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Why insolvencies and output can both be rising

Andrew Rennison

And people think retailers have it bad.

The high street may be taking more headlines – M&S being the latest just this week – yet some stats suggest construction’s difficulties are growing even faster than retail’s. 

Data reported by CN on Wednesday shows that construction insolvencies rose 16.5 per cent to 677 in Q3 compared with the same quarter of 2017.

The same report from business analyst Dun & Bradstreet found that retail failures rose 13.1 per cent to 396 over the same period.

I’m sure I wasn’t alone in rolling my eyes at this revelation – another frustrating reminder of construction’s unjustifiably low public and media profile.

But what really stood out about this latest insolvency data was how much it jarred with a number of recent figures.

Nestled underneath D&B’s gloomy failures graph was the curious admission that “employment levels were rising and new order inflow was the strongest since December 2016”.

The analyst cited the Markit / CIPS PMI that measures construction activity, which rose to 53.2 in October – comfortably above the 50.0 mark that indicates no change.

The government’s official stats have been similarly positive of late, with the Office for National Statistics reporting construction output up 2.9 per cent in August – the third period of growth on the bounce.

While the various performance indicators, surveys and forecasts are not universally upbeat, it’s still a far cry from what you might expect for an industry whose insolvencies have doubled in two years.

So how can this be the case?

For a start, let’s get some perspective. Data on the exact number of construction firms in operation varies depending on how you define the sector, but Creditsafe reckons there were 419,410 as of Q3.

On this crude basis then, combining that number with D&B’s figure would mean 0.16 per cent of industry firms went under during the third quarter.

This is not an attempt to trivialise – every company that fails and job that’s lost is significant. 

But it does suggest the influence of total insolvencies on combined output is unlikely to be substantial in this case.

Of course, the liquidation of a Carillion will have a somewhat different impact than of a one-man band, yet they’re both counted as one insolvency.

But even with the biggest failures, there is also typically a lag before output feels the consequences, as the domino effect on suppliers, creditors and their related projects can take many months to filter through. 

Amid the mixed messages over construction’s health, Brexit negotiations rumble on, with staunch Leavers seizing on any positive economic data and Remainers doing the reverse.

This approach is risky. What the insolvency-output paradox tells us is: beware of setting too much store in one industry metric alone.

Improved output can mask growing insolvencies, just as growing insolvencies do not mean output is shrivelling up.

As is often the case, construction firms need to take a nuanced view of their medium-term prospects – and prepare for more than one scenario.

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