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New order numbers offer few bright spots as recession bites

The best indication of future work in construction is new orders, the latest of which were published on Friday by the Office for National Statistics. The signs aren’t good.

Construction could do with some optimistic news, as output in the final quarter of last year was down and output in the first quarter of 2012 also declined.

Two consecutive quarters of contraction means the industry is back in recession. Yet, given the government’s spending cuts, construction new orders were always unlikely to provide a boost.

Overall, new orders in Q1 were down 3.6 per cent compared with the same quarter one year ago and that follows on from orders in 2011, which were 14 per cent lower than a year earlier.

The overall figure for Q1 can be a bit misleading, as orders were falling sharply in some sectors and rising significantly in others. Also, because orders in different sectors have different lead times, actual work on the ground takes place at different times.

For instance, new orders in the housing and industrial sectors tend to feed through into work on the ground quickly, generally within six months. However, education, health and commercial projects can take 12 months before main work starts.

When it comes to infrastructure, the lead time varies considerably; it can be years on larger projects.

It is important to keep in mind that, because orders are signed in one quarter but the work from the contract goes on for months and sometimes years, new orders tend to be much more volatile than output figures. If orders were to fall 50 per cent, don’t expect output to do the same.

Public housing orders in Q1 were 41 per cent lower than a year ago. Of even greater concern, private housing orders in Q1 were 14 per cent lower than a year ago.

This is strange given the positive results we’ve seen from the major housebuilders and their optimism for the next 12 months, but it suggests that SME housebuilders have been the ones suffering.

Orders in public non-housing, which covers education and health, fell 42 per cent in Q1 compared with a year ago but, again, given public sector cuts that is no surprise.

But it is not all bad news: orders in infrastructure were up 60 per cent in Q1, boosted by large water frameworks that will provide work over the next couple of years.

Furthermore, orders in private commercial work, the largest construction sector, actually rose in Q1 by 8.4 per cent compared with the same quarter a year ago, with the growth driven by rises in orders for offices and retail.

Given the economy and business uncertainty at the moment, that is certainly a surprise. Q1 saw two offices projects put on hold in central London alone and both Tesco and M&S reined in expansion and refurbishment programmes recently.

As a result, I’d take the Q1 rise in commercial orders with a degree of scepticism until we see work on the ground, as these orders could easily go on hold.

Despite these bright spots, for an industry already in recession, the orders figures are a concern.

Noble Francis is economics director at the Construction Products Association

 

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