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Business

Germany's Construction Crisis Continues to Grow

After the first quarter turned out worse than expected, Germany's struggling construction industry doesn't expect to see any improvement until the second half of 2003, and experts are divided on what the future holds.

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Is it nightfall or the dawning of a new day for Germany's construction sector?

"An upswing this year is now out of the question," said Thomas Bauer, vice-president of industry association HDB. He said the first quarter had brought an unexpected heightening of the structural crisis in the construction industry. First-quarter industry revenue was down 8.3%, while industry employment fell below 900,000 for the first time since German unification.

HDB is expecting this year to bring 6,000 company insolvencies in the construction industry, 25% more than last year. That means that almost one in ten of Germany's construction companies will be hit by existence-threatening financial difficulties.

But in the view of Heinz Schüssler, HDB's second vice-president, this growth in insolvencies is not giving rise to the dismantling of capacities that will be needed if there's ever to be a stabilization of the construction market.

In the mid-1990s, at the height of the post-unification construction boom, Germany had 71,400 construction companies, Schüssler said. Six years on, the construction industry was at crisis point, and the number of companies had risen to 77,500. This 8.5% rise in the number of companies offering construction services came about during a period in which industry revenue underwent a decline of 22%.

Schüssler explained the process that is at work here. "The insolvency of one of the larger mid-sized companies is increasingly giving rise to the formation of a number of smaller companies, as a kind of by-product. One could almost speak of an atomization of the construction market."

Homes constructors are having a particularly hard time of it right now. In 1995, the number of projects approved in this area stood at 603,000. Last year, it was just 291,000. And there's no sign of a change in trend, according to Bauer.

According to a study by Bonn-based research agency IWG, investments in homes construction in the next ten years are set to fall around 15% from the level seen in the period 1991 - 2000.

But IWG also sees this period bringing a rise of 4% in investment in the construction of public works and commercial buildings. The factor that's at work here is a structural transformation from an industry-based economy to an economy based on services and information.

Adrian Ottnad, the study's author, believes that this shift in the nature of economic activity is working both in the construction industry's favor and to its detriment. On the negative side, technical advances reduce the need for new buildings, since new office equipment is tending to be the focus of company investments. On the positive side, it is also giving rise to a growing need for new office space and new sites for logistics companies.

On the services side, Ottnad notes that one need that has sprung up recently is for more leisure and sports centers, and even stadiums for sports and musical events. He believes that investment in public buildings will suffer for some time yet from the financial crisis in the public sector, but he sees increasing opportunities opening up in this area for the use of private investment. Overall, he sees the coming years bringing annual growth in construction volume of 1 - 1.6% on average.

Analysts at DB Research are less upbeat. They see annual growth coming out at no more than 0.5% on average. In the view of DB analyst Tobias Just, it would be hypothetical to talk of a structural transformation. At the most, what one will see will be a slight shift in the nature of economic activity, but nothing that can be expected to unleash any new demand for construction.

"It's true that we have a strong need in Germany for attractive, networked office spaces. But the newer office spaces already allow for a good deal of flexibility in their use. This reduces the need for new buildings," Just explained. And he also pointed to a growing tendency towards working from home - a development that militates against the creation of demand for commercial construction.

Just does not take a hopeful view of the prospects for public-sector construction. "The private financing of toll roads has been under discussion for more than ten years - without success," he said. "Politicians have shown no real dynamism in attacking this issue - perhaps because they are unwilling to let go of their influence," he said.

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