Contract awards rose in June but that’s less of a surprise when we look at the sector driving that rise

Noble Francis

In what was a bit of a surprise, contract awards rose in June. The CPA/Barbour contract awards index in June was 9% higher than a year earlier.

However, before we get too excited, the key driver of this was a rise in contract awards for private housing and major housebuilders have a business model designed to adjust, or certainly react, to a volatile economic situation and housing market.

The uncertainty running up to the referendum clearly impacted on sectors such as factories and warehouses, where contract awards were lower than one year ago, by 7% and 21% respectively. Education and health appeared relatively unaffected, however.

Before we get too excited, the key driver of this was a rise in contract awards for private housing

Despite the surprise of the referendum result, the impacts on activity on the ground in July are likely to be limited as the uncertainty is so great that it is about focusing on day-to-day business until we get a clear signal. What will be more interesting will be the impact on new contracts in July.

Looking good… but for how long?

The CPA/Barbour ABI contract awards index for private housing was 264 in June, 10% higher than May and 20% higher than a year earlier. It looks good, but there are a couple of caveats.

Firstly, it was a relatively slow first quarter of 2016, so the recent acceleration is from a low point.

More important will be how new contracts signed recently feed through after the referendum. Short-term concerns are about slowing economic growth and the prospects for the housing market. Major housebuilder share prices took a battering in the two days after the referendum result, falling between 28% and 42%.

However, this largely reflects the uncertainty and lack of post-referendum data. Housebuilders are likely to see what the impacts are on transactions and house prices before they take significant action. If transactions and prices fall, expect to see housebuilders focusing primarily on completions rather than new starts, but if transactions and prices hold up we can expect to see them continue to build as they are at the moment, especially with an underlying long-term demand for housing and an interest rate cut to historic lows expected in the coming months.

Noble Francis, CPA economics director