It’s no good relying on one set of indicators: you need to delve a bit, and find out what’s behind apparent contradictions
The construction industry is officially in recession. That’s to say the Office for National Statistics (ONS) measured two consecutive quarters of negative growth. In the first three months of 2016 construction output dropped 0.3%, followed by a further 0.7% drop in the three months to June (Chart 1).
Stories in the national media about construction being in recession may have raised more than a few eyebrows among architects, engineers, surveyors, contractors and small builders. From an industry perspective, while things may not be exactly steaming along, and there are concerns for the future, the idea that workloads are dropping might seem a shade anti-gravitational.
Before challenging the veracity of the ONS figures, it’s worth bearing in mind that many analysts and economic journalists are highly sensitive to signs of change in the economy right now, scouring for hints of the possible impact of Brexit. Many tend to focus on construction’s fortunes through the lens of the Markit/CIPS indicator. This measure dipped sharply in the wake of the EU referendum vote, so it’s no surprise that construction output data is in the spotlight.
For those whose businesses and employment is strapped to such a volatile industry as construction, a drop of 1% or so in work on site over a short space of time is hardly a matter of grave concern. We only have to look back at the official figures five years ago to see how volatile the industry can be. There was a far deeper recession from late 2011 to autumn 2012, when construction output fell 8.5%.
In fact, that recession was hardly noticed by the Markit/CIPS indicator, as we see from Chart 2. The chart also shows that the Bank of England Agents’ score did reflect that downturn. Different indicators measure, and thus suggest, different things.
The lesson is clear: if you want to know what’s really happening in such a complex industry as the one delivering the built environment, you need to consult a range of indicators and explore what might lie behind the apparent contradictions that frequently occur. Dismissing the data out of hand is not wise. A second, perhaps less obvious, lesson is that you need to delve into the often-disguised nuances of each measure.
It’s important to say that the ONS figures will almost inevitably be revised. This may mean that the recession currently recorded could disappear in the official record as more data is received.
Anyway, let’s start with unpicking the construction data as it is, just a little. Chart 3 shows how various elements of construction output have shifted from the final quarter of 2015 to the second quarter of 2016, the period over which this latest technical recession occurred.
The first point to make is that new infrastructure is the primary cause of the recorded decline. Picked out in blue is the change in all new building work, which obviously ignores the infrastructure work. This is the work to which most people in the core of the industry will be sensitive. It grew by about 2%, despite a slight dip recorded in private non-residential work. Housing, meanwhile, evidently performed well from a construction output point of view.
So it’s little wonder that the notion of a recession might slightly confound plenty of people engaged in various aspects of construction.
However, a closer look at the infrastructure figures might be justified. A 9% fall in workload in two quarters is quite a hit. If we look elsewhere for clues we come across the state of trade survey produced by the civil engineering contractors’ body CECA. It shows a positive balance of 20% of contractors surveyed seeing workload rising in the first quarter of 2016. The second quarter figure, although a concern to CECA, still suggested growth, with a positive balance of 2%.
This survey obviously fits badly with the picture painted by the ONS. Without wishing to go into too much detail, there are plenty of issues in how infrastructure workload is measured – so it is advisable to be gentle when placing weight on the official figures.
Further evidence that the infrastructure figures may be awry comes from the survey of materials suppliers produced by the Construction Products Association. As Chart 4 shows, the growth in light-side building materials sales has been pretty weak over the past two quarters. This is consistent with the slow growth in the ONS output figures for building work. Growth in heavy-side material sales, those more likely to be used in infrastructure work, has been quite strong. This supports the view that something might be amiss in the official count of infrastructure work.
We can of course look elsewhere to get other indications of activity within construction. The RICS survey is a fairly good lead indicator of what might be happening on site as the work of its respondents is slightly weighted towards the early stages of the process. Yes, as is evident in Chart 5, its survey implies a big slowdown in growth over the first half of the year. But it still implies growth.
We can look to how workload is progressing among smaller builders, doing smaller-scale local building work, through the survey conducted by the Federation of Master Builders. Although, as Chart 6 shows, its results can be quite erratic, it too points to growth over the first half of this year. Encouragingly, smaller builders are fairly positive about the future.
Taking a view of the labour market is another way to test what might be occurring in construction. Here the latest data provided by ONS shows employment in construction at the end of June this year at its highest level since June 2009. It should be recognised that employment tends to be a lag indicator, with falls coming after a drop in workload. But there seem to be no signs here of any deterioration in construction over the past year. Also of note, a fall in infrastructure would dent the figures less than a fall in building work as the civil engineering sector tends to be less labour intensive, especially compared with repair and maintenance of buildings.
The RIBA survey provides a solid guide to both workload and expectations within architectural practices. As we see in Chart 7, the data for the first half of the year may be down on a year earlier, but it remains very positive and indicates workload was growing up to June.
When we put all these elements of information together we see an industry that on balance ticked along OK in the first half of the year. The pace of growth was far from strong, but with concern over skills shortages that wasn’t necessarily perceived as a huge issue, buying a bit of time for training and recruitment.
The industry’s focus has understandably been less on the size of immediate growth, and rather on the quality of that growth and its sustainability over time. That would provide a stronger basis for attracting talent than a rapid sugar rush of work.
We cannot, however, ignore the fact that Brexit means the world is about to change. How this will affect the fortunes of any particular person or business dedicated to improving the nation’s built environment is far from clear.
Still, to answer the question posed at the outset – construction is probably not in recession. But it might be heading into one. Then again… so much now rests on the choices made by our politicians and negotiators as we recast our economic future. It’s essential that the industry’s voice is heard if they are to make the best decisions.