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Treasury holds the key to construction's future

TRENDS: Government action on PFI will be decisive factor in industry's forward progress

IN PUB chats, in dinner party conversations and in boardroom deliberations up and down the country the 'R' word is back.

'What's your view of the economy?' is the question. The answer, whether from bar room sages or company directors, is increasingly: 'To be honest, I think we could be heading for recession.'

Is this post-holiday blues, a case of catching up with news of global economic travails while abroad? Or is it gloom that yet another summer is fading?

Well, maybe. But maybe still some of this downswing in mood over the past month is down to the Bank of England's interest rate gurus, who wrong-footed almost everyone and scared a few horses with an unexpected cut in the base rate.

Just a month earlier, the monetary policy committee's minutes hinted that a downward move in interest rates was looking, for many reasons, less likely.

Such a swift change in mood by the normally cautious committee has inevitably spread some unease about the economy among interested but casual observers.

There were sound reasons.

Comforted by a new and favourable inflation report, the pain caused by the strong pound and the weakening global economic prospects seemed to sway the committee to cut the rate.

For construction this was welcome in a limited way. It will cheer house builders. It will help materials suppliers, who increasingly trade internationally.

It may help those with industrial clients. And if it helps steer away the chill winds of recession, that too will buoy the construction industry.

But, looking forward, construction's fate is more likely to be settled in the corridors of the Treasury than by changes in interest rates.

When all the noise has died down, the biggest factor that will determine construction's future is how much money the government will pump in - either directly or through sanctioning more PFI projects - and how quickly the cash flows.

The private sector is shaky in many areas. Housing output has been at best flat and the decision by Wimpey to reduce starts when it wraps McAlpine's homes division into its portfolio is another pointer towards fewer starts overall.

The gripe that planning restrictions are the cause of restricted growth increasingly looks disingenuous.

The Glenigan figures show contract awards for housing work down by 12 per cent on the fiveyear average, while planning approvals for housing schemes are rising and currently running 19 per cent ahead of the five-year average.

Those working for leisure firms face a very rude awakening after years of strong growth. Contract awards are at their lowest level since August 1997.

The commercial sector continues with the momentum of a supertanker, but the signs are that it will run out of steam. Contract awards over the past 12 months are down 11 per cent on the fiveyear average and 17 per cent on the previous 12 months.

Industrial remains in the doldrums, so that does leave the publicly-funded sectors, such as health, education and social housing, to support the industry as private sector building eases.

The Glenigan figures also suggest that the building sector is set to decline and that overall growth in construction will have to come from the civils sector. Here too, public money is key.

So ultimately the most important benefactor for the construction industry over the next few years will be, directly or indirectly, the government.

Given the economic storms that may or may not rage over the coming years, that is just as well, as it may provide much-wanted shelter. And wouldn't that be a rare treat for the construction industry?

Pointers - Spotting the hot and cold spots in the construction market

Contract awards for leisure work have fallen to their lowest level since the summer of 1996. Orders over the past 12 months are down 36 per cent on a year earlier and were running at 20 per cent below the fiveyear average. Orders for leisure work in Yorkshire & Humberside and the North have all but collapsed over the past 12 months, while London continues to enjoy healthy growth.

The decline in the level of contract awards for industrial related work appears to have been arrested over the past three months after a downward trend that started in August 1997. There are also signs of an upturn in the figures for tenders in recent months. But the level of orders won over the past 12 months is half that of the 12 months leading up to the summer of 1997.

The signs of life in the housing sector seen in recent months all but evaporated in July. All the evidence seems to point to a fairly flat time in that market over the coming months, although planning approvals appear to have picked up significantly over the past 12 months.

Three major road contracts helped to perk up the civils figures in July after two fairly unimpressive months. The 12-month moving average is once again on the rise and hitting new highs. The West Midlands is the strongest region for civils work.

Despite a couple of lacklustre months, contract awards for commercialrelated work in London remain extremely buoyant.

The amount of work let over the past 12 months is 13 per cent up on the equivalent figure a year ago.