Despite all the talk of “green shoots” over the last few months, it was apparent that this recession was going to be harsh from the offset and our forecasts for the industry over past year have suggested this. This week sees the release of our latest forecasts and it makes for grim reading (unsurprisingly).
The first quarter of 2009 saw the sharpest falls in GDP and construction output on record. Overall, construction output is expected to fall 16% in 2009 with further falls in private housing and industrial, the first sectors to be hit by the recession, joined by the commercial sector.
Despite recent rises in housing starts, this is from catastrophically low levels and the increases, while welcome, would still leave 2009 with the lowest number of housing starts since 1924, excluding World War II. Credit conditions are clearly still difficult and constraining both demand and supply.
One of the most noticeable factors in this recession is how quickly the commercial sector has been hit. Usually, the commercial sector starts to contract two years after recession in housing and industrial. However, in this recession, the lag has only been one year.
This means that the first year of commercial sector falls occur simultaneously with the second year of falls in housing and industrial, exacerbating the fall, overall, in construction.
New build offices is expected to fall more than 50% over the next two years with retail falling over 40% over the same period, which as shocking as it is, makes intuitive sense.
In the grand scheme of things, with insolvencies up 52% and so much offices and retail space available, why would you be building new office or retail space?
In the short term, public sector construction is providing growth and contractors on education and health frameworks may still be relatively isolated from the worst of the recession.
However, medium term, the situation doesn’t look so bright. The public borrowing figures are unprecedented and unsustainable. Three years ago, public borrowing for the year was £35bn. In the first two months of this financial year, borrowing was already £30bn, with expectations that it may rise to £180bn for 2009/10 or 14% of GDP.
This means spending cuts. Sharp spending cuts, especially on capital expenditure.
Private sector construction isn’t going to recover until economic activity and credit availability improve.
Public sector construction is going to fall considerably post-election, whoever is in power, and constrain recovery for the industry. After 2013, even if growth returns to trend each year then output will not get back to 2007’s levels until 2020... a worrying prospect.