Czechia: Warm winter and falling interest rates behind the rise in construction output

A warm winter and falling interest rates were behind the February growth in construction output, the Czech Statistical Office (ČSÚ) reported yesterday. Although this is the highest increase since May last year, the construction industry in February was mainly driven by engineering, i.e. transport, constructions financed from public investments. On the other hand, civil engineering, which includes house construction, declined and investors are still cautious in this segment, according to analysts polled by the Czech News Agency. The data, they said, may also be skewed by year-on-year comparisons with the low figures last February.

"Construction activity has been helped by this year's above-average winter months. In fact, the spring temperatures helped construction output, but of course could hardly have had an impact on building permits issued. And here the statistics were not so optimistic," said Jan Vejmělek, economist and analyst at Komerční banka. He pointed out that the indicative value of buildings for which building permits were issued was 15.9 percent lower year-on-year. "In the first two months of this year, construction output fell by 0.9 percent on average year-on-year," he added.

Creditas Bank economist Petr Dufek also agrees that the increase in construction output is primarily due to warm winter weather. Based on February's construction sector figures, he believes that this year's construction output will be led mainly by public sector investment, while the private sector is more likely to continue consolidating its portfolios. "While civil engineering construction is stimulated by public procurement, civil engineering is somewhat on the sidelines, regardless of the current results. Commercial construction has been stalling for a number of months due to a more cautious attitude from investors," Dufek said.

According to Štěpán Křeček, an economic adviser to the prime minister and an analyst at BH Securities, this year's interest rate cut will increase people's interest in mortgages, but it will also lead to an increase in property prices. According to an analysis by Swiss Life Hypoindex, mortgage interest rates are falling, although not at the same rate as the Czech National Bank's base rate. The bank cut the two-week repo rate by half a percentage point to 5.75 percent at its March meeting.

The Czech construction industry is also still suffering from a large amount of unnecessary regulations, according to Křeček. "Long permitting processes make construction projects significantly more expensive. The situation could be partially improved by digitisation of construction procedures, which is, however, running into a time lag," Křeček added.

After four months of decline, construction output in the Czech Republic increased by 3.6 percent year-on-year in February, the fastest growth since May 2022. According to the CZSO data, civil engineering construction drove the construction sector upwards, while civil engineering declined year-on-year. Compared with January, construction output was up 4.8 percent. Ground construction was down 1.5 percent year-on-year in February, while civil engineering construction was up 19.4 percent. Building permits were granted for projects worth CZK 35 billion in February, down 15.9 percent year-on-year.

Source: ČSÚ and CTK