A Modest Rally For German Construction

The battered industry can't call it a boom yet

If it weren't for people like Detlef Gahn, the German economy would be in much better shape than it is. The 55-year-old bricklayer, who joined the jobless last January when his Frankfurt employer went out of business, illustrates one of the underlying problems of Germany's underperforming economy: its long-suffering building industry.

Construction, which accounts for 10% of German gross domestic product, has undermined the economy for years, taking an estimated 0.5% from growth in 2002 and 0.3% in 2003. "If you factor out the building industry, growth doesn't look quite as bad compared to other countries," says Roland Döhrn, an economist at the Essen-based Rhineland-Westphalia Institute of Economic Research.

Try telling that to Gahn and other construction workers on the dole. Since 1995, when a post-unification building boom turned into a long-term bust, German builders have cut their workforces nearly in half, dumping 650,000 people onto the unemployment rolls. To make matters worse, Gahn says subcontractors hire foreign workers at less than the industry minimum wage of $11 an hour. "It's criminal how subcontractors undermine the minimum wage," he says.

SIGNS OF LIFE

Maybe Gahn and other idled construction workers will get a second chance. Döhrn and other industry watchers forecast a 0.8% increase in building investment for 2004 as the economy improves and capacity finally comes into alignment with demand. Hardly cause for jubilation, but it's a big improvement over the decline of 3.7% in 2003. Moreover, it means construction will no longer act as a dead weight on growth. "That pressure on the economy will be removed," says Döhrn.

Profits of big builders are also showing signs of life. Essen-based Hochtief, Germany's biggest construction company, brought its domestic operations back into the black in the first half of 2003 with a profit of $9.6 million. That compares to a $192 million loss for the domestic operations in 2001.

To be sure, many builders remain deeply skeptical that the industry's problems are coming to an end. Even after the huge layoffs of recent years, there are still too many contractors fighting for too few contracts. Prices have barely budged for years. "We haven't hit bottom yet," says Norbert Ewald, head of the economics department at IG Bau, the labor union that represents construction workers.

Such pessimism is understandable. Following German reunification in 1990, the government poured billions into East German reconstruction. Private industry also invested heavily in the East, underestimating how difficult it would be to convert from a socialist to a capitalist economy. In the mid-1990s, amid slowing macroeconomic growth and stretched public finances, a brutal correction began. The victims included Frankfurt builder Philipp Holzmann, which fell into insolvency last year. Its remnants were sold to a group of Middle East investors.

To survive, companies in the $300 billion industry have looked abroad for contracts or focused on profitable niches. Foreign projects, such as the new Athens airport or new dormitories at Temple University in Philadelphia, now account for 84% of the total at Hochtief.

The hope is that, after so many years of cutting back, the industry has shed most of its overcapacity and is poised for an upturn as demand rebounds. Economists also hope that planned tax reform will shift money to Germany's hard-hit cities and towns, which traditionally are major customers for construction. For example, Mannheim-based Bilfinger Berger is lead contractor for a new $470 million subway line in Cologne. October construction output rose 1.3% from September, while greater optimism in the building industry helped push up the Munich-based IFO Institute's closely watched barometer of business sentiment in November.

Plenty of risks remain. Beginning next year, German companies will face increased competition from construction outfits based in Eastern European countries joining the European Union. The office market remains slack in most major cities. Industry watchers also fear that a surge in housing construction this year won't last because it is driven by expectations that the German government will cut subsidies to new homes. "It's a going-out-of-business sale," says economist Bernd Bartholmai of Berlin's German Institute for Economic Research. Still, any sign of life is better than none at all.

By Jack Ewing, with Andrea Zammert, in Frankfurt

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