Construction output in Eastern Europe is expected to contract by 2% in 2023, as the headwinds that arose last year will continue to weigh on the industry and firms will struggle to sustain high levels of activity, according to GlobalData, a leading data and analytics company.

Stronger-than-expected data from Q3 and Q4 2022 caused annual output levels to outperform previous estimations, suggesting that the downturn in the short-term will be marginally less severe than previous projections. However, the lasting impact of tightening monetary policy, weak external demand, high construction costs and subdued investor confidence stemming from the fallout of the Russia-Ukraine conflict will weaken the industry’s recovery over the medium-term.

Joel Hanna, Economist at GlobalData, comments: “Despite the conflict in Ukraine and the energy crisis, resilient activity in the second half of 2022 led to only a marginal contraction in annual output last year. However, the outlook for this year is gloomy. Weakness in leading indicators data such as permits and confidence surveys, particularly in the residential sector, signals the impact of rising interest rates and elevated homebuilding costs on housing demand.”

According to GlobalData’s report, “Construction Market Size, Trends and Growth Forecasts by Key Regions and Countries, 2022-2026,” all the major Eastern European markets are expected to contract in 2023, with Hungary posting the sharpest contraction of 7.6%, following strong growth in the previous two years. The outlier is Romania, which is expected to post growth of 2.5%, supported largely by EU recovery funds. The two largest markets, Russia and Turkey, continue to face significant challenges in 2023 and are expected to post contractions of 4.2% and 3%, respectively.

Hanna continues: “Russia’s construction sector was surprisingly strong in 2022, mainly owing to strong growth in infrastructure and energy, backed by windfall oil and gas profits amid the spike in energy prices in Q2. However, the impact of sanctions, particularly its loss of access to Western machinery and technology, will continue to weaken Russia’s productive capacity and its ability to maintain a positive trend rate of growth. Turkey, on the other hand, looks slightly more positive in the medium-term, with inflation beginning to ease and confidence levels in the industry showing an uptick in recent quarters. However, economic, and political risks remain heavily on the downside, which will sustain pressure on construction throughout 2023.”

Beyond 2023, construction output in Eastern Europe will grow by 1.7% in 2024, revised down from 2.2%, before continuing to expand at an annual average rate of 4.3% to 2027.

Hanna concludes: “The impact of geopolitics and deteriorating global economic conditions have set the post-COVID recovery back significantly. The damage sustained to the underlying economy in the wake of the Russia-Ukraine conflict is likely to continue to weigh on output levels over the coming years. However, the financial support for EU markets via the RRF and REPowerEU initiatives will help to sustain the progress on major transport and energy infrastructure development projects.”