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Output heads south as the wait for recovery goes on

After just three years of fearing the onset of a double-dip recession, the reality materialised last week. Figures from the Office for National Statistics showed the UK re-entered recession for the first time since the end of 2008.

The figures showed the UK economy contracted by 0.2 per cent in the first three months of 2012 following a 0.3 per cent fall in activity in the closing
quarter of 2011.

The ONS said the most recent fall in the UK economy was driven by a 3 per cent drop in construction industry activity plus a 0.4 per cent fall in the production industries.

First-quarter fall

Few construction economists were surprised that work in the sector fell in the first three months of 2012. A 12.9 per cent reduction in January’s output meant figures for the quarter were likely to be poor despite a slight revival of 6.1 per cent in February.

Click on graph to enlarge

GDP and Construction Output Q1 11 to Q1 12

“To say it is a surprise would be wrong,” says Construction Products Association senior economist Kelly Forrest. Output estimates for March would have to be an implausible 40 per cent higher than February to get growth for the quarter, according to the ONS’s analysis.

Signs of a fall in work were already visible in 2011’s new orders figures. They fell steeply between the first and second quarters of last year and again between quarters three and four.

Click on graph to enlarge

New Construction Order Q1 11 to Q1 12

The time taken for new orders to become work on site varies between sectors; it could take three to six months for housing and industrial projects but
12-18 months in the commercial sector.

In infrastructure, time taken from order to site depends on the size of the project - but the falls were bound to be felt at the start of 2012.

The two key factors behind the construction recession are a long-heralded decline in the public sector and a fall in office building. Additionally, trouble
in the eurozone has meant that office projects have been put back on hold.

These GDP figures are not the last word on output, however. The ONS will publish the finalised March figures on 24 May.

Construction output figures for the final quarter of 2011 have been revised up so the same could happen for the first quarter of 2012, although the trajectory for the year is downwards, says Simon Rawlinson, partner at consultancy EC Harris.

But figures are usually revised by only 1-2 per cent, which would not be enough to take construction into growth for the quarter.

Revisions and sceptics

Previous revisions have led to some scepticism in the industry about the ONS figures.

“I am not sure we quite believe the figures,” says UK Contractors Group director Stephen Ratcliffe.

“Last year the figures over-recorded construction activity and suggested things were better than we felt on the ground; now probably the opposite is true. I am not saying everything is rosy, but I think sentiment among UKCG members has improved a bit.”

That said, he believes the falls in output over the past six months, balanced against rises earlier last year, leave output roughly flat, which reflects contractors’ experiences.

Figures for the final and first quarters of each year come with another health warning. The data comes from ONS surveys that ask contractors what work they have done in the month.

It is not easy to identify exactly what has been done in the month so contractors tend to report work they have invoiced instead.

“Usually this doesn’t matter too much, but it does mean that the disruption to work caused by the Christmas closedown could be reflected in January and February’s figures rather than December’s,” explains Ms Forrest.

The ONS applies seasonal adjustments to December and January’s figures, but if contractors report work in the wrong month then the statisticians could be adjusting the wrong figures.

Recovery improbable

So could the wider economy come out of recession if the construction figures are revised upwards? “Revision to construction alone is unlikely to reverse the direction,” says Ms Forrest. But small rises across several sectors might take the wider UK economy into growth, she adds.

The difference between growth and recession in the wider economy is “infinitesimally small”, points out Mr Rawlinson, so it would not take much to turn a technical recession into very sluggish growth.

Even if the wider economy ends up narrowly avoiding a recession, construction has more tough times ahead. New orders fell 14 per cent in 2011, including poor figures for the final quarter, which points to weak output in Q2 and Q3 of this year, says Mr Rawlinson.

“The idea that we will get an economic rebound in output is a bit optimistic,” he adds. He expects the new orders data for the first quarter of this year to be “pretty grim” when it is published in June, owing to office schemes being put on hold and the continued decline in public sector work.

The CPA has forecast a 3 per cent contraction in output in the industry this year, although it says the second half of the year will be better than the first.

Road closures for the Olympics will affect construction work in some areas of London while the extra bank holiday in June will also have an impact on output, says Ms Forrest.

Looking further ahead, the CPA says output will be flat in 2013, while 2014 and 2015 will bring increases of 3.4 per cent and 4.8 per cent respectively.

Bright spots include private housing and infrastructure, which will see continuous growth over the period, according to the analysis.

But commercial output will not expand until 2014 and public sector new build will continue to decline until 2015, when social housing may pick up.

How could the government help construction?

  • Reveal how it will get more institutional investment into public projects – Construction Products Association and UK Contractors Group
  • Clarify future of PFI – UKCG
  • Encourage local authorities and economic partnerships to spend on infrastructure – UKCG
  • Divert existing spending to capital projects but without increasing public spending overall – CPA
  • Reduce regulation, including slowing the introduction of zero-carbon homes – Federation of Master Builders
  • Reverse the planned VAT increase on listed building improvements – FMB
  • Reduce the VAT on property repairs – FMB
  • Offer council tax cuts or other incentives for people to improve the energy efficiency of their homes – FMB
  • Make it easier for small firms to get public sector work – FMB
  • Act against banks that discriminate against construction firms and their clients – FMB



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