Poland is entering the economic recovery phase. Indeed, the economic improvement is somewhat laborious and uncertain in the face of various challenges, especially the impact of foreign markets’ situations. However, the economic growth in Poland, forecasted by Coface at 2.8% in 2024, will progress at a much faster pace than the mere 0.2% observed last year. Will the economic acceleration result in improvement in the construction industry?
The construction industry consists of several elements, which can develop at varying rates. One often mentioned is the residential segment, accounting for about 20% of the construction market in Poland. After the first few months of 2024, entrepreneurs are speculating about the industry’s outlook for the coming period. What do economists say about this?
What have the last few years looked like in the construction industry?
After a favorable economic trend supported by increasing purchasing power of households, strengthened by rental investments and low interest rates, the market collapsed. Accompanied by growing uncertainty exacerbated by Russia’s full-scale aggression on Ukraine and a rapid increase in interest rates in Poland that started in October 2021. However, apartment prices continue to trend upwards, which will continue in 2024, while a slowdown has been expressed on the demand side.
As economists indicate, the number of dwellings completed in 2023 decreased by 7.6% compared to the previous year; the number of those that started construction dropped by 5.6%, and the number of building permits or notifications with a project decreased even more – by 19.1%.
Will it be that bad?
Although the above data affect future trends in residential construction and paints a fairly pessimistic picture, on the other hand, if there was to be a further significant deterioration in this segment, it would already be reflected in falling prices, which are not happening.
– The improving economy with a strong job market and lower interest rates are gradually improving the situation in the residential sector. High apartment prices are a limitation, but they also create demand in the rental market – says Grzegorz Sielewicz, Chief Economist of Coface in Central and Eastern Europe. – The number of residential construction investments should increase, but developers will still face a limited pool of construction sites, especially in large cities. They also face other challenges present throughout the construction sector – explains the expert.
It is also worth noting that the unlocking of funds from the National Recovery Plan will result in increased investment in many market segments, including rail construction and those related to energy and roads. It is important to emphasize that investments using national and local government funds were not as significantly restrained as other segments. Undoubtedly, the so-called EU recovery fund and the new EU budget will be a lever for many investments, thus for the entire construction sector in Poland.
A Successful End to 2023
On the other hand, the business investment construction segment was a positive surprise in recent months. We did not observe high growth, but the forecasts assumed that limited demand, a worsening economic climate, and great uncertainty would cause companies to massively hold back on investments. However, it turned out that investment expenditure on buildings and constructions increased by 2.8% in the first three quarters of 2023 compared to the same period of the previous year. On the other hand, this growth was supported by higher nominal investment values in the face of rising prices, which still did not undermine the investment attractiveness of our country, which is still the place where many foreign companies decide to expand or establish new production plants and warehouses.
– The dynamics of construction and assembly production in Poland in 2022-2023 were mostly positive, with an average level of 5-6%. From the second half of last year, acceleration began with a double-digit dynamics recorded especially in the last months of 2023. Despite the difficult market situation in recent years, it would be hard to call this period a crisis – says Grzegorz Sielewicz. – In 2021-2022, the dynamics were negative for only four months, and the decline reached less than 2%. This is far from the crisis period for construction – 20 percent falls in 2012-2013, 2016, 2020 or early 2021 – adds the expert.
Analysis of the microeconomic situation of the construction sector
Although economists’ conclusions are not entirely unequivocal, they indicate that we can expect an improvement in the business cycle in the industry. On one hand, the number of companies evaluating their situation negatively still prevails, which is confirmed by the latest reading of the general business sentiment index in construction. In January 2024, it was -7.1. On the other hand, since the beginning of 2023, this index has been characterized by an upward trend, and its downward deviations in recent months are mainly due to cyclical factors in the winter period, which habitually limits the industry’s activity.
Most construction companies list high employment costs as obstacles to their business operations, as well as material costs – despite these no longer being at as high levels as before, they still constitute a significant cost of building activities. At the same time, more than half of the construction companies covered by the latest business survey conducted by the Central Statistical Office indicated that uncertainty about the overall economic situation is a barrier to them. Almost one third named lack of skilled workers as a limitation of their activities.
– The Coface payment survey recently conducted among Polish companies indicated that the construction industry offered shorter payment terms than a year earlier (shortening from 50 to 44.4 days) in 2023. More importantly, also shortening are payment delays reported by the industry (from 59.7 to 56.5 days). However, this is still more than the average of 48.7 days for all industries – reports Grzegorz Sielewicz. – The majority of construction companies expect a stabilization of payment delays in the coming months. The remaining cases are mainly companies that expect their growth – he adds.
Insolvency in the construction industry
Meanwhile, data on insolvency among companies in Poland showed that last year 638 construction entities were covered by one of the available forms of insolvency. The values are incomparable to previous years due to a wider range of available forms of insolvency (judicial and non-judicial) recently, but dynamics in the construction industry were higher than the average for all sectors in 2023.
Over the last year, trends in insolvencies of individual construction entities have reversed. While the first few months of 2023 brought a significant number of insolvencies of companies doing construction work related to building construction, the following were marked by a growing number of insolvencies of companies doing specialist construction work. Construction also accounted for 14% of all proceedings (across all industries), which was close to pre-pandemic levels. However, in subsequent years (2020-2022), the share of this industry in total insolvencies dropped to 10%. Moreover, insolvency statistics indicate that almost two thirds of construction companies were involved in non-judicial proceedings last year, offering a hope for a successful judicial restructuring and, as a result, a return to effective business activities.
Economists suggest that economic recovery will be a chance for the construction industry to grow. However, obstacles related to the cost of employing workers and purchasing materials should be kept in mind. Geopolitical situation, which should be closely monitored, also significantly matters.
