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Early-1990s hint at worse to come for construction

In the previous downturn of the early 1990s construction output fell by 15 per cent from peak to trough. By Simon Rubinsohn

A similar contraction does not look out of the question this time – the complete collapse in house building leaves open the possibility that it could be greater.

Job losses are already being announced in construction and on any reasonable set of economic assumptions this process has further to run.

The prospect of large scale job losses this time around is also being reflected in the responses to the RICS Construction Survey.

Employment expectations have fallen sharply into negative territory over the past quarter and this is also evident in an easing in skill shortages.

Results for specific trades are little better with the net balance of respondents highlighting shortages of carpenters, electricians and plumbers all at historic lows.

The picture for bricklayers and plasterers is only marginally better. Against this backdrop, construction companies may derive some relief from a further moderation in pay pressures.

Official data shows wage growth has already eased in the sector to less than 3 per cent, a figure below that being seen elsewhere in the economy.

The picture regarding other input costs is a little more mixed. Although cement prices globally are under some pressure, domestic producers have recently announced increases.

On the other hand, steel prices have begun to slip. But more important could be the loss of skills to the construction industry as employment is cut back.

This may mean that when the recovery does eventually come around the industry will be ill-equipped to respond to the needs of the wider economy. In an environment in which output is being squeezed, demand for materials will fall.

Brick deliveries have fallen by around one fifth over the past year. Despite this, brick manufacturers have announced price rises of 12 to 14 per cent to be introduced in January – approximately double last year's rise.

The explanation for this is the big jump in production costs, notably energy and transport.

These factors were major drivers earlier in the year, but these trends are now being reversed.

Simon Rubinsohn is chief economist at RICS