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No firm line on boom or bust as the runes continue to settle

ECONOMY

Mixed messages mean the future of construction is difficult to divine at present. Brian Green seeks enlightenment in the confusion

WITH less than a week gone, July 2005 had already established itself as a 'turning point' for the nation, the significance of which is hard to judge at this close distance.The significance to construction is still harder to fathom.

On the first Wednesday, when the Olympic Committee announced that the 2012 games were to be staged in London, there was a surge of euphoria that swept City sentiment towards building company stocks in a fit of what can only be described as unjustified exuberance.The idea that a project of roughly the scale of the Channel Tunnel Rail Link - in budget and length of time - would have radical implications for construction firms would be to misread the industry seriously.

Admittedly, since there is much more in the way of building works for the Olympics than for CTRL, the numbers employed will be greater for each pound spent.That will be good for construction workers.But will it for firms? One may wish to discuss the financial benefits of taking on a high-profile sports contract with Wembley stadium contractor Multiplex.

Not that the staging of the Olympics will fail to provide some boost for construction, particularly in London. In value terms over the construction period it amounts to about half of one per cent of construction output, which may be the difference between recession and stability, but certainly not the foundation of a building boom.

Almost certainly there will be a multiplier effect, with projects in and around Stratford coming forward on the back of the regenerative effect of the Olympic bid.

This will be useful. But in the end it may prove that the biggest bonus to construction and the economy at large is the emotional lift that hosting a games can provide and this outweighs the £3 billion to £5 billion capital investment that is eventually made.

Ironically, disturbing as it may be to contemplate, the events that took place in central London the day after the Olympic bid celebrations are likely to have a more profound impact on construction generally and on the construction of the Olympic Games infrastructure in particular.

Security inevitably will become more prominent a consideration in high-profile projects and this will put stress on design, project management and vetting of the labour force. All three factors are likely either to slow projects or raise costs.

Meanwhile, in the background, as these events were being covered on the front pages and many middle pages of the press, there were a string of other events and statistical announcements the effects of which will have a significant bearing on the future path of construction activity.

Put together in one basket they add up to disquieting news.The Bank of England held the base rate at 4.75 per cent, despite much speculation that it might fall and relieve one burden on an already tight industry and the increasingly indebted consumer.

Figures released also showed that industry was facing double-digit inflation in the cost of raw materials and fuel, while it was able to pass on just a fraction of this to buyers.

The rise in the new Consumer Price Index measure of inflation to 2 per cent - its highest level since it became the new main measure - was interestingly not seen as down to rising oil prices, but rising seasonal food prices.How this and the pressure from rising commodity prices will play out with the Bank's Monetary Policy Committee in the deliberations next month is hard to call.

One factor that may come into the committee's assessments will be that the number of people claiming unemployment benefits increased last month by 8,800 to 864,900.This was the fifth consecutive monthly rise and the longest sequence of rises since 1992. UK jobs increasingly appear to be resting on public spending.

Consumer spending is stalling and the rapid reduction in levels of cash being withdrawn as mortgage equity release will contribute to the slowdown.There is likely to be a further squeeze as consumers feel the burden of debt ever more acutely, especially homeowners, who are being denied the 'wealth effect' from rising house prices.

This changing consumer landscape is already affecting the construction industry, with the small local builders feeling the pinch.The FMB's latest survey showed a fall in private housing RMI work in the first quarter of this year compared with significant growth throughout last year.But firms remain optimistic about this sector and expansion is predicted.

Overall the RMI sector has weakened considerably over the past few quarters since peaking in the first quarter of 2004.

This does suggest that discretionary spending on construction is being held back.How this reticence to spend will play out when it comes to capital spending will be one to watch.

The drag on the RMI sector was certainly sufficient to hold back construction output overall. In the first quarter the rolling 12-month total fell.

Whether this is a pause for breath or the start of decline, time will tell.

With what appears to be a weakening private sector, looking to the public sector for salvation may be a vain hope.There is a general consensus that the public purse is under pressure and, with an easing in spending already on the cards, the question remains how well will the sector deliver on its promises.

For all these reasons, it should be understandable why forecasters are trimming their predictions for construction.But so far few are suggesting recession is on the way.

But a question remains as to whether construction will be able to ride the economic squalls and storms as it has for the past 10 years.

Experts' view

Irum Malik, economic & policy director, ACE

Times are looking good for UK consultancy and engineering firms. Evidence suggests that the majority of construction sectors will experience growth in consultancy workloads over the coming two years. And this was before London won the Olympic bid.With up to £10 billion likely to be spent on the Olympic sports venues, the village and improvements to infrastructure, prospects are getting brighter by the day. Overall, a third of consultants believe UK workloads in 2005 will be more than 5 per cent up on 2004, with this trend continuing into 2006 and 2007.

International expansion is also on the cards with workloads expected to rise, particularly in the Middle East, North America, Australasia and Asia Pacific.With utilisation rates coming close to 80 per cent, the questions are less about workload than resources. This puts recruiting and retaining the best and brightest employees at the top of ACE's agenda.

Jerry McLaughlin, Forecasters have been scaling back their construction predictions for 2005 and 2006 as the prospects for economic growth and government borrowing worsen. The financial pages have dire stories about high street spending and the public sector deficit and the CBI is calling for an interest rate cut. Maybe some perspective is called for. Construction output exceeded £100 billion last year for the first time and the economy is still growing - albeit more slowly.

Remember the 1980s and 1990s, when men were men and recessions were recessions? We're a long way from those days, but on the other side of the coin we're not heading for a future boom either. The Olympics will be big in London, but won't move the national construction market much. Personal debt and pension concerns will stop most consumers re-emerging as spendthrifts, while public sector debt will curb the growth of public investment when politically convenient. No bust, no boom.