Economic upturn in construction sector "may not last"

There are mixed messages coming from the construction sector about the strength of the economic recovery, with better figures for the second quarter of 2010 being greeted with caution by some industry commentators.

Wider economy

The Construction Products Association CEO Monthly Overview for August 2010 quotes figures from the Office for National Statistics (ONS) which confirm that the economic recovery strengthened in the second quarter of the year at a faster rate than many commentators anticipated. However, the pace of growth is expected to slow as a result of public sector spending cuts. Job losses in the public sector could reach 600,000, and inflation remains well above the Bank of England's target level. The latest economic indicators include:

• GDP rose by 1.1% in Q2 2010, according to the ONS's preliminary estimate
• Interest rates were held at 0.5% in August and the Bank of England's programme of quantitative easing was maintained at £200bn
• CPI annual inflation eased to 3.2% in June from 3.4% in May. RPI inflation slowed to 5.0% in June, from 5.1% in May
• Unemployment fell by 49,000 in Q2 2010 to 2.46 million. Employment rose by 184,000, with growth in part-time working the main driver
• Prospects for economic growth have weakened, according to the Bank's latest Inflation Report, with GDP growth of 1.6% now forecast for 2010 and 2.7% for 2011.

Construction output

The latest ONS figures for construction output in Q2 2010 showed even stronger growth than was indicated by the provisional figures released at the time of the first estimate of GDP. Key highlights include:

• Output rose by 9.1% in Q2 2010 compared with Q2 2009, and was 8.6% higher than in Q1 – the largest quarterly increase since the spring of 1963
• New work output rose by more than 14% year-on-year and by nearly 10% compared with Q1. Repair and maintenance (R&M) output recorded more modest growth year-on-year (1%), but quarter-on-quarter R&M output was 6.6% higher
• The main areas of growth in Q2 compared with Q1 were new-build private housing (+22%), private housing R&M (+13%), and public non-housing new work (+10%). Commercial and industrial output also grew in Q2.

Another positive sign came from the Civil Engineering Contractors Association, who reported that more than a quarter of its members said their business had increased year-on-year. Also, several major companies in the construction sector have seen growth in their turnover. However, in spite of the better news in Q2, by the start of Q3 growth in construction work had begun to tail off, according to the Chartered Institute of Purchasing and Supply. According to RICS, most parts of the industry were affected by this trend.

In its press commentary the CPA is keen to play down the ONS statistics as a sign of a strong recovery in construction. It highlights a number of special factors in the early part of the year and, going forward, the inevitable impact which cuts in public spending will have on construction. The former Labour government's plans for major housing developments have been cut back considerably since the general election, with local authority schemes for an estimated 80,000 to 90,000 new homes being scrapped. But at the same time the new government is introducing measures designed to stimulate the housing sector.

Construction industry trade survey

Sales of products rose sharply in Q2 2010 compared with the same quarter in 2009. However, uncertainty about future prospects continued to dampen the short-term outlook for manufacturers. Key findings from the survey included:

• 77% of heavy-side and 69% of light-side manufacturers saw sales increase compared with a year earlier
• 61% of heavy-side and 51% of light-side manufacturers anticipate no change or a fall in sales in Q3 2010
• 47% of light-side manufacturers reported rising raw materials costs in Q2 2010, while 45% of heavy-side manufacturers reported that fuel/energy costs rose.

Construction products price inflation

BIS data suggest that the annual rate of materials cost inflation across the industry accelerated to 9.0% in June from 7.7% in May. At 7.2% in June, materials cost inflation in the housing sector was lower than in the non-housing (9.6%) or R&M (9.2%) sectors.

Construction Products Association forecasts of construction output

With the government's Comprehensive Spending Review (CSR) being published on 20 October the CPA has revised its programme for announcing its forecasts. An updated forecast will be published in mid-September and the main forecast for the period 2011-2015 will be published in early December, so that account can be taken of the CSR.

 

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