If the private housing sector falters, architects would do well to have another string to their bow
The start of the new year might be just an arbitrary day in the annual cycle, but it prompts a long hard stare into the future and glimpse over your shoulder at the year gone by.
With that in mind, it’s worth a quick gander at how the numbers that define construction activity shifted in 2017 and a longer look at how they might shape up in 2018.
Before looking forward or back at the wider trends, it’s worth noting the here and now and how the year has started with a nasty bang.
The collapse of Carillion may have been considered by some to be predictable in the light of its recent turbulence, but the impact will be severe across the industry. A boulder has been hurled into the construction pond that will send waves lapping over the gunwales of the many construction-related businesses already struggling to stay afloat.
How severe and widespread the effect will be, no one is in a good enough position to answer, but it would not be a shock to see it hit the big number that broadly defines the industry’s performance – construction output.
Taking what we know about construction output from the already published data, we have good news, a few worries looking forward and plenty of confusion. That is without considering the potential Carillion effect.
The published data (see Chart 1) so far only goes up to November, but when the final count for the year is done the official record is likely to point to expansion of activity in the sector of around 5% over the year. This is substantially above what had been expected.
There are, however, worries in the data. They show activity falling, with work done in the latest three months down 2% on the previous three. That’s the largest three-month fall since August 2012.
The data suggest a surge in activity in late 2016 provided a flying start for 2017. Activity then eased after the summer, with commercial work slowing sharply, down 4% over the latest three months.
But there is confusion too around these figures. Numerous and substantial revisions to the data have made the series perplexing to interpret. The latest revisions in November have added about £3 billion to the annual value of construction. Given that activity will hit about £156bn in 2017, this is not an insignificant lift.
Leaving aside the quirkiness in the statistics, the narrative one might take from the data has been broadly consistent. The industry was flatlining, albeit at a relatively high level, for most of 2017 up to the summer. Rising private housing activity – both new build and repair, maintenance and improvement – and solid workloads from the commercial sector to some extent disguised a lacklustre performance elsewhere, notably in the public sector.
Some may question a 5% or so rise in construction activity in 2017, but growth has not been evenly distributed. In support of this estimate of growth, the statistics for employment show the numbers working in construction were rising over the period, up around 4% between September 2016 and last September. And most other indicators have also pointed to growth in activity.
Looking forward, however, there are increasing numbers of indicators that point to much weaker growth in 2018. And when the industry forecasts are published in a month or so, they are likely to suggest a broadly flat path for activity.
The headline measure of new orders we see in the dotted line of Chart 2 is not as exciting as it seems. The sharp rise is down to contracts let for HS2. Assuming all goes to plan it will generate lots of construction work, but over a very long timeframe. And infrastructure tends not to be as beneficial to architects as building.
Take infrastructure out of the new orders and a similar, if not less encouraging, pattern emerges to that seen in the output data. The value of orders, excluding infrastructure, rolling in has slowed since the spring and appears to be in decline.
The general slowdown in the vibrancy of construction suggested by these two official measures is evident across a range of data. The regular soundings from the Bank of England Agents and from data company Markit both point to weakening growth, as we see in Chart 3. This is not a positive trend to take into 2018.
The release in late December of the latest RIBA Future Trends survey provided a cold blast before Christmas, showing that on balance architects expected work in the coming three months to fall. And, for the first time in about four years, the future staffing index dipped to negative, as shown in Chart 4.
The forces constraining growth in construction are well rehearsed.
Whichever side you sit on in the Brexit debate, it’s hard to dismiss the effects of the uncertainty caused by the protracted negotiation process. Uncertainty tends to curb economic activity and is seldom a welcome guest in the world of construction.
The UK, having been among the faster growing economies internationally leading up to the referendum, is now lagging well behind the average for advanced nations, according to the latest OECD data. Causation or coincidence, the economy is weaker in the wake of Brexit.
Naturally there are other Brexit related impacts on construction, such as a tightening in the supply of labour and potential disruption to the ease of supply of materials from what is currently the single market.
One feature of the weakened economy is poor earnings growth. This in part reflects the continued confoundingly sluggish growth in productivity within the UK economy. Combined with higher inflation since sterling’s drop in value after the EU referendum, this has put a huge squeeze on household finances as income growth turned negative in real terms in 2017. Unsurprisingly, consumer confidence has waned (Chart 5).
Reduced consumer expenditure naturally disconcerts investors in retail and entertainment related construction. It also directly hits big-ticket items such as new cars and housing repairs, maintenance and improvements, which tend to follow similar growth paths. Car sales were down in 2017. This hints at a squeeze on investment in home improvements which historically has shadowed the trend in car sales some months later.
It is the nature of economics that there tend to be upsides to balance at least partly the downsides associated with changes to the economy. The fall in the pound, while importing inflation, has supported exporters, which have been further boosted by stronger economic growth globally. Rising exports from the manufacturing sector is providing some lift to the economy.
But as Chart 6 shows, the economic performance of the UK is far from solid and the expectation is that growth will be even more muted in 2018. Historically, construction activity has been intimately linked with medium-term levels of growth in the wider economy. So, for instance, if growth over a period of three years drops below about 5%, there is a much increased likelihood of a construction recession. We appear to be edging ever closer to that level.
With the decline of commercial activity, notably in London, activity outside infrastructure looks increasingly reliant on investment in private housing.
If private housing falters, the picture facing the industry will inevitably darken. It is reassuring to have more than one string to your bow.
This may be a time for the larger or specialist practices to look again at boosting work overseas, where they have been extremely successful in recent years. That proved a valuable support in times of trouble in the home market.
But before rushing to conclusions or action, it is worth noting a reflection made by those tasked with steering Carillion away from the rocks. In an interim results statement and update on its strategic review last autumn, the newly installed management team reflected on its initial observations of what went wrong.
One eye-catching comment reads: 'Too much data and a lack of meaningful information.'
Whatever the best answer is, it will more likely emerge not from floundering in facts, but from thoughtfulness and clear-sighted analysis.