How much charge is left in Spain?

Despite a few clouds on the horizon, the future for Spain’s economy and the construction industry in particular looks good. The forecast for growth in the economy stands at 3.5% this year easing to 2.8% in 2007. Consumer price inflation in the economy stands at 3.7% and is expected to drop to 3.0% in 2007. Growth in turnover of construction is currently 7.5%, while construction tender price inflation is running at 4.5%.

Sunny outlook

Optimism in the general economic environment in Spain remains justified as the economy continues to grow above the European average. The country’s GDP closed in 2005 with an annual increase of 3.4%. Nevertheless, this growth has occurred due to increases in internal demand resulting in difficulties with balance of payments and a rate of inflation above the average of the Eurozone countries which is currently running at 2.4%. Furthermore, industrial production remains weak, well within the shadow of the construction sector. While the construction sector grows year on year, gains in productivity are barely noticeable.

Consumer spending decreased to 4.4% in 2005 against 4.8% in 2004, due to a decrease in government spending. However, this is the result of an increase in the number of permanent jobs throughout the year. Mortgages also continue at all time highs with many Spanish families nearing over-debtedness, of further concern with recent rises in increase rates.

Gross fixed capital formation (GFCF) grew by 7.2% in 2005, boosted by construction, which generates 58% of the GFCF in the country, and investment in capital goods.

While imports slowed down in the fourth quarter of 2005, they are still growing by over 7%. External demand will likely continue to contribute negatively to the Spanish economy, in the light of the major role energy plays in imports, and the lack of stability in energy prices.

The latest outlook of the Spanish government at the end of 2005 called for a rise in growth of 3.3% for 2006, although The Economist is forecasting a rise of 3.5%. It would seem reasonable to maintain this moderate scenario. There is also hypothesis of a slowdown in economic growth to 3.0% in 2007 and 2.8% in the following year, due to a decrease in growth of private consumption and a modification in the distribution of European funds.

Counting on construction

Over the short term, the health of the Spanish construction should cause little concern. There was an increase of 7.5% of turnover in 2005 compared with the previous year. Whilst initially in 2005 civil engineering and building activity grew at similar rates, later in the year building construction came to the fore.

An employment survey carried out early in 2006 recorded a 0.6% increase in employment when compared with the last quarter of 2005. Spain is a country that is somewhat dependant upon concrete structures (as opposed to steel) and cement sales increased by 5% during 2005.

The number of housing construction permits being granted is still rising – in the first six years of this decade there were over 3.6m housing starts, which is greater than all housing starts in the 1990s. This trend looks set to hold.

Municipal building permits for non-residential construction also continue to rise; the latest figures for October 2004 to September 2005 indicating a 4.4% increase in permit volume over the previous 12 month period. Public tendering increased annual growth to 18.5% in 2005 compared with 18.3% in 2004.

Housing sector set to relax

Current opinion is that the new residential market in Spain is nearing the end of its current phase of expansion. Nevertheless, this has been popular opinion for a longer period than initially thought, since similar peaks in activity in Spain have never lasted the length of the current boom. The long awaited return to normality has now been more strongly announced with an increase in interest (and therefore mortgage) rates.

However, these mortgage rate rises have been incremental and not caused the anticipated fear of mortgage defaults due to failure to make monthly payments.

There is also considerable speculative purchasing of property in Spain despite the slight slowdown. The volume of new residential construction in 2005 was the highest in the last four years with an increase of 6.4%, compared to the previous year, well above the expectation of 4.8% growth; house renovation also performed well with an increase in volume of 4.5%.

Initial figures for 2006 indicate that there remains a clear potential for continued expansion and a 3.8% growth rate is expected during this year. There could be some slippage in construction permit volumes, but this would only revert to 2004 figures after an exceptional 2005.

There is little hope of substantial growth in the housing sector in 2007/8, since the increases in numbers which have been seen recently are not sustainable over the medium to long term. However this is not a major concern as this could still result in permit volumes being similar to those of 2002-4 which were still good years.

Non-residential a non-mover

There have only been slight increases in new construction in the non-housing sector with a trend towards slow deceleration. During 2005 there was growth of 2.1% which is significantly below the overall volume of the construction industry. Commercial and agricultural construction was stagnant throughout 2005, with a small recession in commercial office construction. Those sectors which did perform well include industrial (3.4% increase), logistics (3.0% increase), education (3.6% increase) and health (4.4% increase).

During 2006 it is anticipated that growth will be seen in industrial, cultural, recreational, commercial and warehousing sectors. It is anticipated that the 2005 recession of commercial office construction will be overturned to reactivate the real estate market.

Infrastructure – still a long way to go

Unfulfilled demand for civil engineering projects has existed in Spain for many years to make up for the substantial deficits in infrastructure workload, but plans have now, at last, been put into place for the medium/long term with new infrastructure projects stretching the length and breadth of the country. Medium to long term projects are finding funding through PPPs and structured EU funding finances in the short term.

There was therefore an exceptional growth of 8.2% in civil engineering projects in 2005, exceeding all forecasts, when the sector formed almost 28% of all construction activity. Increases in tender requests were over 11% in 2005 compared with 2004 and it is believed that growth in 2006 may be as high as 6.4%.

Tender prices up

The threatened major increase in tender prices did not materialise in 2005 although tender prices rose by 4.5%. The cost of labour has remained low with a 2.9% rise, while increases in costs of materials has slowed to 5.2% during 2005.

In materials, major increases have been seen in bituminous products which rose by 27.8%, followed at a distance by metallic products which increased by 6.8%. Price containment has contributed to relatively low rises in the prices of cement, up by 4.2% and electrical equipment, up 3.0%.