Upgrades to output forecasts across the board are encouraging but the end of Help to Buy, infrastructure uncertainty and slack wage growth all pose risks.
The latest construction industry forecasts for output growth are more positive over the next two years than those published as little as three months ago, particularly for the previously downbeat commercial sector.
Risks remain, however, and while growth is largely expected to continue, it is accepted that this will be at a slower rate post-election than we will see over the next two years.
Our analysis of the industry output forecasts from the Construction Products Association, Experian, Hewes & Associates and Leading Edge shows an average predicted growth of 4.3 per cent in both 2014 and 2015, before a slowing to 2.9 per cent growth in 2016.
The forecasters all expect output to have grown in 2013 – a year earlier than anticipated – attributing the revisions to the Office for National Statistics output figures (published in December 2013) and an acceleration in positivity across the economy towards the latter part of last year as drivers.
“A lot of the growth we have at the moment is through Help to Buy and consumer spending, which has a more ‘worn off’ effect about it”
Martin Hewes, Hewes & Associates
Opinion is divided over how long growth momentum will be maintained. The Construction Products Association and Experian are predicting stronger growth next year than in 2014, while Hewes & Associates and Leading Edge are expecting the largest uplift in output (within the forecast period) to occur this year.
Hewes & Associates predicts only marginal growth in output before a slight decline in 2016. Founder Martin Hewes says: “There are a few potential risks out there.
“A lot of the growth we have at the moment is through Help to Buy and consumer spending, which has a more ‘worn off’ effect about it.”
New work is fuelling growth forecasts, with an average rise of more than 5 per cent in both 2014 and 2015.
More optimism surrounds the commercial sector than previously – at least in the short term. The Construction Products Association says the sector will join housing and infrastructure as major growth drivers over the forecast period to 2017.
Experian head of construction futures James Hastings says: “There has been a tightening of availability of Grade A space [in London] over the past two to three years, so we are beginning to see the return of speculative developments, which is not huge but going in the right direction.”
Leading Edge managing director Mel Budd says: “We expect more growth in offices, particularly in London. In terms of new orders, offices is looking quite strongpositive compared with 12 months ago, and with stronger economic growth, schemes are starting to be dusted off as demand for premium space increases.”
Experian expects the commercial sector to grow by 9.2 per cent between 2014 and 2016, with Leading Edge forecasting 10.8 per cent growth during that period. Hewes & Associates is more cautious, with the sector held back by a 2.9 per cent decline in 2016.
“We are beginning to see the return of speculative [commercial] developments, which is not huge but going in the right direction”
James Hastings, Experian
The continuing push towards online retail spending is aiding the forecast growth for the industrial sector.
A combination of being the industry’s smallest sector by value, and the fact that growth is coming from a low base after significant declines, means a more muted forecast than for other sectors.
Mr Hewes, who expects the sector to grow by 12.1 per cent between 2014 and 2016, adds: “Warehouses by 2016 will be worth about £1.3bn to £1.4bn mainly due to food retailers needing to build more warehouses to cope with a growing demand in online retail.
“This is more of a structural change than an economic stimulus, and factories [output] by 2016 will be levelling off.”
The forecasts expect infrastructure output volume to peak in 2016. The Construction Products Association and Leading Edge publish forecasts to 2017, and the former expects another peak then.
This does not translate into an increasing rate of annual growth in output, with a slowing down in the growth rate expected in 2016 if not a year earlier.
The Construction Products Association forecasts infrastructure output to grow by 31 per cent between 2014 and 2017 but economics director Noble Francis says: “Rail growth rates will fade.
“Theoretically, Network Rail has more to spend but the public subsidy is falling, so where will the money come from? In addition, by 2017 work from Thameslink and Crossrail will slow.”
Experian, whose forecast of 10 per cent growth in infrastructure this year is the highest for 2014 across all four forecasters, is optimistic that work on Hinkley Point will begin in 2014.
“We desperately need new energy investment – and not just the decommissioning which is currently driving growth”
Noble Francis, Construction Products Association
“Crossrail is peaking but other work in rail such as the London Bridge project will offer a full year of output in 2014,” Mr Hastings says.
“Electrification on the Great Western Line will also begin this year, along with work in Scotland – there is still a build-up. We are expecting work on Hinkley Point to start this year.”
Dr Francis says: “We desperately need new energy investment – and not just the decommissioning that is currently driving growth – so we are expecting some of Hinkley Point works to occur in 2015 and the vast majority in 2016.”
Mr Budd says Leading Edge hopes for a 2015 start on site, but “we have taken the estimate that it will be later than that”, while Mr Hewes has not assumed a start at Hinkley within the forecast period to 2016.
“There are a lot of politics around it – we have decided to exclude it, as there is still a lot of uncertainty,” he says.
A common concern is the uncertainty over sustained growth in the private housing sector post-election, particularly around Help to Buy.
The Construction Products Association is anticipating a marked drop in growth of housing starts, with a 10 per cent increase next year slowing to 2 per cent in each of 2016 and 2017.
“There is going to be stronger [private housing] growth this year and then it will start to tail back”
Mel Budd, Leading Edge
Dr Francis says: “During the last forecasts we had to make assumptions post-2015 – that the mortgage market would not be self-sustained and that Help To Buy or a similar policy would continue. Now indicators [for continued funding] are more pessimistic.”
Mr Hastings says: “There is uncertainty around when Help to Buy runs out and uncertainty post-election. Help To Buy is primarily there for first-time buyers and there could be affordability issues for those who will still find saving for deposits difficult.”
Mr Budd also highlights the sector’s slowdown later in Leading Edge’s forecast period. “Help to Buy is a main driver of recent growth but we are still below the 2007 peak [for housebuilding]. There is going to be stronger growth this year and then it will start to tail back as Help to Buy finishes.
Alongside concerns around the plight of the eurozone and global economies, such as China, turning into negative risk drivers, there is agreement that closer to home real wages must pick up for economic and construction output growth to keep pace, along with, perhaps more critically, an upturn in business investment.
Mr Hewes points to the “disparity between earnings and inflation – how long will that last?”
“Business investment is crucial if we’re not intending to go through a consumer debt-driven growth period – but there is growth in business investment forecasts,” Mr Hastings says.