In Denmark, a small open economy, it is common wisdom that the economy business cycle is more or less dictated by our trading partners. The growth in important countries as Germany and Sweden is all but impressive, and nonetheless aggregate demand is high in Denmark and especially in the Danish construction sector. Even though new build has suffered from high material prices and interest rates like in the rest of Europe, the construction employment and activity have been strong in Denmark. Activity has just shifted to civil engineering and to R&M. From 2025 activity will partly shift back to new build and away from R&M.
The Danish economy is running above its structural capacity. That has been the case since the rapid recovery in 2021. According to the Denmark’s Fiscal and Structural Plan, there will be a positive output gap at least until 2029.
This might seem surprising, given the unemployment rate around 6 % according to the Labor Force Surveys. However, the labor market has delivered record high employment numbers every quarter since the beginning of 2021. Furthermore, the register-based data shows a much more stretched labor market with a gross unemployment rate at about 3 %. We can also detect widespread recruitment problems.
Now private consumption is picking up. The budget for 2025 is expansionary. And Danish export continues to grow – not least due to the success of the pharmaceutical industry. Thus, the government GDP forecast is near 3 % for both 2024 and 2025. Even with some of the growth stemming from merchanting and processing abroad, the pressure on the labor market will be substantial.
On a macroeconomic level, the above is counterintuitive for a small open economy with struggling trading partners such as Sweden and especially Germany. The manufacturing sector is indeed affected by the situation in exporting markets, and consumer confidence has still not recovered fully from Covid19. But aggregate demand is still high.
For construction workers, the unemployment is even lower. It is about 2 %. In this environment, aggregate construction demand is not setting the scene for production. Supply of labor is. A 5 % increase in demand across construction segments will have no effects. The famous demand side economist John Maynard Keynes is dead in more than one sense in the current state.
If we want to understand the production development in the Danish construction then we should have two things in mind: Supply side economics, and demand changes within construction.
The supply side economics is about accepting that production and growth is determined by a very rigid supply. A substantial pool of inactive labor simply does not exist. The employment growth in the construction industry in recent years has been solely driven by foreign workers. Nothing indicates that this will change in a foreseeable future.
Supply-side constraints are limiting growth in the construction industry. The rebound in new construction comes at the expense of R&M activity, not due to falling demand but because supply cannot meet the needs of both sectors. At the same time, demand for civil engineering projects is at a record high, further straining the industry’s limited capacity. This may seem counterintuitive considering the construction sector hitting rock bottom in 2024, with production values dropping to €45 billion. However, a shift toward the more labor-intensive R&M sector means lower material input per employed worker. Hence, the production value fell. The decline in 2024 can thus be attributed to the significant drop in new construction, following an exceptional peak in 2021 and 2022 – a period of unprecedented activity.However, recovery of the production value is on the horizon. In 2025, the industry is set to rebound with a solid 2.4% growth rate, paving the way for even stronger momentum. By 2026, growth will accelerate to 3.3%, before stabilizing at 2.4% in 2027. Between 2024 and 2027, residential new construction will account for just over two-fifths of the total growth of €3.7 billion, corresponding to a growth contribution of 3.6 percentage points. Non-residential construction will contribute 2.3 percentage points, while civil engineering will add 2.4 percentage points.
Not a bad outlook from a starting point with full construction employment.
