Construction activity is dispersed: construction projects are carried out not only in large urban centres but also in small towns and villages, which means that construction can stimulate the development of the country’s least industrialised areas. Construction creates the multiplier effect, as it generates demand for services, materials, machines, home furnishings and other equipment.

Construction depends on investment

Construction responds quickly to changes in the economy. As a result, changes on the construction market should be seen in the context of cyclical fluctuations and economic development, particularly investment. Statistics over long time scales show there is a correlation between changes in investment spending and changes in construction output.
In the second half of the 1990s both investment and construction grew rapidly, driven mainly by the inflow of foreign investment. The subsequent economic recession and slump in investment hindered the development of many sectors of the economy, with an especially adverse impact on construction. Poland’s entry to the European Union brought about an economic revival. However, when GDP grew at a rate of more than 5%, industrial output at 12% and the financial condition of companies was very good, the increase in investment was below the expected two-digit figures.
As early as 2004 companies started to earn profits high enough for them to be able to set aside quite a lot of money for development and the financial barrier disappeared. But despite that, they were still very cautious about taking decisions to invest. A turning point came in 2006 and 2007. In 2006 investment rose by nearly 18%, in 2007 by around 30%.
The high rate of growth in investment is now driven by rising domestic and foreign demand for products and services (spare production capacity is increasingly scarce), an improving financial situation of companies (corporate profits have never been as high as in 2004-2007), easily available and relatively cheap bank loans, an inflow of foreign capital (companies with foreign stakes are responsible for over 40% of the total investment spending) and the absorption of EU funds.

Construction market – from recession to rapid growth

The economic recession and slump in investment had a particularly adverse impact on the construction market. In 2000-2003 the construction volume generated by large construction companies declined by almost one fourth. The economic revival which began in 2003 had an influence on the building sector. But construction started to come out of recession later than other sectors of the economy. Now, for the third consecutive year construction growth has outpaced that of the wider economy, although the growth difference has been gradually declining.
Construction output rose by 7.4% in 2005 and by 17.5% in 2006. In the 1st quarter and 1st half of 2007 it grew by as much as 50% and 30% respectively. This high growth took many entrepreneurs by surprise – they underestimated the emerging difficulties and barriers, which became especially noticeable in the 3rd quarter, the most intensive time for construction activity. As a result, construction growth weakened in the 2nd half of the year.

Structure of the building industry

In 2006 and the 1st half of 2007 the highest growth was recorded by civil engineering construction, and sectors dealing with installation work and preparing sites for development. Companies dealing with finishing work and new home building recorded stagnation or decreases in their output. In the 2nd half of 2007 growth indices were much lower than in the 1st half of the year. The only exception was residential building, where the final months of the year saw a rise in the number of newly completed homes and a rise in the number of construction permits and new home starts.

Barriers to growth in construction

Barriers to growth in construction, signalled by many experts, are becoming increasingly strong. It follows from monthly outlook surveys that shortages of skilled and unskilled workers, high labour costs and shortages of equipment and materials are the major constraints on construction. The surveyed companies also increasingly point to the absence of local development plans as a factor which delays the start of construction projects. These factors determine the real level of construction companies’ production capacity: it has turned out that the real demand for construction services is higher than the building sector’s potential to provide them given the existing labour and material shortages. More and more of the surveyed companies indicate that the barriers are persistent and increasingly strong. They also signal a high level of capacity utilisation. Some of the companies do not have enough capacity to complete projects already started or carry out new ones. The average capacity utilisation rate is estimated at over 90%.
Labour shortages, unseen in the past, have been recorded in the building industry since 2005, when the sector started to grow increasingly fast. The factors which contribute to labour shortages in construction include difficult work conditions on construction sites, low wages, low mobility of the workforce and labour emigration to other EU countries following Poland’s entry to the European Union. Another factor which has to be mentioned is the closure in the period of recession of many vocational schools for construction workers. As a result, the inflow of young workers to the construction sector is now quite limited. The shortage of skilled and unskilled labour is estimated at 100-150,000 but the figures will go up much higher if the implementation of large construction programmes planned in Poland begins.
In past years wages in the building sector were “traditionally” lower than in the wider economy. In the period of recession, when the number of construction workers declined, there was no upward pressure on wages and wages actually dropped. But now, with labour shortages being increasingly acute, construction companies have to offer more attractive work conditions and higher wages to retain and attract new workers. As the financial situation of construction companies was improving, they were able to raise wages. In 2006 the rate of growth in construction wages outpaced the wage growth rate in the wider economy.
In November 2007 the average gross wage in the construction sector was PLN3,225 (EUR880), up by 16.9% on November 2006. It is noteworthy that labour costs are relatively high in Poland: they are higher by one third or more than in Ireland and the United Kingdom. And this shows that wage increases alone, although substantial, are not sufficient to stop labour emigration.

Rising construction costs and prices

In the period of recession construction prices slowed down due to low demand for construction services. In 2004 prices accelerated considerably as demand for construction services started to increase. But the main factor behind this acceleration was the pressure created by Poland’s EU entry (fears that prices will go up once Poland becomes an EU member). In 2005 prices stabilised and the price index in construction stood at 2.5% until mid-2006.
In the 2nd half of 2006 construction prices started to grow faster than inflation. This was due to rising demand (companies received more orders than they were able to carry out), upward pressure on wages because of labour shortages, and growing prices of construction materials.
In the 3rd quarter of 2007 construction prices decelerated: in November 2007 they increased by 8.5%. The market for construction materials also calmed down.

Does construction have a chance to sustain a high growth rate in coming years?

Despite its weaker performance in the final months of 2007, construction has a chance to sustain a high rate of growth because investment is on the rise, the financial situation of companies is very good and Poland can use EU assistance funds. Experts believe the Polish construction sector will be able to exploit the enormous opportunity created by the Infrastructure and the Environment Programme 2007-2013 and tasks connected with the UEFA Euro 2012 football championships.
The share of civil engineering construction has been on the rise in recent years, largely thanks to the growing absorption of EU funds, which support the development of the most neglected sectors, like the construction of roads and railways, telecommunications, utility infrastructure (water supply and sewage networks) and environmental protection projects. Growth trends in construction may be sustained if these funds are utilised effectively.
Construction growth is very strong in all countries which recently joined the European Union (EU-10). Although the growth rate in the construction sector has reached two-digit figures in Poland, there are countries where it is even higher. The Baltic states, Romania and Bulgaria have recorded the highest growth in construction.
In past years there was a widespread opinion that the Polish construction sector has a considerable potential, unutilised in the period of recession, to carry out building and design projects, and a strong and steadily expanded base of materials for construction. As a result, entrepreneurs underestimated constraints which started to appear on the construction market. Signals indicating mounting barriers to growth in construction were too weak and some companies were even surprised by a decline in the rate of construction growth. However, the general outlook on construction is still optimistic. The sector is expected to grow by around 30% in 2008 compared to around 20% in 2007.
It should be stressed, however, that forecasts for construction are more difficult to make than for other sectors of the economy and that they are less reliable. One of the reasons is that construction activity is quite unstable, with large fluctuations which cannot be predicted in many cases. Among the factors behind these fluctuations are the changeable weather conditions and uneven course of investment programmes in construction. No other sector of the economy records as large fluctuations in output as construction. In the years 2004-2007 the Polish construction sector recorded monthly decreases in output of up to 20% and increases of more than 50%. Meanwhile, in the industrial, retail and transport sectors, fluctuations do not exceed several percent.
Zofia Bolkowska