Will the recent declines be a short term blip? Michael Dall on the ONS revisions
The ONS significantly revised its estimates of construction output in the UK last week. I have written before in this column about the revisions that often occur to the data and this month an interim solution which captures price inflation more accurately was included in the statistics. I won’t go into the specifics of these changes here but suffice to say the patterns of growth reflected in the official statistics now align more accurately with anecdotal evidence on the ground.
However, there is no doubt that a slowdown in growth occurred at the start of this year with Q1 figures showing that the industry declined by 0.2% from Q4 in 2014. This appears to have continued into April with output declining by 0.8% compared with the March figures. This suggests that the second quarter is unlikely to show strong levels of expansion within the construction industry.
Analysing the values of contracts awarded in April and May reveals a mixed story with declines in April and a return to growth in May. Interestingly, it was actually the infrastructure sector that was the main factor in the increase in contract award activity in May, with a number of major renewable energy projects reaching contract stage. This was much needed since the value of housing contracts awarded declined significantly in April and May, and there is no doubt that the uncertainty surrounding the UK general election had an impact on the activity of housebuilders. In fact, the value of housing contracts and level of housing units awarded in May was at its lowest level since late 2013. Given the sharp appreciation in housebuilder share prices post-election (some increased by up to 20%) I would expect an increase in construction contract award activity in the second half of 2015.
Now that the general election is over and schemes such as Help to Buy, that have been so effective in boosting new housebuilding in the UK over the past two years, are set to be continued and developed, I expect the recent declines to be a short-term blip. Considering this and the strong showing for the infrastructure sector in May, the outlook for the rest of the year remains positive.
Michael Dall is an economist at Barbour ABI