Construction industry
Construction industry
Overview
The construction industry is once again being put to the test as it faces emerging geopolitical challenges.
Growth is likely to continue in industrial, infrastructure, energy, and utilities sectors, driven by strong public investment. Projects in data centres, pharmaceuticals, and green hydrogen are also gaining traction, supported by significant EU funding, including €1.2bn recently allocated for green hydrogen initiatives.¹
Michael Riordan Senior Director, Europe
Despite a fragmented market performance across the EU, the construction industry has shown resilience through strategic urban development, infrastructure investment, and a growing focus on sustainable building practices.
Construction industry output
While skilled‑labour shortages continue to slow project delivery, energy prices remain elevated, keeping the prices high for materials such as cement and bricks.
At the same time, decarbonisation and renovation initiatives are gathering pace, boosting demand for low‑carbon technologies, and Nordic markets are increasingly recycling building materials to reduce waste and cut raw‑material needs. Underpinning these trends, the European Green Deal mandates the use of greener materials and energy‑efficient designs—measures that promise substantial long‑term gains but demand significant upfront investment and operational adaptation.
2024
- The construction industry in Europe faced a challenging 2024, impacted by weak business and consumer confidence due to persistently high interest rates and rising labour costs.
- While infrastructure, industrial, and energy sectors remained more resilient, they also faced challenges from labour shortages and material costs that, while stabilising in some cases after earlier peaks, remained elevated and volatile due to ongoing supply chain pressures.
- Despite these hurdles, the overall decline in construction output for 2024 wasn’t as grim as feared. Statistical updates point to a year-on-year drop of around 1.1% in Western Europe, a figure softened by unexpected strength in certain countries where public investment in energy and infrastructure remained steady.
- Countries that saw steep declines in 2024, are likely to experience a rebound as economic conditions improve and government policies support infrastructure development.
What lies ahead for 2025
- Over 2025, many European countries are expected to see construction output turn positive, with a modest recovery anticipated across the EU.
- The UK, Belgium, and the Netherlands are expected to see stable or moderate growth, supported by government investments in large-scale projects. The UK’s construction industry is expected to remain resilient, balancing sectoral weaknesses. Belgium’s construction output is set for slight growth, while Ireland is focused on infrastructure and housing investments.
- The UK, Denmark, Spain and the Netherlands are leading with large-scale green energy projects, while other nations are expected to follow suit as funding and regulatory support increase.
- After consecutive declines in construction output in the past few years, Finland's construction industry is expected to witness a growth of 4.2% in 2025, highest in the Nordics region, supported by civil engineering activity combined with investments in renewable energy and mission-critical sectors.
- Belgium’s construction industry is expected to grow by 2.6% in real terms in 2025, supported by investments in infrastructure, residential, industrial and mission-critical sectors. Belgium's strategic location within Europe and its robust digital infrastructure make it an emerging Tier 2 data centre hub. The Belgian federal government has also committed to supporting pharmaceutical research, including radiopharmaceuticals and advanced therapies. It plans regulatory changes to facilitate clinical trials and intellectual property policies favourable to developers.
- Spain’s economic outlook for 2025 signals strong, broad-based growth. The construction industry is projected to grow by 2.9% in 2025, driven by sustained investment in residential, renewable energy, transport, and industrial infrastructure. The country is also emerging as a key hub for mission-critical developments, with its data centre sector ranking second in Europe by project value, behind only the UK, thanks to major investments from global tech firms. Additionally, construction in the chemical and pharmaceutical manufacturing sector is expected to grow by 5.2%, supported by the Spanish government’s Pharmaceutical Industry Strategy (2024–2028), aimed at enhancing capacity and fostering innovation.
- National efforts are picking up, with some countries investing heavily in climate-resilient infrastructure. Denmark is investing €20.93bn in transport infrastructure under its Infrastructure Plan 2035, including the Copenhagen M5 metro line, which incorporates energy-efficient design. Ireland has allocated €517m for national roads and greenways, featuring projects like climate-adaptive drainage systems.
- Italy is advancing a €35.3bn renewable energy initiative, boosting solar and wind capacity to cut emissions. France is also focusing on rail and energy infrastructure upgrades, with investments aimed at modernising its transport network—like flood-proof rail lines—and expanding renewable capacity.
- In parallel, the EU’s new Construction Products Regulation, effective from January 2025, modernises standards to ensure safer, more sustainable construction materials, enhancing industry competitiveness.
- EU funding through the Recovery and Resilience Facility (RRF), remains a cornerstone for investment, with €807bn pledged overall. As of May 2025, over €315bn has been disbursed to member states, including €61.87bn for renewable energy and energy networks, boosting infrastructure and utilities projects.²
Construction inflation
Construction costs across Europe are projected to rise moderately in 2025, with most countries expecting increases in the range of 2 to 3%, driven by regional variations in labour shortages and ongoing geopolitical challenges.
- Overall construction cost inflation in 2025 is expected to remain moderate, except in the UK, where upward pressure is being driven primarily by increased labour costs.
- The increase in the UK's National Insurance contributions from April 2025, together with ongoing labour shortages and changes to immigration policy, may lead to higher labour costs, particularly in London. Alongside the recent rise in corporation tax, these factors might start to affect some projects, with main contractors potentially looking to recover costs through ‘changes in law’ clauses where contracts allow.
- The moderate inflation being seen elsewhere in Europe is primarily due to a steady increase in construction activity, supported by major investments in infrastructure, industrial energy, and data centre projects which are all bolstered by EU funding programs.
- Price increases in key electrical components, such as transformers, switchgear, and power distribution products, are contributing to higher material costs. Additionally, the modest rise in HVAC and cooling equipment prices reflects inflationary pressures, further adding to project costs.
- Energy prices in Europe remain high, driven by factors such as elevated EU carbon taxes and the region’s structural reliance on imported gas.
- The logistics sector is facing uncertainties, with fluctuating fuel prices and rising labour costs, leading to increased transportation and delivery expenses which is impacting some material costs and equipment delivery.
- Material prices are expected to remain relatively stable, or fall across commodities such as copper, steel (rebar and flat) and diesel providing some relief for construction costs across Europe.
- Geopolitical instability and regional conflicts are creating an uncertain environment, which is likely to impact equipment, material and labour costs. Tariff related trade barriers, along with other factors such as labour shortages, add further complexity to cost planning and procurement within the construction sector.
Supply chain outlook
Review of 2024
- In 2024, Europe experienced steady economic improvement, supported by lower inflation and a gradual recovery in industrial activity. While some political uncertainty persisted, the business environment grew more stable toward year-end.
- The MCE market remained largely stable through Q4. Earlier price increases in equipment such as generators, batteries, and switchgear eased by late summer as raw material costs declined.
- Data centre operations in Europe continued to feel the impact of the global semiconductor shortage, particularly in Q3. Though some improvement was seen, supply chain pressure and delays persisted, with early signs of recovery emerging by Q4.
- Power availability and long connection times is driving up project costs in certain locations. While governments focused on renewable energy integration and grid expansion, energy prices in Europe rose by 6%.
- For data centres, demand for liquid cooling surged due to AI and high-performance computing workloads. Liquid cooling accounted for 40% of new installations, driven by capacity and sustainability concerns.
- By the end of 2024, pricing and lead times became more consistent, helped by falling commodity prices and more stable material availability.
Outlook for 2025
- In Q1 2025, market conditions for Europe continued to show signs of stabilisation, supported by easing commodity prices, improved economic outlooks, and greater supply chain competition. These factors contributed to more favourable unit pricing and reduced lead times.
- Freight and logistics, however, remained uncertain throughout Q1 2025, with spot shipping rates continuing to show volatility. Ports faced renewed congestion as imposed tariffs placed added strain on the markets.
- There is market optimism that lead times are anticipated to remain steady for 2025. However, any open opportunities with manufacturers are quickly absorbed by the high demand.
- Addressing the demand for AI computing and the densification of data centres continues to pose significant challenges in 2025. The increased need for power and cooling solutions has further exacerbated the supply chain capacity issues.
- Generator prices are expected to fluctuate as a result of alternative backup power supply technologies such as hydrogen fuel cells.
- The UPS market remains steady, with moderate price increases forecast as manufacturers adapt to evolving technology needs. Oversupply and slow growth in the electric vehicle market will continue to moderate the price trend for UPS batteries.
- Overall, Europe entered 2025 in a more balanced position. However, tariff-related volatility and any reliance on components sourced from the US present ongoing risks, especially regarding lead times and procurement certainty.
- To navigate these conditions, companies are focusing on stronger vendor partnerships, improved forecasting, and proactive supply strategies such as increased efforts to localise supply chains, diversify vendors, and explore tariff exempt sourcing options.
- Looking ahead, global reciprocal tariffs, and regional conflicts are intensifying supply chain concerns, with geopolitical uncertainty emerging as the leading risk over the next 12 months. Escalating trade tensions are heightening fears of shortages, inflation, and mounting cost pressures across key supply sectors. The full extent of these supply chain risks remains uncertain.
The timelines provided are based on specific specifications and brands, as reported in Q1 2025, and reflect market conditions at that time. However, it's important to note that market conditions are subject to geopolitical and other influences which may cause supply chain disruptions that could impact the delivery schedules of equipment. Therefore, the timelines mentioned above are indicative and subject to change.
Sources
- Spain's MITECO allocates €1.2bn to seven future green hydrogen clusters, Enerdata, February 2025
- Recovery-and-resilience-scoreboard, European Commission, accessed on 1st June 2025
- Global Data
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