Words:
Brian Green

Falling output and gloomy forecasts might cast a shorter shadow if housing, a critical factor for construction, comes good

The construction industry’s recent flirtations with recession took a rather nasty turn in the first quarter of this year, with output across Britain sliding by 2.7%.

The picture painted by the latest construction output numbers is one of an industry in decline, as we see in Chart 1.

Chart 1
Chart 1

However, the collapse of Carillion in January and poor weather in the form of the Beast from the East in March will both have knocked activity on sites, which is basically what construction output measures.

So, a fall in output was perhaps not that surprising and for many in the industry there may well be a sense that some of the lost work will come through in the following months and lift workloads.

The puzzle for analysts, though, is whether these two events are the sole reason for the fall or whether they disguise an underlying creeping weakness. After all, growth in the sector as measured by the ONS had already been showing signs of flagging over the past four quarters, as we see in Chart 2.

Chart 2
Chart 2

More to the point, what do the construction output figures suggest for work prospects for architects?

Industry mood

Before looking at what these hard numbers produced by the Office for National Statistics might mean, it is worth checking the mood within the industry more broadly.

We can see from the RIBA Future Trends data how practices view the near-term prospects. The mood we get from Chart 3 is mildly positive, with a balance in March of +6 for expectations of increases in workload and +3 for increases in staff, though with optimism softening after more upbeat responses in January and February, particularly among the smaller practices. Regionally, practices in London remain most pessimistic with some noticeably negative scores in recent months.

That architects are moderately positive is a good omen for the construction industry overall, as architectural work tends to be a lead indicator of construction output. This is true too of the workload recorded by RICS. As Chart 4 shows, this also remains positive in the short-term, both in terms of recent workload and expectations of future work. 

  • Chart 3
    Chart 3
  • Chart 4
    Chart 4
12

The more broadly-based indicators provided by Markit/CIPS survey and the Bank of England Agents’ reports, paint a far more muted picture of current trends, as we see in Chart 5. Both suggest that growth in the industry is close to stalling. These surveys will tend to reflect activity within the more mainstream and larger construction businesses.

Looking at perceptions from the view of more local and smaller builders – those which better reflect the prospects of many architects working as single-person or small practices – the picture is a bit patchy. As Chart 6 shows, optimism was up in the first quarter while workloads were down. The bad weather perhaps explains some of this, with work being delayed and pushed forward.

  • Chart 5
    Chart 5
  • Chart 6
    Chart 6
12

The Construction Products Association state of trade survey paints a similar pattern among materials suppliers. They took a knock in the first quarter but remain modestly positive about the future.

Blips and trends

What we might reasonably take away from these various surveys is that the bad weather and the collapse of Carillion were the blips that explain the fall in construction output in the first quarter. We might reasonably assume also, based on these surveys, that things should pootle along moderately well over the coming year.

But before accepting these assumptions it is worth noting the weaknesses in these surveys and their potential innate bias. They tend to reflect sentiment as well as real change. They tend not to be statistically representative, although efforts are made. There tends to be both optimism bias and survivor bias within in them. So, respondents tend to lean towards being upbeat. And those firms that have failed do not respond, so there is a bias in favour of those that are doing well, who can do even better as a business on the back of work awarded from those that have failed.

That doesn’t make these surveys wrong in a broad sense, nor does it undermine their potential value. We just need to be careful when interpreting what they mean. To give two quick examples. One: Much of the work from the failure of Carillion will go to other firms, so those firms will report an upturn in workloads. Two: Firms may factor in the bad weather effect and discount it in their responses to work done, while seeing the upside in the work to come. They also may not, we don’t know. Few surveys can weight their responses to account for this trickiness.

A look at the forecasts suggests that the analysts of construction output are less optimistic than the trade surveys. Chart 7 points to a consensus view that construction is set for a lacklustre period over the next two to three years. This year promises little growth at best.

With no clear view on the implications of Brexit, these forecasts are subject to significant uncertainties. In that context, starting from a low base it is not that comforting.

But when peering through the haziness to pull out trends, there is a further factor worth bearing in mind. Construction is anything but homogeneous. To make sense of the prospects for architectural practices it makes sense to examine how the mix of construction work is changing. Here too we might find possible explanations for why many architects feel they are doing reasonably well in what would appear, at least at an aggregate level, to be a fragile construction market.

  • Chart 7
    Chart 7
  • Chart 8
    Chart 8
12

The housing factor

Chart 8 illustrates the proportions by value of various sectors within the new work element of construction output. We see immediately that housing is a major element. More importantly, we see that it has increased its share over the years. Looking at the past three 10-year periods, housing’s share by value of new work has risen from 23% in the 10 years to 1997 to 31% in the 10 years to 2017. And much of that growth in share has been in more recent years. The figure for 2017 was 37% up from 24% in 2009.

If we look at total construction, including repairs, maintenance and improvements, the proportion of housing-related work has risen from 35% in the 10 years to 2007 to 38% in the 10 years to 2017.

Given that much of the work architects do is in housing, as is borne out by the latest RIBA Business Benchmarking, it becomes easier to understand why workloads among architects are more solid than the overall construction figures. Architects are mainly trading in a construction sector that is expanding relatively fast.

The less comforting flip side of this trend is that practices increasingly have more of their eggs in one basket – 57% it would seem from RIBA Business Benchmarking 2017 figures.

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