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European Construction Output Falls

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European Construction Output Falls

The Eurostat Construction Output data for the Eurozone has been made public. Year on year this number is 6.7% higher against a prior months reading of 8.8% annual growth. The month on month change is just 0.1%, down from last month’s 1.5% reading.

As a clear proxy indicator for investment in construction projects this figure gives some insight into long-term investor confidence in the Eurozone. It however does not go so far as to provide a split between private and government investments, which would be a very useful measure of where the growth stimulus is originating.

Individual European governments that have been under pressure over the past five years to bring national budget deficits into line have been remiss in their duties toward infrastructural developments. Social policy has necessitated that deficit reduction measures come not only from current account adjustments but also from the capital side. From this point of view many infrastructure projects have had to be cancelled or postponed in order to service more urgent short-term commitments.

The International Monetary Fund (IMF) has recently highlighted the need for recovering developed economies to address the lack of investment contribution to growth. This IMF statement was directed at the UK and US but applies equally to many EU member states. Recovering EU countries are now discovering that markets have a large appetite for their debt issues so raising funds for capital spending is no longer a problem.

Debt to GDP levels in the Eurozone economies, particularly those in the south and on the periphery where incidentally most of the capital development opportunities exist, are on the high end of the Debt/GDP scale. This raises the question that although there are many willing lenders, how prudent is it to raise further debt in order to invest. The reality is that the cost of funds is historically cheap implying that it is not too challenging to produce a positive return from capital investment, this will also have the side effect of mopping up some unemployment with the creation of construction jobs.

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