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Growth set to slow over next two years

Research firm Plimsoll claims that of 1,000 house builders it analysed, 352 are in danger of being squeezed out of the market in 2008. By Maren Baldauf

Strong distribution and logistics sector growth and a rebound in UK manufacturing have underpinned demand for industrial premises for the past two years, generating increased investment in warehouses and factories.

However, industrial activity slowed last year and new orders fell, in particular due to a drop in large warehouse projects. Weaker consumer spending and manufacturing activity in the next two years are expected to dampen investor confidence.

UK manufacturers continue to face difficult conditions, with margins expected to stay under pressure from higher input costs. A weaker UK economy is expected to limit sales growth.

Against this, manufacturers report adequate capacity and factory construction is forecast to fall during 2008 and 2009.

Demand for warehouses slowed last year and activity in 2008 is also expected be hit. But demand for warehouse facilities is expected to pick up in 2009, as the distribution sector is likely to continue to consolidate, while the squeeze on retail margins intensifies the need for more efficient distribution. This should support renewed industrial sector growth from 2010.

Growth in office construction has been supported by a strong rise in new orders since 2004. But the flow of new projects has fallen since last summer as investors have become more cautious and the credit squeeze has restricted their access to funds.

More than 13 million sq ft of floor space is under construction in central London and there will be double digit growth during 2008. But sector growth is forecast to slow to three per cent during 2009, before falling over the subsequent three years.

Below trend consumer spending growth over the next two years is casting a shadow over the retail and leisure sector. New orders during the first nine months of 2007 were 12 per cent down on a year earlier and output is forecast to fall back over the next three years as a number of major shopping centre developments are completed.

The near-term prospects for the building of entertainment and leisure facilities is also subdued, with a weaker US economy and dollar set to deter overseas visitors and temporarily hold back investment in hotels.

Maren Baldauf is economist at the Construction Products Association. This is an edited extract from the CPA’s latest forecast. Find out more at www.constructionproducts.org