The relationship between economic development and construction activity : a local and a European perspective

Abstract

When economies are doing well, more infrastructure and production facilities are required so that this new economic development is sustainable. At the same time, for a country to develop, infrastructure is again required to achieve this step. Therefore, the activity of the construction industry forms an essential part of the development of a country. This study aims to discover whether the relationship between construction output and economic development differs amongst countries according to their level of economic development. Moreover, this study attempts to identify whether the relationship between construction output and economic development is uni-directional or bi-directional through Granger non-Causality tests. This study adopts a European- wide panel data approach focusing on the period 1995-2016. The methodology followed is based on a two-step approach. First, construction output is regressed on a number of explanatory variables using estimated GLS. Secondly, a cointegration test is performed in order to identify any potential long run relationships between construction activity and economic development. This is followed by a Granger non-Causality test in order to identify the direction of such relationship. The findings from the regression analysis indicate that construction output in Europe is greater in countries classified as highly developed. Additionally, the Granger Causality analysis concludes that GDP per capita is driving construction activity in the majority of European countries and not vice versa.