Experian Business Strategies reports on what happened in 2005 when construction output fell for the first time in a decade – and just how far the industry has to go to recover. Plus, how we compare with the overall economy, and the latest new work and R&M output and order figures
01 What went wrong in 2005?
Prior to 2005 it seemed that nothing could halt the expansion of construction juggernaut, which, according to the DTI, increased in real terms year-on-year between 1995 and 2004. This was driven initially by a strong recovery in the commercial sector in the mid to late 90s (following the collapse of the London offices market), with the public non-residential and private housing sectors taking the reins in recent years.
In 2005 the tide turned and the industry suffered its first decline in more than 10 years. At just 1%, however, the drop failed to alarm and an immediate return to growth this year was forecast, which is set to accelerate throughout 2007 and 2008.
So what happened in 2005? Essentially no single factor is to blame. The effect of a further decline in infrastructure output was compounded by an unofficial tightening of the public purse strings. Although the new private housing sector continued to expand, high levels of indebtedness and less certain macroeconomic conditions made consumers wary, lowering their propensity to invest in household improvements. However, it wasn't all doom and gloom, as public non-residential R&M continued to expand robustly and growth in internet shopping and distribution network consolidation by large retailers helped raise activity in the industrial sector.
Over 2005, the decline in new work output was marginally greater than in the R&M sector, with the new work sector accounting for nearly 53% of total output. In 1Q06 the commercial sector was buoyant on the new work side, increasing strongly across most of the central and southern regions, with Greater London in benefiting from a particularly healthy commercial pipeline including several office and leisure schemes. The other new work sector’s performances were more muted in 1Q06 and overall new work output was roughly static quarter-on-quarter. R&M output gave a marginally stronger performance in 1Q06, up 1% from 4Q05.
Official DTI new work orders, providing a good indication as to the likely future path of output, rose reasonably strongly in 2005. At £31bn, in 2000 prices, they were 5% higher than in 2004. Most welcome was a recovery in infrastructure orders, which have been in decline for the past two years. As well as numerous roads projects in the pipeline, recent media scrutiny of water companies and their leaky pipes should reduce scope for any slippage in the delivery of their current investment plans, which are scheduled to peak this year and next. Slower house price inflation and fewer transactions in the early part of 2005 had a slowing affect on the accumulation of private housing orders, which increased by just 5% in 2005 compared with growth of 15% in 2004.
In fact the sole decrease occurred in public non-residential sector orders, which fell 10% with fewer health and offices contracts being let.
In 1Q06 orders were up 1% quarter-on-quarter.
02 GDP vs construction output
After four years of construction output growth above or in line with gross domestic product (GDP), the industry underperformed, compared with the economy as a whole, by nearly 3% in 2005. But there is once again scope for construction to increase at a stronger rate and the forecast is of growth just shy of 3% this year, accelerating to 3.6% and 3.7% respectively in 2007 and 2008. Infrastructure and private commercial are set to lead the way, with steady rises in the housing sector also making a valuable contribution to overall growth.
03 Regional new work output
In 1Q06 there were some clear winners in the new work output stakes. In percentage terms, new work output in the North-east climbed strongly, up 22% from 1Q05. In value terms, Greater London saw the largest increase, with output £310m higher in 1Q06 than in 1Q05. Double-digit increases were also seen in the East Midlands, the Home Counties, the rest of the South-east, the North-west and Scotland.
04 Regional R&M output
R&M output growth was less consistent across the regions. Scotland saw the strongest growth, with R&M output up by 13%. In Greater London output was 6% higher in 1Q06 than in 1Q05. Declines were seen across much of central and northern England and in Wales. The majority of the South-east recorded marginal increases in their R&M sectors in 1Q06.
05 Regional new work orders
Strong orders in infrastructure and public non-residential in 1Q06 contributed to an overall rise of 50% year-on-year in Greater London. Although impressive it is important to mention that 1Q05 was particularly weak and was down by nearly 20% on 1Q04. Scotland and East Midlands also enjoyed strong orders growth. Double-digit declines were seen in the North-east, Home Counties and Wales.