering activity beginning to show signs of recovery. Despite this, homebuilding and commercial construction continued to struggle, although firms’ expectations for the coming year turned positive for the first time since 2022.

Civil engineering made up approximately 14% of the sector’s value added and has shown encouraging signs. The recent government infrastructure package is seen as a potential boost for ongoing projects. Residential and commercial construction faced challenges, with increases in long-term government bond yields and input prices impacting profitability. Despite short-term European Central Bank interest rate cuts, their effect on the sector has been limited.

Cautious Outlook for Construction Sector

The outlook remains cautious as new order declines suggest that a turnaround is not imminent. The improved mood stems from political changes and upcoming infrastructure plans. Confidence has regained early 2022 levels, but actual growth may not materialise until 2026, potentially spreading beyond civil engineering to other construction sectors.

The drop in Germany’s construction Purchasing Managers’ Index (PMI) to 44.4 in May, from April’s 45.1, points to a deeper decline in overall activity. This measure, which tracks monthly changes, remains well below the neutral 50 mark, suggesting industry-wide contraction. Civil engineering, which had been showing sluggish movement, is now gradually picking up. That part of the sector—accounting for around one-seventh of total value added—has drawn some strength from recent fiscal programmes. Elsewhere, issues persist.

Residential and commercial developments remain under pressure. Higher government bond yields have pushed up financing costs, weighing on profit margins and dampening new investment. Rising input prices have added to the cost burden. Even with a cut in European Central Bank (ECB) rates, funding relief has not been enough. Output, particularly in structurally weaker areas like homebuilding, continues to shrink.

New business levels are falling, which means workload pipelines aren’t replenishing. This limits short-term hiring and dampens the wider supply chain. The data suggests that, even if sentiment improves, tangible pickup will lag. Optimism has returned for the first time in nearly two years, spurred by a change in political tone and a clearer push from Berlin towards infrastructure upgrades.

Bridging The Gap Between Optimism and Output

From our vantage point, what matters now is not just the positive expectations but whether construction orders begin to reflect them. For those focused on future price exposure, movements in fixed asset investment data will be informative. If forward-looking indicators on civil engineering activity continue to recover, that might start bringing more predictability to contract pricing.

However, the rest of the sector is still looking ahead with caution. Confidence has returned to near pre-downturn levels, but for projects to resume at scale, we may be looking at 2026 onward. Any deviation in government priorities or ECB positioning could alter this. The key now is to track whether expectations translate into real orders and cashflow, particularly in areas outside of civil development.

We are watching the difference between sentiment and real output closely. It’s not enough that survey-based optimism ticks up. Unless that is matched by announced tenders or construction starts, the sector will stay subdued, especially in medium-sized commercial work. Market pricing on long-dated construction contracts will likely remain sensitive to ECB language and fiscal outlook shifts.

From here, it’s not about confirming a recovery—it’s about narrowing that wide gap between hope and execution. Until tender pipelines thicken and capital outlay resumes, risk will remain skewed to the downside. The near-term trend is still guided by input cost trajectories, forward orders and interest rate signals, not sentiment alone.

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