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Construction Recovery – but will it stay or will it go?

I was showing my 3 year old godson an atlas of the world at the weekend and pointing out where London is. He looked curious but patently had no clue what I was talking about. It was all far too abstract. There was nothing he recognised. Where was the red postbox just outside his house and the newsagent at the end of the street, and where was his school?

It’s a bit like that when I’m telling people about our construction forecasts. If you’re a contractor working on private housing or rail in Central London, you are probably wondering why on earth we're forecasting a recovery in construction when it is going great guns at the moment and has been for a while now. Conversely, public sector work has fallen away so much that contractors working in that area will be struggling to see the light at the end of the tunnel.

Overall, construction output is set to fall 1.5% this year, primarily because of falls in Q1, where output fell to its lowest level since 2001, and output in the rest of the year should be better. With the UK economy expected to sustain recovery, construction output should grow 2.2% next year and 4.5% in 2015.

 

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But, as I say, it really depends which sector you are in. Private house building is rising very quickly. We anticipated last year that 2013 would see considerable growth due to additional demand from FirstBuy and Funding for Lending, but Help to Buy has generated further demand and given house builders the confidence that this demand will be sustained. As a result, they can build more without harming their land values and margin, which is really where their interest is. The key risk is that these policies boost house prices as well as house building and what happens when the policies finish? Help to Buy was supposed to finish in April 2016 but at the rate it is going the finance will be used up in 2015…

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The other key driver of construction growth is infrastructure, which is expected to grow throughout the forecast. Roads construction fell 44% last year and although government has made lots of announcements of capital investment boosts for infrastructure, little of this has fed through to activity on the ground. However, at least with their announcements kicking in starting April 2013, there was a renewed focus on repairs and renewals rather than large infrastructure projects that take years to get going. As a consequence, roads construction is set to grow 5% this year and 12% next year. But, given the fall in the sector last year, it is from a low base. Rail construction continues to grow, boosted by Europe’s largest construction project, Crossrail, but also by station refurbishment projects around the country so expect double-digit growth over the next few years.

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Energy infrastructure is the really interesting area (assuming you’re as dull as I am). Most of the work in there at the moment is currently decommissioning of old nuclear power stations but investment in the sector is set to exponentially increase due to new nuclear, gas, shale, offshore wind. However, we have been saying that for a few years now. The new nuclear programme keeps getting delayed and won’t get going until government agrees a ‘strike price’ with EDF (the investors in nuclear) to give the private firm a guaranteed rate of return on their investment. Government has also said it wants 28 GW of gas investment by 2030 but has given no details of this. Shale is the most controversial of the energy investments but whether it goes ahead or not, the projects actually don’t involve much construction work. What we can be sure of is that investment in renewables is set to rise considerably, with Round 3 of the offshore wind generation programme ready to go in 2014/15.

It won’t be a big a surprise that public sector construction across housing, education and health has suffered over the last few years given the austerity cuts. It also won’t be a surprise that this sector is the biggest hindrance to recovery in construction this year, expected to fall 5.2%.

Overall, construction output is not at a great level but we are expecting growth over the next few years. The growth should also be sustainable, but we need the wider economy to continue to recover and for government announcements to be more than just that – to actually provide work on the ground. It has worked in housing.

Now, I just need to convince my godson where all this work is going to take place…

By Noble Francis at 5 Aug 2013, 15:26 PM

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