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Is construction ready for Brexit uncertainty?

The referendum result and its expected consequences raise renewed questions over data accuracy and just how prepared a still-recovering industry is for another potential downturn.

A seismic change in the political landscape is occurring in Britain, following the historic EU referendum last week.

Measuring construction activity will be more important than ever if policy-makers are to get an accurate picture of the industry’s contribution to growth.

Last week’s vote to leave the EU has sparked stock market turmoil and a slumping pound, with the prime minister to leave office within months and government ministers attempting to steady the ship.

For the construction industry, which had begun to feel increasingly confident of its prospects during the past two years, the vote may spark another period of uncertainty – or, at the worst, recession.

Construction slumped significantly after 2008’s global financial crash; only recently has activity edged towards pre-recession levels, with contractors reporting improving margins and order books.

As the industry faces the prospect of another slowdown, what state is it in today compared with the last time it entered a financial crisis?

Most importantly, with major changes to the political landscape on the horizon, how can contractors be sure policy-makers have a clear view of how the construction industry is performing?

Revisions shake confidence

Construction activity has always been difficult to measure accurately, and whether new orders and output data from the Office for National Statistics give the clearest picture of the industry’s performance has become an increasingly keen debate among industry economists over the past 12 months.

“We’re still seeing a lot of work coming through traditional housing associations, although less work from national frameworks”

Contractor source

Revisions – particularly the billions of extra output added to infrastructure in 2015 – have raised questions about whether the industry is being recognised for its true contribution to GDP, with critics calling for statistics to be improved rather than scrapped altogether.

These revisions and changes to methodology make measuring the industry’s progress over the long term difficult, and they are put into sharper focus following last week’s vote.

New orders data is one such area of contention, with a question mark over whether it gives a clear reflection of what firms are seeing on the ground and how well the industry is performing.

Output is ordinarily the measure for what’s actually being built, in which sectors and when; new orders data tends to lag behind output data by as much as two years.

For example, the pre-recession peak for output was Q1 2008, while new orders peaked two years earlier in Q2 2006. Accordingly, new orders data can be seen as a good yardstick for which sectors are growing and the level to which certain sectors have recovered.

ONS data suggests only one sector, infrastructure, was larger by volume of new orders in 2015 than it was in 2006.

Infrastructure orders were 120.5 per cent higher in 2015 than their pre-recession peak in 2006, reaffirming the sector’s status as one of the industry’s most important hotspots. Roads, rail, utilities and energy schemes will all boost growth over the next three years.

All other sectors covered by the new orders data are below their pre-recession peak. Public housing was 59.2 per cent lower in 2015 than 2006, private commercial was down 52.3 per cent, private industrial trailed by 35.5 per cent and private housing was down 19.1 per cent.

Data discrepancies

However, output data tells a different story: infrastructure work was 63.5 per cent higher in Q1 2016 than Q1 2008, while private housing work was up 17.3 per cent.

Private commercial and private industrial meanwhile were 31.8 per cent and 35.3 per cent lower in Q1 2016 than Q1 2008 respectively, while public housing was up 52.1 per cent over the same period.

The way the stats are collected means new orders data is not “expected to necessarily mirror” output and projects starting on site, says Allan Wilen, economics director at construction intelligence provider Glenigan.

Different value deflators that the ONS has attempted to put in place to improve the accuracy of the data make it “challenging to actually measure the value of work” in the industry, he adds.

However, Mr Wilen points out that infrastructure work is one area where project starts, output and new orders data are marrying up.

The government’s commitment and stimulus packages for infrastructure work have been the crucial factor behind the sector’s growth, meaning that in this case, a number of factors have aligned to boost the sector.

Evidence suggests otherwise

Yet even here, questions have been raised about the data. Earlier this year, the ONS admitted new orders data could be including the full cost of major projects such as wind farms, rather than just the construction cost, which artificially inflates the total value.

This means that what contractors are actually seeing does not match what the data is telling us. Realistically, other sectors could be experiencing the same phenomenon.

“It’s challenging to actually measure the value of work”

Allan Wilen, Glenigan

Public housing new orders were nearly 60 per cent lower in 2015 than in 2006, suggesting there has been a considerable slowdown in new work coming in since the recession; however, a source at a major social housing contractor says this is not the case.

“We’re still seeing a lot of work coming through traditional housing associations, although less work from national frameworks,”  the contractor says.

“But a lot of our clients have their own frameworks and piggy-back on to larger, national frameworks, so we’re still seeing work through those – and also via traditional smaller frameworks and two-stage tenders in the sector.”

There is a similar tale in the commercial sector: new orders data suggests contractors are now seeing half the amount of commercial work they were seeing before the recession, with new orders dropping by 52.3 per cent between 2006 and 2015.

Output is still below the pre-recession peak in the sector, but an ever-increasing lack of supply means pressure is building to get projects under way in the sector.

Crane surveys from Deloitte covering Manchester, Leeds, London and Birmingham all point to heightened activity. London reported its highest level of office starts for 20 years in the six months to March 2016, with commercial activity 28 per cent higher than it was in the previous six months.

Meanwhile, starts in Leeds overtook their pre-recession peak, after office construction doubled in 2015, with more than 865,000 sq ft under construction, up from 425,000 sq ft in 2014. This marked the highest level of office construction on record, above the pre-recession peak of just under 700,000 sq ft in 2007.

All these different datasets and surveys make it difficult for industry activity to be measured accurately – which in turn causes headaches not just for contractors looking to expand, but also for policy-makers, who have no clear picture of the degree to which the industry has recovered or the next steps to take.

With a post-EU climate on the horizon, getting an accurate handle on the industry’s performance takes on added importance.

The industry will need to be make a concerted effort to highlight its position if it is to be heard amid the looming upheaval.

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