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Construction Forecast: Does it Matter if its Black or White?

It’s easy to see things in a reductive, black or white, good or bad way when it comes to a forecast.  However, things are rarely that simple.  The aim for a forecaster is to point the general direction of travel, determine the speed of movement in that direction, and then, most importantly, ascertain what the key issues are driving the forecast and the risks around it.

 

Our latest (Summer) forecasts for construction have just been published and construction output is forecast to grow 4.7% in 2014 and a further 4.8% in 2015, providing the industry with an extra £11 billion of work in just two years.  Sounds good but, as the Financial Times points out, even with the growth we have forecast the industry only gets back to 2007’s pre-recession overall peak levels of our output in 2017, ‘a lost decade’ for the industry.  In addition, major contractors are often still working on contracts won 18-24 months ago at relatively low tender prices, but face rising costs of labour and materials.  This means that, outside the housing sector, margins are still difficult.

Output, however, is forecast to rise 22.2% over the next five years, spread across housing, commercial and infrastructure and pointing towards a good future for the industry as a whole.  Primarily, the focus of activity will be in London and the South East but activity is also growing to other parts of the country.

Private housing in GB rose 21% in 2013 and is forecast to rise 18% in 2014 and a further 10% in 2015 buoyed by wider economic growth, rising consumer confidence and increased mortgage lending.  Looking further ahead, slower rates of growth are expected, primarily because, post-election there is uncertainty whether government, whoever is in power after May 2015, will constrain lending due to rising concerns about house price inflation and affordability.

As much as everyone focuses on private housing, commercial is actually the largest construction sector, worth £20+ billion of work per year.  Work on towers in Central London such as the Aldgate Tower and 5 Broadgate, in the City, is set to drive 23% growth to 2018.  In addition, from next year we should also see a recovery in retail construction, which has been hard hit over the last few years due to subdued consumer spending and the long-term trend away from the high street and towards online shopping (which skews construction away from retail and towards warehouses construction).

Infrastructure activity should also boost growth.  Work is expected to peak on Europe’s largest construction project by value, Crossrail, over the next 12-18 months and increased capital investment on roads from the Highways Agency will raise activity.  The one key risk to work in the sector is in energy, where decommissioning work goes onwards and upwards in terms of budget but urgently needed new energy investment continues to be delayed.  New nuclear investment is still on hold until the European Commission finishes its investigation into whether the ‘strike price’ agreed between HM Treasury and EDF.  Investment in new gas-fired power stations will be on hold until the investigation into energy company behaviour by Ofgem concludes.  Even still, infrastructure output is still expected to rise 52.0% by 2018.

Overall, it is good news for the construction industry.  Only economists, really, are concerned about pre-recession peaks.  Companies, on the other hand, primarily care about this year compared to last year and next year compared to the following year.  In that context, activity will be rising, significantly.  But, it may take time for margins to improve and then feed through to the supply chain…

By Noble Francis at 4 Aug 2014, 12:35 PM

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For enquiries please contact: Emma Salmon emma.salmon@constructionproducts.org.uk

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