Measured by gross value added, UK construction activity fell by 17.1% between the first quarter of 2008 and the second quarter of 2009 – three times the fall the UK economy as a whole suffered in the downturn and in a shorter time. From the fourth quarter of 2009 until the same period in 2011 there was a short period of recovery, but this was not sustained and construction activity fell into recession again – what economists call a “dead cat bounce” – before the sustained recovery kicked in from midway through 2012.
When recession hits, major contractors respond by bidding lower for contracts, leading to lower or even negative margins. They also keep a greater proportion of retentions and extend payment terms. SMEs are more reliant on cash flow and less able to find other sources of finance, especially once the banks reduce lending to construction, as happened in the recession. As a result, the effects of declining demand on SMEs are exacerbated. The construction industry lost 481,000 employees, more than one in five people in the industry, and employment yet to climb back to the level of 10 years ago.
In terms of what construction learned, the business model has developed to deal with the volatility in demand in part by main contractors cutting loose subcontractors when work is scarce.
However, the industry loses about 20% of its employees each recession to other industries and it does not get these people back, so we consistently suffer from a lack of skills. If demand is volatile then the business models need to deal with it so the focus is on flexibility, rather than efficiency or quality.
Government accounts for more than one-quarter of construction as a client and has a key role to play by investing for the long term and counter-cyclically, offsetting as much as possible the effects of the fall in private sector demand – rather than exacerbating the volatility by cutting capital investment when recession hits.
If construction demand were less volatile then we would have a more sustainable industry, retaining essential skills in the industry. Firms would then be more confident about investing for a long-term rate of return that would improve productivity and quality, employing directly rather than subcontracting and upskilling the workforce.
Ten years on: Could it happen again?
The UK construction industry has seen its share of ups and downs. And with human nature being what it is, the downs tend to be more memorable. Construction, along with other sectors in the UK economy, was hit by the recession of the early 1980s and got knocked about a bit more when troubled times rolled around again a decade later. The industry suffered, but most people had seen it all before and worked their way through it. But when the next downturn hit in 2008, few had ever experienced anything on that scale.
Noble Francis is economic director at the Construction Products Association