Forecasters say there’s nothing too scary about 2017 – unless it’s the Ghost of Brexit Yet to Come
Christmas: a time for festive cheer and excessive shopping, but also a time when prognosticators appear like phantoms with predictions for the coming year.
With all its unexpected twists and turns, 2016 was an extraordinary year. It was chastening for forecasters but their work will go on, unshaken by events. The more uncertain things are, the more hunger there’ll be for guidance, whether it proves good, bad or indifferent.
To succeed, we all need a view, some view, of the future – unless we are extraordinarily lucky, rely on serendipity and things fall neatly into place by chance.
So where is the construction sector heading right now, where might we reasonably expect it to go in the year ahead and what does this all mean for architects?
Looking to government policy prescriptions tells us little. Policy A or policy B may improve or impede the path of construction, but over time there is one major factor that determines the health of the industry: the economy. If the economy sneezes construction gets influenza. If the economy races, construction booms.
As things stand, the wider economy continues to chug along reasonably nicely. It has been growing roughly on trend according to the latest economic review by the Office for National Statistics (Chart 1). This steady progress is gradually dispelling any lingering fears of a sudden and dramatic post-referendum recession.
The consensus among economic forecasters, as presented in the Treasury’s November compilation of independent forecasts, is for 2% growth in the economy in 2016, with CPI inflation at about 1.3% by the end of the year.
In line with this reasonably robust economic performance, the latest construction data provides equally easy reading and a far more upbeat narrative than a month ago, thanks to £1 billion more added to the tally in revisions over the past year or so.
True, the industry is estimated to have dipped a little in the third quarter of 2016, but upward revisions made by the ONS produced a higher estimate for the second quarter than published a month ago. This in effect washed away what was technically a recession in the figures for the industry. On past performance it would not be unreasonable to assume an upward revision to the third quarter figure will follow.
Chart 2 shows a broadly stable level of work overall with new work still growing, while repair and maintenance work is flagging slightly. Importantly, industry activity in October was up on a year earlier and there is little in the output data to suggest construction is in a hurry to decline.
In Chart 3 we see that the Markit/CIPS survey and the Bank of England Agents’ survey suggest there is still growth within construction, but at a slower pace.
Chart 4 shows how Federation of Master Builders members are faring. The answer seems to be quite nicely. Indeed the FMB suggests that the problems local builders face are less related to demand for work than supply of skilled labour. So were there significantly more work about they might struggle to do it.
But work in progress is just part of the story. Looking at the flow of work coming through is important in the long run. Here we see more evidence that the industry isn’t heading towards a cliff edge. There was a drop in orders for new work in the third quarter of 2016 compared with the second quarter, but put in context (Chart 5) we can see that broadly the work being won by contractors is on a moderate upward slope.
Infrastructure work is not represented on the chart, but it is clear that three key sectors for architects, commercial, housing and public building, are broadly stable if not in the first two cases increasing.
As an aside, an interesting question the chart poses is when and if work in the commercial sector will return to the heights seen before the recession.
The main point is that across Britain as a whole there seems to be a reasonably steady flow of new work. However it does matter where the work is as well as how much there is.
Looking at the spread of work regionally coming through as new orders, we see a very scattered picture. Chart 6 compares the value of building work (again ignoring infrastructure orders) won over the four quarters to 2016 Q3 with the work won over the previous four quarters. It also compares, by way of reference to a longer trend, the value of work over the past four quarters with that won on average in the previous three years. The bubble size gives an indication of the size of the market.
Over the four quarters to 2016 Q3, most regions saw an increase in the value of work let; of course some of that will be inflation. But some regions appear to have been doing much better than others. Intriguingly, Wales comes out as a winner in this comparison. London is, not surprisingly, a very solid performer, while the northern English regions seem to have struggled to keep the level of orders up compared with previous years.
In fairness the picture in the northern regions of England looks worse in this comparison than it might on the ground. There was a boost in orders won around 2014. This makes more recent orders appear more modest than they might otherwise. However, in the light of the rhetoric surrounding the Northern Powerhouse vision, the slowing of orders is a disappointment.
The chart certainly illustrates the regional unevenness with which work is let and it suggests that the south may well be better set for the coming years than the north – though much depends on how the orders flow through to completion.
Taking a scurry through the latest construction data does provide reassurance and reasons not to panic over work in the year ahead.
What the data do not provide is scope for complacency or reasons to believe that there is no price to pay for Brexit. Construction growth is far from strong. And if we look at the expectations for growth in the economy next year we see some rather darker clouds ahead.
The consensus forecast for GDP growth next year is 1.1% and the forecast for CPI inflation is 2.7%, although there are many who are more pessimistic on inflation. How and when the drop in the value of the pound will feed through into higher prices is uncertain. So is how much upside effect the UK economy might receive by selling more abroad. The one thing that is clear is that the shape of the economy will flex as it adjusts to the lower exchange value of sterling.
The two forecasts on growth and prices point to a testing time for the UK economy next year. Consumer spending has been the biggest driver of economic growth over recent years, helped in part by low inflation supporting real earnings growth. As high prices feed in, the resilience of consumers will be stretched.
It is very possible that we might start to see signs of turbulence ahead for construction as the economy is tested.
When we look at the expectations among architects for workload and employment we do see a fairly positive view of future work, indeed the most positive since the referendum. But a tentative mood remains, as is clear in a very much more cautious view on future staffing.
This seems a reasonable assessment for architectural practices to make as the Ghost of Brexit Yet to Come continues to haunt us.