Steady as she goes

Words:
Brian Green

Construction weathered the squalls of 2016 to end the year with slight growth. That resilience will be needed when we leave the EU harbour

The construction industry sailed into 2017 1.5% bigger than it started 2016. That at least is the first estimate made by the Office for National Statistics for construction output.

In fact the data will be revised. With recent revisions tending to be upward, there’s a fair chance the official construction figures for 2016 will appear a shade rosier a few months hence.

Either way the actual performance over the year fell well short of most forecasters’ expectations at the year’s start. The typical forecast for 2016 a year ago was around 3%. That would have built on a period of solid growth since the industry ‘double dipped’ into recession in 2012.

But 2016 had more than a fair share of political squalls stirring up economic and business whirlpools, so ending it with a positive score might be regarded as a good result.

Private housing remained the main engine of growth, though as 2016 progressed the sector lost some momentum. That loss was in part balanced by a commercial sector that showed more spirit than for many a year.

  • Chart 1
    Chart 1
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Chart 1 shows that in the grand scheme of things construction-sector growth has been pretty flat over the past couple of years, more so if you discount roughly 0.8% per annum to measure it on a per capita basis.

To some it may seem rather silly to unpick past performance when for most people it’s what happens next that matters. But in business, as in other aspects of life, how you did has a big bearing on how you will do in the future.

It is important and a positive thing that the sector appears not to have slumped, despite flirting with a recession in late summer. Growth will have supported employment and firms’ finances should be sounder as a result. This should mean the industry is better set for the future than it might otherwise have been.

Indeed, the resilience built among construction-related firms over the past few years of growth may well prove critical as the industry, indeed the nation, slips its economic anchor and sails away from its EU harbour into rougher seas.

  • Chart 2
    Chart 2
1

Looking forward, the latest set of forecasts (Chart 2) suggest that the construction sector will be teetering on the edge of recession as the nation’s negotiators look to settle an exit deal with the EU.

As the forecasts recognise, there is huge uncertainty. Brexit may mean Brexit, but what it means for the nation is unclear and what it means for construction is equally hard if not harder to fathom.

The Hewes forecast tends to weight more of the downside risks into its main forecast, so it is no surprise it points to recession. But Experian and the Construction Products Association forecasts both suggest that an industry-wide recession may be narrowly missed.

But for those working outside new private house building and infrastructure that will be little comfort. The chances are that workloads will decline in many sub-sectors of construction. The forecasters are on balance gloomier about the repair and maintenance sectors. This would tend to bear down more on smaller firms and architectural practices.

  • Chart 3
    Chart 3
  • Chart 4
    Chart 4
  • Chart 5
    Chart 5
123

Despite this rather dim view of the prospects for repair, maintenance and improvement, there were modestly positive signs from the latest trade survey by the Federation of Master Builders (Chart 3), which is fairly representative of those who undertake much of the RMI work.

Looking to the forecasts for new work (Chart 4), which will be the main focus of larger practices, both CPA and Experian are marginally more positive. But this does not disguise the risks.

The frequent soundings of construction performance taken by both Markit and the Bank of England (Chart 5), suggest the industry has in the main seen the rate of growth slow markedly, but is still enjoying some growth as it enters 2017.

  • Chart 6
    Chart 6
  • Chart 7
    Chart 7
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The latest quarterly construction market survey undertaken by RICS (Chart 6) provides further evidence that the industry is still growing, albeit at a very gentle rate. The RICS survey is interesting in that it tends to run slightly ahead of the movements in actual construction output, given that many of those polled tend to be working in pre-construction phases of projects. The survey also provided signs of a bounce-back within the industry in confidence about the future. But as the chart clearly shows, confidence tends to run well ahead of reality.

The RIBA’s Future Trends survey (Chart 7) shows a similar rise in optimism since the shock to the system that was the EU referendum result. But, as has been mentioned before, the expectations around expanding staffing levels remain muted.

So, as the good ship construction steers into uncharted waters, despite much trepidation, the instruction from the captain to the helmsman seems to be ‘steady as she goes’. 


 

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