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Firms will be ill-prepared for upturn

A leading financial forecaster believes the construction industry may suffer a serious shortfall in capacity when the anticipated economic recovery begins in 2011.

Professor Doug McWilliams, chief executive of the Centre for Economics and Business Research, told Construction News that the biggest challenge for the industry “is not on the downside but the upside”.

“The UK for years has spent half as much as the average developed country on construction. We will go into the next decade with a great shortfall of buildings, roads, rail - everywhere we are underinvested. We are beginning to see the assets crumble before our eyes.

“The problem for the industry after 2010 is that they don’t have the capacity to cope with demand, just as the country wants to push up investment as a percentage of GDP.

“The skills won’t be there and the Government should be providing more funding now.”

Professor McWilliams predicted that despite last week’s drastic interest rate cut by the Bank of England, rates would fall again next year.

“We have said they should go to 2 per cent, but it can go lower than that. I wouldn’t rule out zero - there is enough uncertainty there.

“They see that avoiding recession is the prime aim and they will cut interest rates by as much as they need to achieve that.”

Professor McWilliams, who advises a number of construction companies, warned that the effect of the interest rate cut would be relatively minor - the impact is lessened by the fact the Bank of England did not make a bigger cut at the beginning of last month.

“We live in a world where confidence is everything and we have lost some of the psychological benefits by moving late.

“It is a late wake-up to reality and when you move late you normally have to move more than you would have done.

“I have been critical of the monetary policy committee for being so slow to cotton on to what is going on and they have now had to make a sudden adjustment.”

Professor McWilliams added: “It would be foolish to expect a major effect in the short term. You might see a little bit of extra demand in the housing market and allow banks to be a bit more relaxed about -mortgage lending.

“But I don’t think you will see banks changing their lending behaviour to small businesses - their lending decisions are based on the fact that the prospect for some small businesses is not good and that is not changed by a lower interest rate.”

“Everyone’s prospects get lifted by the rising tide and the construction sector’s prospects probably get lifted a little bit more because it is so highly geared to the economy, particularly at the moment.”

Professor McWilliams said the only realistic way of accelerating public sector spending was meeting existing budgets.

He added: “Every year we see a considerable public sector shortfall and what we should look for is them hitting their balance and that in itself will be a huge boost to construction.

“The Government is good at making announcements and less good at delivering them.”