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Construction forecasting: Uncertainty is the word

Rebecca Larkin

Signs of a slowing economy set the backdrop for the latest forecast at the Construction Products Association and saw construction growth expectations downgraded to 0.7 per cent in 2017, followed by no growth in 2018.

However, this overall figure belies the differing outlooks for each sector of construction.

While a weakening in household spending and business investment has clear implications for the housing and commercial sectors, work on major projects is forecast to drive annual growth rates in infrastructure of at least 6 per cent.

Household consumption growth slowed noticeably in the second quarter of 2017, to 0.2 per cent compared to 0.9 per cent registered a year earlier.

Throughout 2015 and the first half of 2016, consumers were accustomed to near-zero inflation, paired with wage growth averaging 2.4 per cent.

The post-referendum depreciation in the sterling has led to an acceleration in inflation, to a five-year high of 3 per cent in September, but growth in pay has not kept pace.

This fall in real wages is not likely to impact everyday spending; households typically cut discretionary spending first and the decrease in private car registrations over the last six months suggests appetite for large purchases is waning.

Any subsequent slowdown in the general housing market, however, is likely to be countered by demand for new-build housing being supported by the Help to Buy equity loan, now with an additional £10bn government backing.

Economists’ ‘favourite’ word

Any economist’s favourite word these days is ‘uncertainty’, especially with regard to the UK’s future agreements on trade and the movement of labour post-Brexit.

Firms are likely to hold fire on investment decisions until there is further clarity on these issues and the effects of this are most clearly illustrated in offices construction.

New orders in the sub-sector were 19.7 per cent lower in the second half of 2016 compared to a year earlier and as the high volumes of work currently under way reach completion, this reduction of projects in the pipeline will lead to falls in output.

Our forecast envisages this occurring most sharply in 2018, with a 15 per cent decrease in activity.

That leaves infrastructure, forecast to grow 25.4 per cent by 2019. This combines framework spending in rail and water with large projects such as the Thames Tideway Tunnel and HS2, yet delays, cost overruns and site issues during early works on Hinkley Point C highlight that even forecasts for this sector are tinged with uncertainty.

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