Different sectors make downgraded forecasts more complicated than might first appear, but wise architects will remain cautious
When the facts change, I change my mind. What do you do, Sir?
Whether John Maynard Keynes said it or not, it’s still a great quote. It’s certainly useful to bear it in mind when considering economic forecasts. If you turn it on its head, that is.
It’s evident from the recently released batch of spring forecasts that the industry’s key forecasters have changed their minds. Growth, they say, will be shallower than they thought three months ago.
So, what facts have changed? Should we be worried?
Before looking to the future let’s look at the recent past and the latest Office for National Statistics ONS) construction output estimates. These are the base data on which the forecasts are built.
February’s data is the latest, when overall output fell a little. That’s not an issue. Output is quite volatile. You need to look at the level over a period. In Chart 1 the index measure has been smoothed to show the moving three-month averages.
The immediate picture is of rapid growth in total work from 2013 petering out last year. But comparing the growth path of new work with repair and maintenance (R&M) we see them taking differing paths. New work’s growth spurt continued longer, breaking its previous peak. R&M flagged in 2014 to remain below its 2008 peak.
Why R&M has been falling, given the general improvement in the economy, is a curiosity worth wider consideration. Certainly the cash-strapped public sector will be holding back on repairs and maintenance where it can. Reduced government ambition to retrofit buildings to make them greener will have had an effect. And there could be difficulties with accurately measuring the sector, for instance if firms are taking R&M work in-house it will have been lost to the construction industry. A further factor to consider is any change in informal and black market activity which is more common in repairs and maintenance that in the new work sector.
Importantly, it’s worth remembering that new work, in the non-residential sector, includes improvements to existing buildings and infrastructure. So, most work for architects will be in the new work sector, which is performing more strongly than construction output overall. Another technical point worth noting is that the data before 2010, when ONS took over responsibility for producing it from BIS, doesn’t really match the data after.
The key point is that for most architects the output figures should look pretty good.
Let’s turn to the forecasts and how they’ve changed. Chart 2 shows the rollercoaster path of construction (black line) since the recession, together with new work (blue dotted) and R&M (red dotted). To these are added the three leading forecasters’ expectations.
The Hewes forecast is far more pessimistic than the others about new work. This lies behind the downbeat view for total construction work. Hewes generally takes a more pessimistic view of uncertainties, shading down growth forecast more heavily for risks. It tends to be closer to a worst-case scenario than other forecasts.
This is one reason why the difference is starker in new work. Economic uncertainties tend to bear more heavily on new work, as they undercut the confidence needed to invest in new build schemes more than for R&M, which is driven more by here-and-now realities than future prospects. There tends to be more consensus on prospects for R&M which normally has a less volatile growth path.
One way we might read these forecasts is that, with the evidence available now and if things don’t go very awry, on balance there should be solid growth. But there are potentially damaging risks and, comparing the forecasters’ expectations of just three months ago with those of today, we can assume the likelihood of them suppressing construction activity has increased.
Construction Products Association (CPA) cut its forecast for this year from 3.6% to 3.0% and Hewes, despite already being quite pessimistic, cut its forecast from 0.2% to 0.0%. Experian trimmed expected growth from 2.6% to 2.0%, but cut the forecast for next year from 3.9% to 2.9%.
But while CPA and Experian cut their R&M forecasts quite substantially, pretty much in line with the drop in their forecasts for wider economic growth (GDP), the Hewes R&M forecast was unchanged for this year. This fits with previously holding a more pessimistic view of the wider economic fundamentals.
Turning to the forecasts for new work, we see a fairly mixed pattern of changes. These in part reflect the forecasters’ differing views on the impact of various risks. CPA cut its new work forecast for this year from 4.6% to 4.0% and Hewes, despite already being quite pessimistic, cut its forecast from -0.3% to -0.6%. Experian trimmed expected growth in new work this year from 3.2% to 3.0%, but it cut next year’s forecast from 5.5% to 4.0%.
There were significant differences in the downgrades to subsector forecasts. Experian’s big downgrade for this year was in commercial work but the big cut in the forecast for next year was in infrastructure – reflecting uncertainty over, and delays to, the huge Hinkley Point project. CPA downgrades were more evenly spread across building subsectors, with its view on infrastructure output this year unchanged and remaining more bullish than the others. Meanwhile, the downgrades made in the Hewes forecast for this year were in infrastructure and public non-housing work.
When analysing shifts in sentiment in any forecasts, it’s imperative to note that the size of the change from one period to the next depends in large part on the starting point.
What’s the difference?
But let’s try to assess what prompted the change in the forecasters’ minds. Taking a broad view, the downgrade to R&M can be seen as consistent with lower expectations of wider economic growth. Given the variety in the changes to expectations for growth in forecasts for new work, we might assume this results partly from lower expected economic growth, but also from greater uncertainty.
In the real world growing uncertainty hits investment decisions, with plans shelved or delayed. In the world of forecasting it makes it harder to assess which way investors will go. Either way there is plenty of evidence from a variety of indicators to support the fall in optimism among the forecasters.
Chart 3 shows three indicators all saying much the same thing. The latest RICS construction market survey, the Markit/CIPS construction indicator and the Bank of England Agents’ scores all point to growth slowing. The commentary across the board is of a global slowdown, signs of weakening growth in the UK economy and uncertainty generated by the EU referendum.
And fellow architects appear to be trimming their expectations of future workload based on their experiences, as we see Chart 4, which shows the latest RIBA survey data. But it’s not just workload that matters.
The ONS publishes quarterly figures on services producer prices. These give an indication of inflation in the price of services provided in the UK economy. For architectural services the data goes back to the first quarter of 2010, when clearly (see Chart 5) practices were struggling to charge more for their efforts and saw prices falling in real terms compared with consumer price inflation.
The chart shows how things have changed. On balance, practices have had scope for more than a year to push up prices, and with falling inflation they have been able to claw back some of the losses endured through the recession.
So, yes, the facts have changed for the worse. This will affect parts of the architectural and wider construction world. But while there may be good reasons to be cautious, there seems no immediate reason for most architects to be worried.