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Storm clouds and silver linings

Construction News has brought together exclusive research, analysis and expert opinion to give an exhaustive picture of the downturn – and what the future will bring. By Sean Alexander

Everyone knows the downturn has hit the industry badly. But research commissioned by CN from Emap Glenigan shows the true extent of the contraction, how it breaks down by sector and region, and what the likely outcome for the rest of the year will be.

Parts of the industry – private housing, offices and industrial – are badly affected by the deteriorating economic conditions and the credit crunch.

The situation is brighter for those with jobs in infrastructure and the Olympics, although neither of these will be enough to sustain overall industry activity.

Historically, economic growth below two per cent has been associated with falls in construction output. Last month, GDP growth for the second quarter was revised down to zero. Consensus forecasts suggest prospects for growth will slow even further in 2009.

The gloomy economic conditions have led to a sharp fall in the flow of new projects in the pre-construction pipeline. Glenigan expects construction starts in the UK will fall by five per cent in value during 2008.

Leading indicators suggest the outlook for 2009 may be worse. Even if the UK avoids recession, the construction industry will not. For some, the painful consequences of an industry contraction have already begun.

Private housing has been most affected by the credit crunch. The reappraisal of risk by the banking sector has arguably led to more appropriate criteria for accessing credit. However, as a result the asset price bubble in the housing market has burst.

This is causing a long-term contraction in demand since prospective buyers can no longer borrow as much to finance house purchases.

Adjusting to lower demand

Inevitably, those in private housing construction will have to find a way to either cut per unit costs or, more likely, adjust to a new, much lower, level of housing demand.

The impact of the credit crunch on other private sector parts of construction – industrial, offices, retail and hotels – is different. These sectors have not suffered from the asset price bubble evident in private housing.

However, investment in each of these sectors is affected by the prevailing economic conditions.

As such, the immediate outlook is bleak but, with the Olympics on the horizon, construction prospects for the sector should start to improve in the latter half of 2009.

The Government has had an ambitious construction-related spending programme across a number of sectors. Education and health in particular will benefit from an increase in the value of construction projects this year.

But the Government is not immune to the economic slowdown. The absorption of Northern Rock has already put the Government’s finances under pressure. Falling retail sales, rising unemployment and a decline in the profitability of UK firms will reduce tax receipts and add to its difficulties.

Looking forward, the poor state of Government finances may jeopardise some of its proposed construction schemes.

Major infrastructure projects will continue to help buoy the UK construction industry.

Projects such as the widening of the M25 motorway and Crossrail are set to provide a boost to the sector.

Ongoing projects such as Thameslink and the Edinburgh tram line will continue to contribute to the sector’s workload for some time yet. Outside transport, the sector should also benefit from increased capital expenditure by water and electricity utilities.

At present, the macroeconomic and sector-specific conditions are having a much bigger impact on the UK construction outlook than regional factors.

Regional variations

Differences in the composition of construction sectors within each region explain much of the variation in the region’s respective prospects.

For instance, regions where industrial construction is relatively significant, such as the West Midlands and Yorkshire and Humberside, will see the value of construction starts contract this year. The North-east, which has relatively less exposure to private housing than other regions, is faring better.

Sean Alexander is an economist with Emap Glenigan