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Term contracts take the edge off output swings

ECONOMY

The figures say construction experienced a recession early this year. But how important is this in such a wildly fluctuating business, and what of the future? asks Brian Green

IN CASE you missed it, the construction industry managed to pull itself out of recession in the second quarter.

At least that's what the latest construction output figures say, after some jiggery pokery with spreadsheets and biros by Department of Trade and Industry statisticians resulted in the first quarter numbers being revised downward.

If you did miss the recession of winter 2004-05, be comforted that most people missed the one in summer 2000 and, more to the point, no one really counts it as recession anyway.

The common definition of a recession is two consecutive quarters of negative growth.

According to the revised (provisional) figures for construction output, there was negative growth in the final quarter of 2004 and the first quarter of 2005. Only we didn't know we had been in a recession when the 2005 first quarter figures initially came out because the release put out then showed construction output growing.

Confused? Well have some sympathy for the industry forecasters who try to make a living out of predicting the ups and downs of construction.

And spare some more for the poor DTI statisticians who are tasked with turning this messily defined industry into a set of numbers that in some way mirror what is actually going on.

Not that sensible economists would stick to the common definition of recession, especially not in an industry like construction, with its output prone to bouncing about and where seasonal adjustments are at best suspect. That aside, the fact that the figures point to a recession speaks volumes.

However accurate the provisional figures are for the first half of this year they point to output down compared with the f irst half of last year ? a drop of 0.8 per cent. Unless the statisticians revise up the figures for the first two quarters of 2005 (or shade last year's figures down slightly), this means significant growth is needed in the back half of this year if the industry is to avoid its first annual decline in output for more than a decade. Where will this growth come from?

The bad news here is where growth has been coming from.

Private sector house building has provided the majority, with growth of 9 per cent over the 12 months to the second quarter of this year. Commercial has provided a little ? 3 per cent ? and there has been a modest contribution from public housing, both new and RMI.

Little more need be said about the future of private sector house building than things don't look too rosy.

Commercial? This is now harder to unpick following the irritating decision of the statisticians to place PFI in this sector rather than pull it out with its own classification.

Looking at the key drivers of offices and retail won't fill any forecaster with unbridled enthusiasm. With consumer spending under severe pressure the desire among major retailers to invest will be kept well in check, while in off ices the unexpected resurgence of a year or so ago seems to have waned. The Emap Glenigan figures for commercial ? they leave out PFI education and health ? show a dip in contract lettings in the sector and a plunge in the work coming out to tender since last autumn.

To date, output in the private sector housing RMI has more or less held up, falling just 3 per cent over the past 12 months.

But with housing transactions down, with fewer TV screenings of 'how to get rich quick developing a house' and with consumers desperately tightening belts, this sector looks one of the most vulnerable.

There are signs of life in the infrastructure sector but work is running at about two-thirds of what is was three years ago and the sector isn't big enough to swing the whole of construct ion onto an upward path.

This leads to the rather tricky issue of the broader public sector and how much 'oomph' that can provide to f lagging output.

The quick answer is that it has been propping construction for some time and the pot isn't likely to get bigger. We are at the point in the cycle where the private sector needs to take up slack as public spending begins to ease, especially if, under pressure, the Treasury looks to slow the f low of taxpayers' cash into construction.

Reassuringly, the Construction Products Association holds the Government to task on its spending and so far has found no sign of the Treasury pulling back on its promises.

Any problems tend to be with spending departments' ability to turn cash into construction.

For all that the recession may prove a phantom, this still leaves one big question. Given the slowdown in output, why are there no cries of pain from contractors? The answer may well reveal the silver lining.

In the absence of hard research, let's speculate. With more long-term contractual arrangements, contractors need focus less on scrabbling for turnover and can concentrate on quality of earnings, as they are better placed to plan ahead and feather their businesses to match workload. Naturally the level and direction of output growth matters, but perhaps not as much as it once did.