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Construction a drag on GDP? Try the other way around

Tim Moore

The first quarter of 2018 was one to forget for the UK construction sector.

The economic data started badly amid the fallout from Carillion, and ended worse as heavy snowfall caused severe disruption on sites across the country in March.

A steep fall in construction output was the main reason behind the recent slowdown in GDP growth, or so goes the narrative since the figures were released. Construction may have been the chief culprit from a statistical point of view, but the finger of blame should really be pointed at fragile consumer spending in recent months.

Put it simply, a weak UK economy has been holding the construction sector back, not the other way around.

Consumer gloom

Growth opportunities for construction firms appear to have diminished in several key areas, most notably retail and office development. Consumer-facing businesses are struggling against a tide of softer household demand and rising operating costs, which has suppressed investment plans and encouraged greater risk aversion so far in 2018.

Despite widespread doom-and-gloom on the high street, we may soon pass the high watermark for household cutbacks. Softer inflation and rising wages are expected to reduce the squeeze on incomes in the months ahead, alleviating the pressure on consumer demand in the first half of 2018.

All eyes are now on how much of an economic rebound will be achieved in the spring. The early signs are admittedly not that promising, with the IHS Markit / CIPS purchasing managers’ index reporting weak levels of growth across the private sector economy in April.

“The latest upturn in housebuilding was one of the strongest seen over the past two-and-a-half years”

Service sector growth was particularly weak after Easter, with little sign of recovery from its 20-month low seen in March. Manufacturing has been the only broad sector to achieve a healthy upturn this year, helped by improving global economic conditions and a currency tailwind for export sales.

The subdued performance of non-manufacturing companies appears to have persuaded the Bank of England to keep policy unchanged in May, with any hike in interest rates seemingly contingent on stronger economic growth in the second half of 2018.

Order book flagging

Construction companies need fiscal and monetary policy to reflect the toll external factors are taking on their industry.

The IHS Markit / CIPS survey recorded declining order books in three of the past four months, with firms suggesting that entrenched Brexit uncertainty and subdued business confidence has hit tender opportunities. Against this backdrop, commercial building was the weakest-performing category of construction work in April, with resilient demand from industrial clients outweighed by subdued spending elsewhere.

On the infrastructure side, survey respondents continued to report a lack of work to replace completed projects. Looking at the year to date, the PMI showed civil engineering activity at its weakest run since 2013. However, with major energy and transport projects in in the pipeline, construction companies appear relatively sanguine about the longer-term outlook, which boosted overall business expectations to an 11-month high in April.

Looking at growth drivers in the near term, once again it seems that all roads lead to homebuyers. Even taking into account catch-up effects from the cold snap, residential building picked up sharply during April. In fact, the latest upturn in housebuilding was one of the strongest seen over the past two-and-a-half years.

If sustained, renewed residential momentum will inject much-needed confidence into construction – and arguably represents the best hope that the recent malaise will soon be consigned to the past.

Tim Moore is associate director at IHS Markit

Readers' comments (1)

  • "widespread doom-and-gloom on the high street"
    This is not only a result of household cutbacks. Another reason is that the consumer is being treated so badly. Poor service, dreadful parking options and boring high streets are some of the problems but a very large factor is the lack of quality products available. From tumble dryers to kettles, women's clothing to mens suits, the quality products have disappeared from England. My partner, my friends and I are all avoiding the poor quality products currently available and making do with what we have. Most of the clothes we have bought in the last 2 years we have bought overseas where the prices may be higher but the quality and choice is much better.

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