Construction sector, recovery strenghtens in Q1 2017

June 19, 2017

luca.agolini@prometeia.com

The construction sector seems to be on course to reach the definitive end of the long recession, an unprecedented event in the post-war period in terms of intensity and duration. The key drivers of recovery will be the investment in housing renovation and the measures planned for public works

 

After closing 2016 with a positive figure, for the first time since 2006, the construction sector appears to be heading towards a consolidation of the recovery. The national Accounts data relative to the first quarter of 2017 indicate a growth in investment equal to 0.6% on the previous period, for a 1.6% increase on a y-o-y basis. 

In detail, the sectors relative to the other construction (non-residential buildings and civil engineering) were the most dynamic, with a 0.8% q-o-q increase, whereas the residential construction has slightly slowed down its pace (0.5%, from 0.7% in the previous quarter).  

The most recent, available information, while suggestive of a certain degree of caution, tends to confirm the start of a new construction cycle. The business climate in this sector has improved throughout April and May, reaching the highest levels since the first half of 2008, driven by the positive expectations relating to new orders, and the substantial stabilisation of the building permits for new residential units is confirmed, albeit at historically low levels, with the first signs of recovery as from the second quarter of 2016.

Fig 1: Gdp and construction investment (indexes, 2007=100)
Source: Prometeia's calculations on Istat data
 

Favourable indications for the property market

Furthermore, the favourable indications continue for the property market, as the positive trend of sales is continuing both in the residential segment (8.6% in the first quarter of 2017) as well as in the non-residential segment (10.8% and 12.2% for the commercial and productive sectors respectively).  

In the light of this information, the gradual recovery of construction investment is expected to continue in 2017 and in the following two-year period, at rates slightly higher than 1% on average per year, estimated as accelerating towards the final part of the forecast horizon. As a result of this growth, investment should be stabilised, in relation to the GDP, as slightly higher than 8%, a level in any case still far from the one attained in the peak years of the construction cycle (at around 12%). 

The scenario is characterised by many factors in support of investment, primarily in the residential segment. Confirmation for the whole 2017 of the 50% tax relief for refurbishment and 65% deduction for energy efficiency renovation should continue to support investments in residential renovation, to which the extension of the "energy bonus" to interventions in flats would also contribute (until to 2021). As regards tax incentives the extension is provided until 2021 for the deductions for the implementation of safety measures for dwellings and productive buildings in areas at high risk of earthquakes. 

However, the dynamics of the residential segment will keep paying the price for the weakness of the new housing sector, that may return to growth only as from 2018. The high level of stock unsold will indeed tend to restrict the boost to residential demand resulting from the improvement in the disposable income of households and from the still favourable credit conditions. 

 
Fig 2: Construction investment: %change on previous quarter, by construction sector
Source: Prometeia's calculations on Istat data
 

Crescono gli investimenti nel genio civile

With regard to the other sectors, we expect an acceleration in civil engineering works, although subject to overcoming the negative effect of the new procurement code, once the amendment to the reform has been completed, and to the actual implementation of the announced upturn of infrastructure investment. In this respect, a relevant stimulus is expected from the measures included in the 2017 Budget Law, as from the institution of the multi-annual "Investment Fund", with a view to boosting the development of infrastructures from an initial allocation of over 11 billion EUR up to 2020.
  A considerable share of the Fund will be assigned to the financing of the Master Plans of RFI and ANAS for investment in the railway network and in the maintenance of the road network: other interventions are expected for the implementation of measures for the safety of Town streets, for local public transport (completion of the undergrounds under construction) and urban refurbishment ("Plan for the suburbs"), as well as for safeguarding the territory and for the prevention of hydrogeological risk. 

 

Post-earthquake reconstruction activities

Even post-earthquake reconstruction activities should contribute to the recovery of construction investment, following the appropriations for reconstruction works - public and private alike - and for seismic risk prevention (school-building schemes). For the implementation of safety measures for the territory and the housing stock, apart from extraordinary measures, the definition of a long-term national plan ("Casa Italia" project) is also provided for that is already ongoing with the first 10 pilot building-sites in as many municipalities.

As well as investments that can be activated from the public sector, the non-residential segment is also expected to turn positive again as from this year; the consolidation of a new cycle of investments in capital goods may indeed contribute to reactivating private non-residential demand.