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Output falls but growth in jobs bucks the trend

ECOCOMY - Construction faces a tricky period with fi gures pointing to a flat 12 months ahead, but employment in the industry is on the rise. How can this be, asks Brian Green?

FEW THINGS are better than a teasing paradox to encourage a closer examination of the facts.

Earlier this month after the official output figures showed a 1.3 per cent fall in the first three quarters of this year Allan Wilen, economics director at the Construction Products Association, raised the spectre that construction might be facing a recession.

Set that against employment figures that show contractors took on 21,000 more workers over the three months of the summer and the best part of 250,000 more over the past two years and we have an odd circle in need of squar ing.

Why if construction output has reached a plateau, or is falling, does the industry need a bigger workforce?

This is particularly odd given that historically construction on average has had to grow by between 2 and 3 per cent to maintain a given workforce.

One normally associates recession with job losses, so if contractors are struggling to find workers they may be banishing thoughts of recession.

The key to the conundrum might lie in the buoyancy of individual sectors.

The worst performing sector, new infrastructure work, has slipped sharply over the past nine months. But infrastructure on average employs fewer people for a given level of output than building work.

But despite a slide in private housing RM&I over the past 18 months, repair and main-tenance work has continued to grow. This generally employs more people per pound spent than new build.

The net effect is that while construction may be slipping, the demand for labour is not.

Given the comments of the CPA this begs the question: are we heading for recession?

It is hard to find many areas of significant growth. The most promising appears to be the education sector, where both output and orders figures look spectacular.

Spending on health, having been a driver of growth, appears to be waning.

A look at previous statistics shows how both health and education have been taken from quiet backwaters of construction to centre stage.

In 1997, in cash terms, output in health (public and private) was £1,129 million, while education output amounted to £1,390 million. The output over the past four quarters for health now stands at £3,252 million and education at £6,463 million.

As a proportion of construction, health and education now represent almost 17 per cent of all new build work, this compares with 9 per cent of new build work in 1997.

While the order figures suggest that there is more growth to come in the education sector, at some time in the relatively near future there will be an end to this growth and a likely slide back to histor ic levels.

Looking at public sector investment in construction, there are signs that it may be nudging its peak level.

While public RM&I output has continued to grow, there have been slides in infrastructure spending. Social sector new housing output is down on a year ago, as is public noninfrastructure output.

With the Treasury under pressure, the view towards capital expenditure on construction is likely to be dimmer rather than bright. The growth in public sector repair and maintenance looks threatened in the medium term.

That said, the prospects for infrastructure appear to be brightening and there are signs that the slide in output may be set for a reversal.

Orders for the 12 months to September are up 37 per cent on the same period a year ago, driven both by public and private investment.

On the private sector side, while there is plenty of talk of urban regeneration, construction output is not built on hopes: big regeneration schemes need the buy-in of many funders to get off the ground and any wavering in the economy may spook nervous investors.

The private housing sector continues to see growth in output, despite concerns over house prices.

But this may be set to slow, particularly if consolidation among house builders creates a dip in overall numbers built.

The commercial sector is performing well but much of this is down to PFI, particularly health and education.

While the order figures look positive for offices and shops, the generally weaker economy suggests a fairly muted future.

Private sector housing repair and maintenance work is suffering as consumer spending is under pressure and as housing transactions have fallen back.

Prospects here remain limited and further falls are more likely than a return to growth.

What appears likely is that construction output will remain flat over the coming year but there may be a shift in the balance of work in the sectors.

This should benefit the infrastructure sector, with repair and maintenance work sliding.

Perhaps in a year or two we might be considering the paradox of an industry shedding workers at a time of relatively stable construction output.