Germany’s construction sector remains in recession, although the decline rate slowed towards the end of Q2. Growth in civil engineering and commercial activity helped, but both sectors couldn’t counterbalance the drag from residential activity, affecting business confidence.

Civil engineering sees growth with the third consecutive rise in its index, influenced by an infrastructure package, although the money isn’t yet from the €500 billion fund. Private companies, expecting future projects, quickly complete existing orders. Input price inflation in June hit its highest in 28 months due to rising material and labour costs, passed down by suppliers, impacting construction costs.

Subcontractors increased rates even as their availability rose. The new government’s decision to raise the minimum wage by over 8% to €13.90 in 2026 concerns construction companies. The confidence seen in May turned to pessimism in June, driven by the deepening housing sector recession. The Housing Activity Index fell for two months despite an interest rate cut by the ECB, impacted by high long-term interest rates due to rising public debt, among other factors.

Industry Sentiment Shifts

The article outlines a persistent recession within Germany’s construction industry, where a marked weakening in residential construction continues to offset modest gains made in other sectors. Although civil engineering and commercial works have shown a streak of progress, the heavy drag caused by the housing downturn remains the dominant theme. Business sentiment, particularly in residential construction, continues to erode in response to increasing costs and policy uncertainties.

The civil engineering segment has put together a short string of positive results, aided in part by expectations around major infrastructure spending. But to be clear, this isn’t momentum built on actual disbursed funds from the €500 billion pool – rather, it’s based on planning optimism. Firms are pushing to clear existing orders before competition for new projects intensifies. That signals an acceleration to conclude older work, not necessarily a ramp-up in new demand. Meanwhile, inputs—everything from concrete to copper—are pricier, with June recording the steepest material inflation in over two years, thanks to rising labour expenses and supply delays. Suppliers are pushing that cost up the chain.

Subcontractors do seem to be easier to source, perhaps suggesting a slackening in broader demand. But in a twist, they’ve raised rates, likely as pre-emptive cover for expected wage hikes and future administrative overhead. The proposed increase in the national minimum wage has begun reshaping the pricing dynamics before it even takes effect. The move to increase it to €13.90 by 2026 will inevitably compress margins within labour-heavy firms. Larger firms may attempt to push rates upward again to preserve operating ratios, while smaller outfits might face real strain.

Monetary Policy Challenges

We saw an unusual change of tone from May to June. Where confidence briefly flickered on the back of rate policy adjustments, it’s now turned sharply towards unease. Despite the European Central Bank’s recent decision to lower its policy rate, long-term borrowing costs remain stubborn. That’s largely a reflection of rising sovereign debt loads, which continue to lift yields and swell mortgage rates.

For those operating in rate-sensitive corners, particularly residential development, this is no minor shift. Forward-looking indices continue to fall, confirming little appetite for new residential investments. Buyers remain extremely cautious in the face of high project costs, wage uncertainty, and less favourable lending terms.

The current setup implies compressed margins over the near term, especially where forward bookings for housing remain thin. Given the widening gap between input pricing and consumer demand, a further decline in volume is more probable than not. As such, holding long duration appears broadly unattractive unless hedged through materials or wage-exposure spreads.

In these kinds of conditions, we generally scale back directional bets on building activity metrics and instead examine where volatility lies – especially in subcontractor rates and demand assumptions baked into civil engineering output. Spreads that once reflected optimism around infrastructure plans have begun to retrace, and activity contracts continue to misalign with funding timelines. That should be evaluated closely in positioning.

Also worth observing is the liability chain from wage increases. With wage adjustments now priced in earlier than expected across firms, it tightens cash flow further into the second half of the year. Initiatives to pass on that pricing could vary depending on contract structure. Watch for businesses extending build timelines as a way to protect bid prices against unexpected volatility.

Long-term rate action has also not fed cleanly into confidence proxies. The fall in the Housing Activity Index across consecutive months, despite central easing, signals a deeper malaise not easily corrected by monetary policy alone. Traders should anticipate further discounting of this reality through revised profitability assumptions on residential-facing firms.

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