2017: A year for resolution

There’ll have been plenty of new year’s resolutions made in recent weeks, many already broken. However, constant resolution rather than individual resolutions is what’s needed in the year ahead. It’s going to be tricky, and it could get tough.

That’s not to say it will be bad, but business managers will need to have their wits about them to spot potential risks, grab the best opportunities when they arrive and chart a sustainable path to more settled times.

The economy is not just in an uncertain place, it remains fragile after a deep recession and years of austerity. And the nation’s debt remains high despite – some argue because of – years of public sector belt-tightening.

So, as the chair of any meeting might sensibly ask: ‘Where are we and what might we reasonably expect in the year ahead?’

If we focus first on the current performance of the construction sector, the data suggest the industry will start the new year pretty much in a holding pattern. 

Chart 1 shows the latest construction output figures. Technically they hint that by year end the industry will have experienced a shallow recession. In reality, given the likelihood of revisions and the accuracy with which we can actually measure the volume of work undertaken, the data is simply telling us that output in the industry is flat.

It’s worth looking a bit deeper at the performance of the individual sectors. One point to note is the growing importance of new housebuilding in the overall picture. In the depths of the recession it accounted for 23% of new construction work. Currently it accounts for 35%. So the fortunes of the industry as a whole rest increasingly on the health of housebuilding.

Chart 2 paints a slightly more positive picture with the Bank of England’s Agents score for construction (the latest data is for November) suggesting that the industry left 2016 growing modestly. Markit, meanwhile, suggests there was a slight rally in workload at the end of the year.

This all fits with the assessment we might draw from Experian’s Construction Leading Activity Indicator. As we can see in Chart 3, it points to some growth in the months ahead.

There are other indicators that also suggest the industry is doing better than the Office for National Statistics construction figures might have us believe. But in broad terms, while the industry may possibly be growing, that growth is modest. Within that there may be sectors or regions that are doing very well indeed.

Looking at the expectations architects have for the coming months (Chart 4), here too we see a smidgeon of optimism. Practices are on balance positive about growth. But they are not so positive as to be expanding their staffing levels. That says a lot, and the context suggests they are right to be prudent.

You can criticise experts all you like. Yes, they do get things wrong (don’t we all?), but they know stuff. And what the nation’s leading economic experts know leads them to expect pretty sluggish growth in the year ahead. Chart 5 shows the latest average of independent forecasts compiled by HM Treasury, compared with how things looked in those more settled pre-referendum times in June.

The GDP growth forecast for the economy in 2017 was 2.1% in June last year. That’s solid if far from spectacular. The referendum vote, however, shocked many economists into making deep revisions to their forecasts in August. Since then the average has slightly crept back, as you might expect after a shock reaction. In December it stood at 1.2%. Interestingly, within that average the spread of forecasts has widened from 1.2% to 2.7% in June to 0.5% to 2.7% in December – a clear indication of the increased uncertainty among the community of experts.

Growth this year of 1.2% might be far from the Brexit-related recession some suggested before the referendum, but this does not mean construction can be certain of dodging a recession. There is a historic trend that suggests if the economy grows less than 5% over a three-year period there is a strong likelihood that construction heads into recession. It is not a foregone conclusion, just a fairly strong tendency based on 60 years of data.

Currently (up to the third quarter of 2016) the three-year growth rate stands at about 7.3%. Importantly, though, if the forecasters are correct that growth rate should dip below the 5% mark at the end of 2017. Construction doesn’t need the wider economy simply to be growing, it tends to need solid and sustained growth.

What adds to the risk of a dip in UK construction are inflationary pressures within the supply chain, potential skills shortages if migrant workers exit the UK and uncertainty within the investment community. Brexit may be our destination, but the road we choose to get there will have a huge bearing on the construction industry. Inflation, unpredictability and skills shortages are not helpful travel companions to construction on any journey.

So the economic backdrop for 2017 is unlikely to provide any favours. As Chart 6 shows the forecasters expect inflation to be much higher than they thought six months ago, mainly as a result of the fall in sterling.

The forecasters also expect unemployment to rise. This may not be quite such a problem for the economy or construction unless it feeds through and reduces consumer spending, which to date has been a major driver of the economy. This might well dent the smaller housing jobs that provide nice bread-and-butter work for smaller local practices.

It looks like businesses of all shapes and sizes in construction have plenty to keep an eye on in the year ahead.

There is, however, some comfort in the improvement in fee earnings. The latest services producer prices index show those providing architectural services are still enjoying more than 2% real growth in prices. That should help to underpin the long process of rebuilding company margins and staff pay rates.

In essence 2017 could be a bumpy ride. But with strong resolution and a watchful eye there shouldn’t be too many nasty surprises.

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