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The impact of the business cycle on the construction companies’ sector in selected states Rafal Wolski Magdalena Zaleczna Introduction After the strong increase in economic activity, which in many countries was connected with the boom in the real estate market, the activity was rapidly reduced also within the broadly understood construction sector. This contributed to the slowdown of the growth rate or the economic downturn. Authors have undertaken the analysis of impact of business cycle on conditions of residential real estate markets and the construction sector in selected European states. The research questions: • Authors searched for an answer to the questions: – how much residential markets reacted for the economic slowdown, – how much the construction sector and the enterprises changed their activity in the recent years. For the purpose of the analysis a database of over 99274 construction enterprises from the Czech Republic, Poland, Slovakia, Hungary, Ireland and Spain was created. Business cycle and construction sector • The economic revival and the boom in the real estate market in the years 2000-2008 were strictly related. In some countries the increased activity of the construction sector, significantly involved in the residential market, played an important role in those processes. These countries include: Ireland, Spain and Cyprus, and among the post-socialist states – the Baltic States and Croatia [SUN, MITRA, SIMONE 2013]. Business cycle and construction sector • On the eve of the crisis, in 2007, according to Eurostat data, the construction sector of the EU states gave employment to 14.8 million employees (11.5% persons employed in nonfinancial sectors) and provided EUR 562 billion in value added (9.3% of total value added brought by non-financial sectors). Business cycle and construction sector • In 2010, the employment in the construction sector in the EU states amounted to 13.4 million (10% persons employed in nonfinancial sectors), and the value added generated by that sector amounted to EUR 496 billion (8.4% of the total value added generated by non-financial sectors). Business cycle and construction sector • The largest part of the sector, concerning construction of buildings, clearly felt the effects of the crisis – the comparison of the beginning of 2007 and 2010 indicates a drop in activity by 16.5%. The only country which did not show a decrease was Poland. Share of the construction sector in the generation of GDP in selected countries (%). Source: own study based on data from the European Construction Industry Federation The construction sector structure in the analysed countries - a great majority of enterprises in this sector are small entities, employing up to 9 people Czech Republic Poland (data in thousands) Slovakia Hungary Ireland (data in thousands) Spain Changes in the level of employment in construction in the years 2003-2012 (%). Source: own study based on data from the European Construction Industry Federation Value of construction output in the years 2003-2012 (EUR million). Source: own study based on the Eurostat data. New residential units in the years 2003-2012 and changes of prices in the housing market in the years 2003-2012 (%) in the Czech Republic and Poland 45,000 35 30 25 20 15 10 5 0 -5 -10 -15 -20 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2003 2004 2005 2006 2007 2008 2009 2010 change in nominal prices change in real prices total number of new residential units including: new detached houses including: new multi-residential houses 2011 2012 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 80 60 40 20 0 -20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 change in prices in secondary market change in prices in primary market total number of new residential units including: for sale or for rent New residential units in the years 2003-2012 and changes of prices in the housing market in the years 2003-2012 (%) in Slovakia and Hungary 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 80 70 60 50 40 30 20 10 0 -10 -20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 50000 15 45000 10 change of average price of 1 sq. m. of a flat 40000 change of average price of 1 sq. m. of a higher standard house 35000 residential units handed over for ocupation 30000 0 25000 -5 20000 -10 5 15000 -15 10000 -20 5000 0 -25 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 change in price of residential units total number of new residential units including: constructed by companies New residential units in the years 2003-2012 and changes of prices in the housing market in the years 2003-2012 (%) in Ireland and Spain 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 20 10 0 -10 -20 -30 -40 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 700,000 20 600,000 15 500,000 10 400,000 5 300,000 0 change of price on the primary market 200,000 -5 change of price on the secondary housing market 100,000 -10 number of new houses nad flats in total new flats 0 -15 2003 2004 2005 2006 change of price of 1 sqm 2007 2008 2009 2010 2011 2012 number of new houses nad flats in total Data • 99274 companies (5416 from Czech Republic, 7927 from Poland, 2798 from Slovakia, 15385 from Hungary, 7900 from Ireland and 91374 from Spain) • Period: 2003 to 2012 • Financial data are derived from the Amadeus database. Data on GDP at market prices, denominated in euros, derived from the database Eusostatu • Companies in the sector marked by Eurostat NACE Rev. 2 statistical classification of economic activites in the European Community with codes: 4110 - Development of building projects, 4120 - Construction of residential and non-residential buildings. The Pearson correlation between GDP and the subsequent selected balance sheet positions Correlation coeficient, N=10 ROE using Net ROA using Net GDP at market prices, at current prices, millions of euro Total assets income income Czech Republic Pearson correlation ,701* ,730* -0,024 Significance (two-sided) 0,024 0,016 0,948 Poland Pearson correlation ,713* ,665* -0,496 Significance (two-sided) 0,021 0,036 0,145 Slovakia Pearson correlation ,680* ,707* -,828** Significance (two-sided) 0,031 0,022 0,003 Hungary Pearson correlation 0,458 0,501 -,651* Significance (two-sided) 0,183 0,14 0,042 Ireland Pearson correlation ,772** ,799** -0,452 Significance (two-sided) 0,009 0,006 0,19 Spain Pearson correlation ,862** ,835** -0,325 Significance (two-sided) 0,001 0,003 0,359 * Correlation is significant at level of 0.05 (two-sided). ** Correlation is significant at level of 0.01 (two-sided). Czech Republic Poland 8.00% 8.00% 6.00% ROA using Net income 4.00% 7.00% ROA using Net income 6.00% 5.00% 2.00% 4.00% Real GDP growth rate - volume percentage change on previous year 2012 2011 2010 2009 2008 2007 2006 2005 2004 -4.00% 3.00% Real GDP growth rate - volume percentage change on previous year 2.00% 1.00% Hungary 12.00% 6.00% 10.00% ROA using Net income 2.00% 2012 2011 6.00% 2.00% -6.00% -4.00% -8.00% -6.00% 2012 2011 2010 2009 2008 2007 2006 -2.00% 2005 0.00% 2004 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 Real GDP growth rate - volume percentage change on previous year 2003 -4.00% ROA using Net income 8.00% 4.00% 0.00% -2.00% 2010 Slovakia 8.00% 4.00% 2009 2008 2007 2006 -6.00% 2005 2003 0.00% 2004 -2.00% 2003 0.00% Real GDP growth rate - volume percentage change on previous year Ireland Spain 10.00% 5.00% 8.00% ROA using Net income 6.00% 4.00% -6.00% -8.00% ROA using Net income 2.00% -3.00% -4.00% -5.00% 2012 2011 2010 2009 2008 2007 -2.00% 2006 -1.00% 2005 0.00% 2004 Real GDP growth rate - volume percentage change on previous year 2003 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 0.00% -4.00% 3.00% 1.00% 2.00% -2.00% 4.00% Real GDP growth rate - volume percentage change on previous year Construction enterprises’ results In general the profitability ratio like ROE or ROA stayed positively correlated with real GDP growth rate - volume percentage change on previous year. In all cases, except Hungary, the correlation was statistically significant. There is pone case which drew attention: Poland. Positive correlation with a GDP growth that is also positive means that companies noted slower development, but not recession. The results indicate a strong dependence of the sector from the whole economy. And almost all the countries surveyed, with the exception of Hungary. Conclusions: The residential markets activity changed in analysed postsocialist states in moderate way: - the growth and decrease of new residentail units number was moderate - the incease of prices was dynamic and the fall was not deep The case of Ireland and Spain was different: - the growth and decrease of new residentail units number was extremely high - the change of prices was dynamic and the fall was high Conclusions: • The construction sector analysed by the changes in employment, number of construction enterprises and value of construction output indicates Poland as a country with the best situation in construction sector; • Ireland and Spain are countries having dramatically decreasing construction sector activity; • the financial condition of enterprises in post-socialist countries is quite good, but in Ireland and Spain the situation seemed to be quite dramatic. Thank you for your attention