Construction on the verge of overheating

In contrast with the external environment, where growth has clearly slowed down, the internal economic cycle of the Baltic states currently seems fairly stable. Consumption is growing steadily, but there are an increasing number of signs in construction that the industry is at the point of overheating. In this construction cycle we are probably close to the highest point, although there are differences between the Baltic countries, and construction in Lithuania in the first quarter of the year has continued its powerful growth.

Meanwhile, in Latvian construction, this year has begun with a climb of just 7.4% and in Estonia by just 2% compared with the close to 20% growth in the previous two years and the number of construction permits issued in Estonia has been reducing since the end of 2017. This confirms that the cycle is starting to slow down in the industry, and this may even be desirable, because we can see signs of overheating. Last year, in all three Baltic states, the proportion of construction in the economy outstripped the average level for the past 20 years, which leads me to believe that, in this industry, there is not currently any possibility for further fast development without provoking wider macroeconomic imbalances.

The most important reason why we should expect slower growth than previously in the construction sector this year is the stabilisation of the flow of EU funding. In construction, the current EU investment cycle is nearing its highest point, and current predictions state that EU funding this year will be close to last year’s level. Therefore, there will be no additional stimulus from the public sector this year. At the same time, the high number of construction permits in Latvia and Lithuania shows that demand for construction in the private sector remains powerful. However, I predict that growth in construction will not be more than 10% in any of the Baltic countries in 2019.

With growth rates slowing down, the construction industry may soon feel its own vast fluctuation, which is certainly the industry’s largest challenge in the Baltics. Historically, the industry has fluctuated much more than the economy in general, and the state budget spending increases these fluctuations rather than evens out these fluctuations. Our Citadele Index business confidence survey shows that the largest fluctuations in business owner outlook have long been noticeable in the construction industry - for years, periods of absolute pessimism have alternated with flares of optimism. Currently, construction in Latvia is the industry with the most positive mood, with its optimism reaching a level rarely seen in the post-financial crisis period. At the same time, builders admit more often than representatives of other industries that their businesses lack employees - as reported by 62% of construction businesses, which creates pressure on expenses and promotes wage growth in other industries.

Further articles:
Under the influence of the global economy headwind, growth in the Baltics becomes more moderate
The external environment becomes less favourable and risks increase
Europe’s industrial recession not yet felt in the Baltics