The future is undoubtedly unpredictable still – which means there is reason for hope as well as concern
For those eager to gain any inkling of what Brexit means, the lack of hard facts is frustrating. Hungry for insight into the possible effects on their businesses and jobs and a host of other concerns they are obliged to gorge on speculation.
Interesting perhaps, but it might be better to focus on what we do know. If you want a clue to where you could be heading it’s not a bad idea to work out where you were and your direction of travel beforehand. Another tip: if you anxiously seek signs of Brexit effects in every data release, you’ll end up finding plenty, whether they are real and meaningful or not.
The recent releases of construction data provide just such a feast for the fretful. The Office for National Statistics estimate that construction output fell 2.1% in May was well publicised. This came hot on the heels of the Markit/CIPS data for June showing construction activity crashing at its fastest rate for seven years.
Set this disturbing foreground detail of dropping construction activity against the far gloomier background picture painted by recent forecasts and, to the nervous mind, the path ahead could look very rocky indeed.
It’s worth unpicking the data a little, if we want to gain some real understanding. They deserve more considered interpretation and greater recognition of their limitations than a headline or two might provide.
Two instant points to settle some nerves. First, as we’ve noted before the Markit/CIPS indicator may well be exaggerating the depth of decline. Secondly, it is simply plain wrong to take the most recent month’s construction output figures too seriously at any time. It’ll be revised and, if the recent pattern of revisions is any guide, it’ll be revised up.
This does not mean that there isn’t any cause for concern – rather that things are probably less worrisome than they at first might appear.
Starting with the construction output figures, these latest data have been heavily revised as part of an annual process connected with the National Accounts and some other technical reasons. The revisions actually go back to 2010, with growth revised up in 2015, 2014 and 2012.
Critically, though, one effect is that construction is seemingly about £2 billion bigger in cash terms than was estimated a month ago. The current prices measure of construction output in the 12 months to April, put at £143.6 billion in the June release, now stands at £145.7 billion.
This may sound mad, but it happens in statistics as the past is re-evaluated. And part of these changes are down to the effect of introducing a backlog of data from late-arriving returns. That’s a good reason why we should treat the most recent data with caution.
Chart 1 puts the figures in a historical context. It tells us that growth has been pretty non-existent for a year or so (red line), with repair and maintenance in decline for a couple of years (blue dotted line).
Stripping out repair and maintenance, building work has held pretty stable. The weakness in new work lately has been in infrastructure. Admittedly, this is baffling some people, but there are huge difficulties in measuring this sector – not least because deciding what goes into infrastructure is far less obvious than it was a few decades ago.
So the broad picture from the output data is that the level of building work has been fairly stable over the past year or so. Within this mix the stellar growth seen in housing from 2013 has been missing over the past year and there has been a moderately increased contribution from private commercial work.
Looking forward, while the level of construction output still looks OK as things stand, recent weakness is a concern given the current turmoil. In the first five months of this year output was down slightly on a year earlier. The problem though is that it was being propped up by housing and commercial work. These are the two sectors seen as most vulnerable to Brexit effects.
There are two recent forecasts for construction activity – Experian, cast before the EU referendum and Hewes, cast after the vote. It’s fair to assume that the Experian forecast would have been downgraded were it made after Brexit.
It is well worth noting that, even before the vote to leave the EU, Experian was forecasting weaker growth than it had previously expected. Chart 2 shows the trend in recent Experian forecasts and how optimism has faded quarter by quarter.
It reads like a chart of growing disappointment, suggesting that confidence in construction has been waning over the past year. From last autumn with the prospect of average growth of 4% per annum (blue markers) to this summer with expected annual growth falling to well below 2% (red markers).
Before overstating its meaning, however, we should note that much of the weakening growth comes from lower expectations in repair and maintenance and in infrastructure. These sectors are tough to measure and consequently hard to forecast. That said, expectations for commercial work have been downgraded, although housing growth prospects have remained fairly consistent.
Experian’s downgrading of expectations is consistent with the consensus of forecasts collated by the Treasury. Last autumn the view was for economic growth of 2.4% this year. That view had shifted to 1.8% before the referendum and will have slipped since.
Hewes’ forecasts tend to be more downbeat generally. Three months ago it was forecasting growth of below 1% per annum. The forecast now shows a fall of 2.5% this year, 4.3% next year and 1.4% in 2018. That’s a pretty slumpy recession. As we might expect, private housing and commercial are where the pain is thought to lie. Hewes is looking at a fall of 10% in private house-building activity next year.
These are just forecasts. They rest on assumptions and Hewes does tend to weight risk more heavily than other forecasters. But they suggest some tougher times ahead.
On a more positive note, while Experian’s leading indicator measure (Chart 3) does show the market weakening, it remains above 50 so that points to some growth in the system. Furthermore, the Construction Products Association’s state of trade survey also paints a picture of growth, reporting a 13th straight quarter of growth.
However, even though 75% of the responses were received before the EU referendum, the mood among products manufacturers suggests increasing pessimism, with a sizeable proportion expecting sales to fall in the year ahead.
Interestingly though, Barbour ABI has not, so far, noticed a slump in the number or value of contracts awarded ahead of the referendum. There are two ways to read this. It may be that the effect is smaller than many expect. It could also be that there is a lag in the collection of data, with awards made official after deals have been struck. If that’s the case we will see any slump in coming months.
It is interesting too that RIBA’s workload expectations survey also remains positive. Chart 4 shows how expectations have been muted lately compared to headier times between late 2013 and early 2015, but the data suggests plenty of activity and a positive view of the future.
How this will change, and how fears of a Brexit impact will be read by architects, is yet to be seen. But the data provides reassurance that the profession was in fine fettle at the time of the vote. This view is underpinned by the ONS measurement of inflation in architectural services (Chart 5). Price rises may have cooled off a little in the first quarter of this year, but for architectural work they remain above general consumer inflation with real price growth (red line). So businesses are seeing real rises.
Turning to informed speculation, and what to make of it, it is worth maintaining a fairly open mind on the impact of Brexit. Construction activity is highly sensitive to growth in the wider economy. Worryingly, the forecasts for economic growth are pretty close to the tipping point where we might expect construction to fall into recession.
However, government policy is frequently paradoxical. Freed from the restraints of rapid deficit reduction, the option for the government to step in and fund or underpin the funding of projects is now far more a possibility than previously.
Faced with housing as a major ever-growing issue of concern, should building falter we may see more direct action to prop up the sector. Who really knows?