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When demand returns...

The recent announcement that the Treasury is going to directly help support cash-starved PFI projects is one bright spot for the construction industry amid a sea of otherwise unrelenting gloom.

Whether it is the best way to address the financing shortfall is open to debate but at least this important issue is now being addressed.

Significantly, it was subsequently confirmed that construction output plunged 7 per cent in the fourth quarter of last year alone and the picture looks set to get worse.

Order books are falling sharply as both the housing and commercial property markets sink further into the mire. And most timely surveys of the sector tell a fairly similar story.

The latest RICS survey of the construction industry is a case in point. The net balance of surveyors seeing a decline in workloads has sunk to an historic low, with even the infrastructure sub-component showing a worsening picture. More ominously, the level of new enquiries for future work is also collapsing.

This trend is evident across the board although the public sector, stripping out housing, still appears to be showing some degree of resilience.

Not surprisingly in view of this, all the measures of expectations that we monitor are heavily in negative territory. Workloads, profits and employment are all projected by surveyors to fall further over the coming months. Even so, the long running issue of skill shortages in the sector has not (yet) completely evaporated.

Respondents to the RICS survey continue, albeit in lesser numbers than previously, to point to a lack of quantity surveyors as well as other construction professionals.

This raises the very real mediumterm issue of how well the construction sector will be placed to support the economy when the recovery eventually emerges. If the experience of the 1990s is anything to go by, the risk is that is that it will lag the upturn rather than lead it.

RICS believes that the macro numbers could begin to look a little more encouraging towards the end of 2009 running into 2010 although GDP growth is unlikely to average much more than 1 per cent next year. By recent standards, that is still likely to feel very much like a recession.

There is, moreover, the additional threat that when the time comes for the Government to get its books back in shape, capital spending programmes may be disproportionately in the firing line. This is certainly the historical experience.

The well regarded Institute for Fiscal Studies, in its Green Budget released in January, suggests that the public borrowing could comfortably exceed £100 billion for the next three fiscal years on the basis of the assumptions set out in the Pre-Budget Report. These actually built in a drop in net investment of almost 20 per cent from the high water mark as well as some modest tax increases.

However, the likelihood is that such a huge hole in the public sector’s finances will be viewed as unsustainable.

Further moves to bolster revenues are likely to be sought but the soft option may be another major axe-wielding exercise on the capital spending programme.

Simon Rubinsohn is chief economist of the Royal Institution of Chartered Surveyors