Industry sentiment remains positive though the grounds for that could be a little shaky

As the Chancellor delivered his budget the main economic vital sign – growth in gross domestic product – was more positive than many had earlier imagined.

‘I report today on an economy that has continued to confound the commentators with robust growth,’ as Philip Hammond put it in the first line of his speech.

This is good news for construction, which thrives on real economic growth but is also susceptible to changes in confidence.

That said, the latest estimate of economic growth for 2016, 1.8%, was far from spectacular and well below the long-term trend of around 2.4%. But, as Chart 1 shows, the economy has remained in positive territory and fairly stable.

When we adjust for population growth the economic performance looks ever more lacklustre, with annual growth at 1.1% compared with a long-term trend growth of around 2.0%. 

  • Chart 1
    Chart 1
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So the good news is that, given the risks inherent in Brexit, the economy is growing and not sliding. Indeed the momentum in the economy since the EU referendum led the Office for Budget Responsibility, which is there to scrutinise the budget and set an independent forecast, to raise its forecast for 2017 slightly to 2%. But this gain is washed away in its forecast for future years where it expects a lull in growth before it returns to 2% in 2021.

Whether the OBR’s forecast level of economic activity might sustain growth in construction remains to be seen. It is on the fringes of what might normally lead to a stasis or dip in output. For now though, the big thing for construction is that there has been no collapse in confidence.

Construction output appears to be growing moderately well. The latest data included significant upward revisions, suggesting output rose 2.4% in 2016 rather than the more modest 1.5% the Office for National Statistics estimated a month ago.

Yes, the ONS did record a dip in output in January, but one month’s growth should not be taken too seriously or dampen too many spirits. It will be revised and to date those revisions have tended to be upward more than downward.

  • Chart 2
    Chart 2
  • Chart 3
    Chart 3
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The drivers for the industry at the moment are on the new build side, as Chart 2 clearly illustrates. For architects the drivers are housing and commercial work, with offices the main element as retail work continues to act as a dragging anchor.

The latest new orders figures published by ONS give us a glimpse into work making its way along the pipeline. Here the picture is less impressive. The volume of work dipped in the final quarter of 2016. But taking a wider view, the picture is of new work broadly stable. Again, as we see in Chart 3, there has been no discernible sign of a significant post-Brexit collapse.

How to accommodate rising costs is the big challenge for the industry. The EU Referendum leave vote led to a fall in the pound, and this has pushed up costs markedly. The full force of this is yet to be seen and skills shortages are likely to add further cost pressures. What impact this will have on the progress of work is very uncertain, but leaves plenty to worry about.

  • Chart 4
    Chart 4
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Industry sentiment seems to remain positive. The Markit-CIPS survey (Chart 4) suggests companies are, on balance, still seeing rising workloads. This survey does, however, underline the rising issue of cost pressure, which it suggests is at an eight-and-a-half year high.

‘Some construction companies noted that sharply rising input costs had an adverse impact on decision-making and contributed to delays in contract completions,’ it said in its latest report (covering February).

Despite these worries, the survey found construction firms upbeat about the 12 months ahead. It seems 48% are forecasting a rise in business activity while only 13% expect a fall.

This rising level of confidence seems pervasive across the wider industry and is evident among architects. The latest RIBA Future Trends survey for January (Chart 5) was the most positive since the EU Referendum. There was a sharp rise in expectations of workloads and, perhaps more telling, a rise in the expectations for increasing staffing levels.

But the howling winds that may lie outside the European harbour have yet to catch the sails of the good ship Britain. We have yet to find whether these winds will speed the economy’s progress or capsize it.

  • Chart 5
    Chart 5
  • Chart 6
    Chart 6
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What we do know is that economic growth is a major determinant for construction. What we also know is that over time an increasing proportion of the UK’s economic growth has been associated with an increase in the population, particularly the working population. Chart 6, which compares GDP growth with GDP-per-head growth, illustrates how an expanding population has been a major driver of the national economic growth.

Inward migration, where the proportion of younger economically active people is far higher, has been a major contributor to this expansion in the population.

Reduced migration will slow population growth and, all other things being equal, this will substantially dent GDP growth.

The key for construction, which thrives on economic activity, is for all those other things not to remain equal. That will be an interesting challenge.